End of the fhl regime and transitional rules
The furnished holiday let (FHL) regime has been a fixture of UK tax planning for decades, allowing property owners to claim generous reliefs and deductions. However, significant changes are afoot. From 6 April 2024, new rules have fundamentally altered how FHLs are treated for income tax purposes, with important transitional provisions for those currently operating under the old regime. Understanding these changes is crucial if you own or are considering investing in holiday rental property.
What’s Changed and Why
The government has reformed the FHL regime to align holiday let taxation more closely with standard residential property rules. Previously, FHL owners enjoyed several tax advantages: relief for finance costs (mortgage interest) at the full amount, rather than the restricted 20% relief that applies to standard buy-to-let properties, and the ability to claim certain capital allowances. From April 2024, these privileges have largely disappeared for new FHLs and those transitioning from the old rules.
The rationale, according to HMRC, is fairness across the residential property investment market and to discourage property hoarding in holiday hotspots. Whilst the decision has been controversial among landlords, it’s now law, and planning accordingly is essential.
Who Qualifies as an FHL?
Before discussing the transitional rules, it’s worth confirming what HMRC considers an FHL. To qualify, your property must:
- Be let furnished on a commercial basis
- Be available for letting to the public for short-term holiday use for at least 210 days per year
- Actually be let for at least 105 days per year
These thresholds are strict. If your property falls short on either metric, you’ll be treated as a standard rental property, triggering the standard income tax rules for landlords, including restricted interest relief.
Transitional Rules Explained
If you owned an FHL before 6 April 2024, HMRC has introduced a transition period to ease the change. Here’s how it works:
The Grace Period
For the 2024/25 tax year and 2025/26 tax year, existing FHL owners can claim full mortgage interest relief—much like the old regime—even though the FHL regime technically no longer exists in its former guise. This two-year window allows you to plan for the permanent shift to restricted relief.
What This Means in Practice
If you’re a basic-rate taxpayer with a £100,000 mortgage at 5%, you’d normally claim £5,000 in interest relief. Under the old regime, this was a full deduction. Under standard rules from April 2027 onwards, you’d claim only £1,000 (20% of £5,000). The transitional rules give you until at least April 2026 before this restriction fully applies.
Capital Allowances
The position on plant and machinery allowances is more nuanced. Existing FHL owners can continue claiming capital allowances during the transition, but the rules are tightening. New claims are heavily restricted, and you should review your capital allowance position with a qualified adviser before the transitional window closes.
Planning Steps for FHL Owners
Given these changes, several actions are worth considering now:
Review Your Lettings Qualification
Confirm you’re genuinely meeting the 210-day availability and 105-day letting thresholds. If not, you’re already outside the FHL regime and should be planning around restricted interest relief.
Calculate the Permanent Impact
From April 2027, if you’re a basic-rate taxpayer, the move from full interest relief to 20% relief will increase your tax bill materially. Modelling this now helps inform broader investment decisions—whether to hold, refinance, or restructure your property holdings.
Consider Corporate Structures
Some FHL owners are reviewing whether holding properties through a limited company makes financial sense. Company tax rates and rules differ from personal taxation, and for highly leveraged properties, this may warrant exploration with your accountant.
Documentation
Ensure your lettings records demonstrate you meet the statutory requirements. HMRC scrutinises holiday let claims closely, and the transition period is no exception.
Looking Forward
The end of the FHL regime represents a significant shift in residential property taxation. Whilst the two-year transitional window provides breathing room, the permanent changes from April 2027 will reshape the economics of holiday let investment. Properties with large mortgages will be especially affected.
The key is to plan proactively rather than reactively. Review your position now, stress-test the numbers, and consider whether your current structure remains optimal under the new rules.
For tailored advice, contact Severn Accounting — we’re here to help.