Severn Accounting
Tax & Accounting

FHL – relief for finance and investment costs from April 2025

By Ali Jaw ·

Landlords letting furnished holiday accommodation have hitherto enjoyed a range of tax benefits, including the ability to deduct interest and finance costs in full when calculating their taxable profits. However, the favourable treatment of these costs is set to change significantly from April 2025, aligning FHL (Furnished Holiday Let) taxation more closely with standard rental income rules. Understanding these changes is crucial for anyone operating in this sector, as they could materially affect your tax position and cash flow planning.

What’s changing in April 2025?

From 6 April 2025, the interest relief restriction – which has applied to standard residential rental properties since 2017 – will extend to furnished holiday lets. This means landlords will no longer be able to deduct all finance costs as a business expense when calculating taxable profits. Instead, finance costs (primarily mortgage interest) will be restricted to basic rate income tax relief only, regardless of your actual marginal tax rate.

For higher and additional rate taxpayers, this represents a significant change. Whereas previously you could offset 100% of your finance costs against rental income, you’ll now only receive relief at the basic rate of 20%. If you’re a higher rate taxpayer (40%), you’ll only recover 20% of your interest costs through the calculation of profits, meaning you’ll lose 20% of the benefit you currently receive.

Understanding the implications for different taxpayers

Basic rate taxpayers will see minimal impact, as they already benefit from tax relief at the standard rate. However, it’s worth noting that the system operates differently – instead of a direct deduction, you’ll receive a tax reducer applied after calculating your tax bill.

Higher rate taxpayers face the most significant change. If you’re currently paying 40% tax and have substantial mortgage debt, this could increase your tax bill considerably. For example, if you have £50,000 in annual finance costs, you’d currently offset that in full. From April 2025, you’ll only receive relief equivalent to £10,000 (20% of £50,000), meaning an additional £20,000 of profit becomes taxable at 40%.

Additional rate taxpayers (45% tax rate) will experience an even more pronounced impact, losing 25% of the relief benefit they currently enjoy.

The broader picture: alignment with standard rental rules

These changes form part of the government’s wider levelling of the playing field between different types of rental income. Since 2017, standard residential landlords have operated under the interest relief restriction, and extending this to FHL from April 2025 creates consistency across the rental sector.

It’s also worth noting that FHL status itself remains valuable. You’ll continue to benefit from other reliefs, such as capital gains tax exemptions on the property itself, and the ability to carry forward losses (something standard landlords cannot do). However, the removal of full finance cost deductibility does diminish the tax efficiency of the FHL regime considerably.

Action steps for FHL operators

If you operate furnished holiday lets, now is the time to review your position. Consider:

  • Calculating your exposure: Work out what your tax bill will look like under the new rules. If you’re a higher or additional rate taxpayer with significant borrowing, the impact could be substantial.
  • Reviewing your financing: Some landlords may wish to explore refinancing options or consider whether FHL status remains the optimal structure for their circumstances.
  • Documenting your records: Ensure your finance costs are clearly documented and categorised, as HMRC will scrutinise claims more carefully under the new regime.
  • Planning ahead: If you’re considering purchasing additional FHL properties, factor the new rules into your financial projections.

In conclusion

The extension of interest relief restrictions to FHL from April 2025 represents a meaningful shift in the tax landscape for holiday let operators. Whilst FHL status retains other valuable benefits, the removal of unrestricted finance cost deductibility will affect your bottom line – particularly if you’re a higher rate taxpayer or operating multiple properties with significant borrowing.

This is not a change to ignore or leave until April. The sooner you understand the precise impact on your circumstances, the sooner you can take informed decisions about your property portfolio and financing strategy.

For tailored advice, contact Severn Accounting — we’re here to help.