Relief for FHL losses post April 2025

From 6 April 2025 onwards, furnished holiday lettings (FHL) are treated for tax purposes in the same way as other residential lets, and residential lets and furnished holiday lets owned by the same person (or same persons) for the purposes of calculating losses will be treated as a single ring-fenced business. This represents a significant change to the tax relief available for those operating FHL businesses, particularly where losses are incurred. Understanding what this means for your tax position is crucial if you’re affected.

For decades, FHL properties have benefited from special tax treatment under UK law. They’ve been classified as trading income rather than investment income, which has allowed landlords to claim losses against other income more freely. However, the rules are changing, and from April 2025, that preferential treatment will end. This shift could have substantial implications for your tax liability and planning strategy.

What’s changing in April 2025?

The current position sees FHL losses treated more favourably than standard residential rental losses. From 6 April 2025, this preferential treatment will be withdrawn. All residential lets—including furnished holiday lettings—will be subject to the same loss relief restrictions that currently apply only to standard rental properties.

The key change is that FHL and standard residential lettings owned by the same individual (or partnership) will now be treated as a single “ring-fenced” business for income tax purposes. A ring-fenced business means that losses can only be set off against future profits from the same ring-fenced business; they cannot be offset against other sources of income, such as salary, profits from a different trade, or investment returns.

This mirrors the existing rules that have applied to ordinary residential lettings since 6 April 2017 under the “non-trade finance income” (NTFI) provisions.

Understanding the impact on losses

If you currently operate an FHL that generates losses, the new rules mean you’ll lose the ability to claim those losses against other income. Instead, unrelieved losses will be carried forward to set against future profits within the same ring-fenced business.

For example, if you have a loss of £5,000 from your FHL in 2025/26, you cannot offset this against your salary or other income. The loss will sit on your account until you generate sufficient FHL or residential rental profits to absorb it.

However, there is a transitional provision worth noting. Losses arising in the tax year 2024/25 (the final year before the change) may still be claimed against other income under the existing rules, provided the claim is made by 31 January 2026. After that date, the new rules apply in full.

Planning ahead for affected landlords

If you currently claim FHL losses against other income, now is the time to review your position with a qualified accountant. Several strategies may help you manage the transition:

Accelerating expenses: Ensure all allowable expenses for 2024/25 are claimed in full before the new rules take effect. This maximises the losses available for relief against other income under the old rules.

Capital allowances: Review whether you’ve claimed all available capital allowances on furnishings and equipment. These can be claimed generously in the year of purchase and may reduce your profit or increase your loss.

Timing of purchases: Consider bringing forward planned improvements or equipment purchases into 2024/25 where feasible to maximise deductions before the rule change.

Combining businesses: If you own both standard residential lets and FHL properties, the new ring-fencing rules mean they’ll be treated together. Ensure you’re accounting for them correctly from April 2025.

Next steps

The change does not apply overnight—claims for the 2024/25 tax year under the old rules must be submitted by the normal deadline of 31 January 2026. From the 2025/26 tax year onwards, the new rules apply automatically.

It’s also worth noting that these rules apply to individuals and partnerships. Companies that own residential properties face different corporation tax rules and may not be affected in the same way.

Given the complexity of this transition, especially if you have losses carried forward from previous years, getting professional advice before April 2025 is strongly recommended. The sooner you understand your position, the better you can plan your tax affairs.

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