Taxation of furnished holiday lettings

What is a ‘Furnished Holiday Let’?

A Furnished Holiday Let (FHL) is a property that has to satisfy certain criteria to be eligible for certain tax breaks. Conditions include where the property is located, whether it is furnished, whether it is commercially let, and a number of ‘occupancy conditions’. HM Revenue and Customs (HMRC) has guidance on how to work out whether a property qualifies as a FHL.

Statutory provision for the FHL regime is consolidated in the Income Tax (Trading and Other Income) Act 2005, as amended; and the Corporation Tax Act 2009, as amended.

What are the tax advantages to renting out a FHL?

Landlords renting out FHLs can avail themselves of certain tax breaks that are not available for other types of landlords (for example, landlords renting out a property to a long-term tenant). For example, they can avail themselves of plant and machinery capital allowances on items such as furniture and furnishings; capital gains tax reliefs for traders; and the deduction of finance costs from their FHL profit before calculating tax.

Overall, this advantageous tax treatment exists before income from a FHL property is considered to be trading income, even though the letting out of a property is usually not considered to be a trade.

Brief history and development of the FHL regime

The Office of Tax Simplification outlined that the FHL regime was established in the 1980s, when there was no clarity on whether the operation of a short-term holiday rental business qualified as a trade or not. Section 50 and schedule 11 of the Finance Act 1984 clarified that income from a FHL should be treated as trading income, rather than investment income, thus allowing landlords renting out FHLs to avail themselves of additional tax allowances and reliefs.

In 2009, the Labour Government proposed to abolish the FHL regime. The provision was originally included in the Finance Bill 2009-10. However, due to the timing of the 2010 election, the proposal was dropped from the Bill, and the incoming Conservative-Liberal Democrat Government did not proceed with the previous Government’s proposal. The Coalition Government changed some of the eligibility criteria for a property to qualify as a FHL (for example, increasing the occupancy criteria days for a property to be classed as a FHL). More detail on this is provided in the Library research briefing on Furnished Holiday Lettings.

In 2022, the Office of Tax Simplification (OTS) suggested that the Government should consider whether the FHL regime was still needed. However, they added that abolishing the regime could introduce complexity and uncertainty, particularly with the prospect of taxpayers arguing that their FHL activity constituted a trade. They suggested the Government should explore whether a statutory test could be introduced so that FHL businesses providing a high level of service could be classed as a trade, and thus maintaining the favourable tax treatment.

Budget 2024

At Budget 2024, Chancellor Jeremy Hunt announced the FHL regime would be scrapped. He said that the regime was “creating a distortion” in the market in a way that people in local communities were struggling to find long-term rental properties. The measure was broadly welcomed in the House. Media publications reported mixed views, with some welcoming the proposal, and others expressing worry about the risks of the measure to the tourism industry in those communities. Several MPs also tabled Parliamentary Questions asking the Treasury for an assessment of the proposal on certain parts of the economy.

Since the measure is not included in the Finance Bill currently before the House, HMRC has not yet published an impact assessment of the measure.

The OTS proposal mentioned above was suggested to the Chancellor at a Treasury Committee evidence session on the Budget. In response, the Chancellor said that he wanted to equalise the tax treatment for landlords regardless of the type of property they were renting, and that the Government’s proposal was significantly simpler than what the OTS had suggested.