Tax Rules for Furnished Holiday Lettings

Furnished holiday lets (FHLs) receive special tax treatment that's more favourable than standard property lettings. If your property qualifies, you can claim business reliefs that aren't available to ordinary landlords, including capital allowances on furniture and equipment. However, your property must meet specific occupancy and availability tests throughout the tax year.

What is a furnished holiday let?

A furnished holiday let is a property that's available for short-term holiday rental to the public and meets certain letting conditions. To qualify for FHL tax treatment, your property must be in the UK (or European Economic Area if you acquired it before April 2025) and meet three key tests:

The property must be furnished to a standard where it's ready for immediate occupation – guests should be able to turn up and live there without bringing their own furniture or equipment.

The qualifying conditions

Your property must satisfy all three of these tests during the tax year:

Pattern of occupation test – The property must not be in the same person's occupation for more than 31 consecutive days at any point during the year. Even one continuous letting of 32 days means the property fails for the entire tax year.

Availability test – The property must be available for commercial letting to the public as holiday accommodation for at least 210 days in the tax year.

Letting test – The property must be commercially let as holiday accommodation to the public for at least 105 days in the tax year. Days when the property is occupied by you, your family, or friends (whether or not they pay) don't count towards this total. Only genuine commercial lettings count.

All three tests must be met. If you own multiple FHLs, each property is assessed individually against these tests. However, there's an averaging election (explained below) that can help if some properties fall short.

Averaging election

If you own more than one furnished holiday let, you can elect to average the letting days across your properties. This helps if one or more properties doesn't meet the 105-day letting test on its own.

When averaging, you add together the actual letting days for all your properties and divide by the number of properties. If the average is at least 105 days, all properties can qualify – even if individually some had fewer than 105 letting days. Each property must still separately meet the availability and pattern of occupation tests.

You must make this election in your tax return for the year in question. The election cannot be made late or amended after the return deadline.

Period of grace election

If your property met the FHL tests in the previous tax year but fails the availability or letting tests in the current year, you may be able to make a 'period of grace' election. This allows the property to continue being treated as an FHL for up to two consecutive tax years while you try to restore qualifying occupancy levels.

You cannot use the period of grace if the property fails the pattern of occupation test (the 31-day rule). The property must also have genuinely been available for letting during the year – you can't use this election if you deliberately reduced availability or didn't attempt to let it commercially.

Tax advantages of FHL status

Qualifying furnished holiday lets are treated as a trade for certain (but not all) tax purposes. This brings significant benefits:

Capital allowances – You can claim plant and machinery allowances on items like furniture, white goods, carpets, curtains, and equipment. This includes the Annual Investment Allowance, which allows you to deduct up to £1 million of qualifying expenditure from your profits each year. Standard residential landlords cannot claim capital allowances on such items.

Business Asset Disposal Relief (formerly Entrepreneurs' Relief) – When you sell the property, any capital gain may qualify for this relief, reducing the Capital Gains Tax rate to 10% on gains up to £1 million over your lifetime. This relief is not available for ordinary rental properties.

Rollover relief – If you sell an FHL property and reinvest the proceeds in another qualifying business asset (including another FHL), you may be able to defer the capital gain.

Pension contributions – FHL profits count as relevant earnings for pension contribution purposes, allowing you to make tax-relievable pension contributions based on your FHL income.

Loss relief – Losses from your FHL business can be offset against your other income in the same or previous tax year, subject to certain restrictions. Standard property losses can only be carried forward against future property income.

What FHL status doesn't give you

Despite the business-like treatment, FHL income doesn't count as earnings for certain purposes. You cannot use FHL profits to:

• Build up National Insurance credits
• Claim the trading income allowance (£1,000 tax-free allowance for trading income)

However, you can still claim the £1,000 property income allowance if your total property income is below this threshold, though you'd lose the benefit of capital allowances if you do.

Finance costs

Like standard residential landlords, FHL landlords are subject to restrictions on mortgage interest relief. You cannot deduct mortgage interest and finance costs from your FHL profits. Instead, you receive a basic rate tax reduction (currently 20%) on your finance costs.

Record keeping

You must keep detailed records to prove your property qualifies as an FHL. Keep evidence of:

• All bookings showing dates and guest names
• Advertising and availability calendars
• Income and expenditure records
• Any periods when you or family occupied the property

HMRC may ask for this evidence if they enquire into your return, particularly given the valuable tax reliefs available.

What happens from April 2025

The government has announced that FHL tax treatment will be abolished from April 2025. Properties will no longer qualify for the special tax advantages from the 2025/26 tax year onwards, though transitional rules may apply to capital gains and allowances claimed in earlier years.

If you currently operate furnished holiday lets, you should speak to your accountant about how these changes will affect your tax position.

Sources

• Furnished holiday lettings (Self Assessment helpsheet HS253)

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.