The new tax landscape for holiday let landlords

The tax regime for furnished holiday lettings came to an end on 5 April 2025. For 2025/26 and later tax years, landlords letting furnished holiday accommodation are treated in the same way as landlords with other residential lets. What do clients letting furnished holiday accommodation need to be aware of in 2025/26 and beyond?

No need to keep furnished holiday lets separate

For 2024/25 and earlier tax years, the profit or loss on furnished holiday lets was calculated separately from that on  other properties let by the same landlord. This is no longer the case; everything now goes in the same pot. Where a landlord owns more than one rental property in the same capacity (for example, in single ownership), the income and expenses from all their let properties are taken into account to calculate the profit or loss for the property business as a whole, regardless of the type of properties.

However, where a landlord has UK and overseas properties, the profit or loss on the UK properties and overseas properties is calculated separately. The landlord has two property businesses- a UK property business and an overseas property business.

Example

Ali owns five rental properties- two residential lets and three holiday lets. For 2024/25 and earlier tax years. Ali needed to calculate the profit or loss separately for the holiday lets and the residential lets. For 2025/26 and later tax years, Ali calculates a single profit or loss figure for all five properties.

Interest relief

Under the former tax regime for furnished holiday lets, unincorporated landlords were able to deduct interest and finance costs in full in calculating the rental profit on their holiday lets. This gave them relief at their marginal rate of tax. From April 6 2025 onwards, unincorporated landlords letting furnished holiday accommodation are subject to the more restrictive rules that have applied for a number of years to unincorporated landlords letting residential property.

Under these rules, relief for interest and finance costs incurred by an unincorporated landlord letting furnished holiday accommodation will be given a tax reduction at the basic rate. The deduction reduces the amount of tax that the landlord has to pay.

The tax deduction is 20% of the lowest of the following amounts:

• Interest and finance costs.
• Profits of the property business and
  • Adjusted total income (income after losses and reliefs but excluding savings and dividend income to the extent that it exceeds the landlord’s personal allowance).

From 6 April 2025 onwards, there is no distinction between furnished holiday lets and other lets. Consequently, when working out the basic rate reduction account is taken of the interest and finance costs relating to all residential properties, not just those let as holiday accommodation. The interest restriction does not apply to interest and finance costs relating to commercial properties, so where the landlord’s portfolio includes commercial properties as well as residential properties, the associated interest and finance costs can be deducted in calculating the profit of the property rental business.

For landlords paying tax at a rate above the basic rate, the change in the rules will increase the post-tax cost of borrowing on holiday lets and reduce profitability. As a result, landlords with holiday lets may wish to review how their properties are financed, particularly where interest rates have risen since the mortgage was taken out.

Corporate landlords letting residential accommodation, including holiday lets, can continue to deduct the interest and financial costs in calculating their taxable profit.

Jointly-owned holiday lets

Where a property is jointly-owned by spouses or civil partners, the general rule is that the income is treated as arising to each partner equally for tax purposes, regardless of their individual shares in the property and how much they actually receive. Where the property is owned as tenants in common in unequal shares, the parties can jointly elect (on Form 17) for the income to be allocated for tax purposes by reference to their beneficial ownership shares.

These rules did not apply under the former FHL regime. Instead, where a property was jointly owned, the owners could choose how to allocate the profits and losses. This applied equally where the joint owners were married or in a civil partnership.

Following the end of the FHL regime, spouses and civil partners who jointly own holiday lets will need to review their position and decide if they need to make a Form 17 election. If they do nothing, they will each be taxed on 50% of the rental profit. This may not give the best result.

A Form 17 election can be made jointly by spouses and civil partners where they own property in unequal shares as tenants in common. It cannot be made where the property is owned as joint tenants- where this is the case, the spouses/civil partners jointly own the whole property.

The election must be submitted to HMRC within 60 days of being signed. The election is effective from the date of the election- it cannot be backdated. This means that the couple cannot wait until the end of the tax year to decide if an election would be beneficial for that year.

A Form 17 election will not be beneficial. Where a property is owned in unequal shares and the spouse/civil partner with the highest marginal rate of tax owns more than 50% of the property, the default 50:50 split will give the best result.

Married clients and civil partners who jointly own a holiday let should assess whether making a Form 17 election would be beneficial.