From 6 April 2025 new tax changes are coming in, which will impact those with furnished holiday lets – not just in West Wales but across the UK. Here we give you some insight into what’s happening and how it may impact your rental business. We’d advise you to speak to your accountant for their recommendations on the actions needed for your own particular situation.

What’s changing?

Up to now, HMRC has distinguished between holiday lets and tenanted properties. This has allowed owners of furnished holiday lets to benefit from a number of tax reliefs – ones which owners of tenanted properties have not been able to enjoy. From 6 April next year this will change, with higher tax implications for owners.

What is a furnished holiday let?

A furnished holiday let is a property that meets a number of criteria – 

• They are furnished – it may sound obvious, but to enjoy the tax benefits HMRC spelled out the requirements, stating that “there must be sufficient furniture provided for normal occupation and your visitors must be entitled to use the furniture.”

• The property must be in the UK or in the European Economic Area – properties outside of these regions do not enjoy the same benefits.

• Occupancy rates – there are strict criteria on the durations that a furnished holiday let can be rented. Its rentals must be ‘holiday’ in nature, so lettings that exceed 31 continuous days cannot make up more than 155 days during the tax year.

• Availability – the owner must ensure that the property is available for rent for a minimum of 210 days within any tax year.

• Rental rates – for at least 105 days within the tax year the property must be let at commercial rates.

What have the tax advantages been up to now?

Current legislation brought a number of tax advantages to owners of holiday rental properties, including – 

1. Income tax benefits – These included full relief on mortgage interest payments, as well as elements such as the ability to split holiday rental profits by ownership percentage or work performed, and capital allowances on furniture, fixtures and fittings.
2. Capital gains tax reliefs – unlike a normal residential property sale, where the owners pay capital gains tax of 18% or 24%, furnished holiday lets are treated differently and are eligible for Business Asset Disposal Relief. This allows the owner to pay just 10% capital gains tax if they meet certain eligibility criteria. 

There is also Rollover relief, which is available when the proceeds from a furnished holiday let sale are reinvested into another furnished holiday let. This lets the capital gains tax from the first sale be delayed until the sale of the second property.

Finally, Gift hold-over relief is provided if you give away your holiday home, or sell it for less than the market value to help the new owner. This defers the capital gains tax, which only becomes payable when the recipient of the gift sells the property.

What do the changes mean from 6 April 2025?

On 6 March 2024, the then Chancellor Jeremy Hunt announced that he was abolishing the different tax provisions for furnished holiday lets. As a result, from 6 April 2025 owners of furnished holiday lets will face revised taxes, which are likely to reduce profitability and increase capital gains tax payments when a property is sold. 

In terms of income tax, the changes mean that relief for mortgage interest payments will be restricted. Going forward, mortgage interest payments will not be deducted from the profits made from letting, rather a credit for 20% of the interest payments will be deducted from the owner’s final tax bill. This is a big change for owners and one which is expected to result in reduced profitability for higher rate and additional rate taxpayers in particular. Your financial advisor will be able to assess the impact for your individual situation. 

In terms of Capital Gains Tax, unfortunately there is the potential for owners to face further expense. If an owner decides to sell their furnished holiday let, they can currently claim Business Asset Disposal Relief, which means they may pay just 10% capital gains tax on the sale. With the change in legislation, from 6 April 2025 the Business Asset Disposal Relief is no longer available on the sale of furnished holiday lets, meaning owners will pay significantly more – 18% or 24%, depending on their own situation.

What’s happening in the property market?

As a result of the change in legislation we are seeing an increase in the number of furnished holiday let properties coming onto the market across West Wales. Many owners want to sell before the 6 April 2025 change, to enable them to take advantage of the Business Asset Disposal Relief. If you’re an owner thinking of selling make sure to get advice from your financial adviser, and if you choose to sell contact us to find out how we can help.

You can find out more about the changes on this government website.