Landlords letting furnished holiday accommodation have hitherto enjoyed a range of tax benefits, including the ability to deduct interest and finance costs in full when calculating their taxable profits. However, the favourable regime for furnished holiday lettings comes to an end on 5 April 2025. From that date, landlords letting furnished holiday accommodation will be subject to the same tax rules as apply to other residential lets. While corporate landlords will still be able to deduct interest and finance costs when calculating their taxable profits, unincorporated landlords letting furnished holiday accommodation will be subject to the more restrictive interest relief rules for residential lets.

The rules

Rather than deducting interest and finance costs when calculating their rental profits, from 6 April 2025, relief for interest and finance costs incurred by an unincorporated landlord letting furnished holiday accommodation will be given as a tax deduction 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).

There are some points worthy of note.

From April 2025, the profit on furnished holiday lettings is not calculated separately from that on any other residential lets. Consequently, the finance and interest costs relieved as a basic rate tax reduction are those incurred in relation to all residential lets, not just those relating to holiday lets. Likewise, when working out the amount of the reduction, the profits are those of the property business as a whole, not just the profit relating to the furnished holiday lets. The concept of a furnished holiday let will cease to exist from April 2025 and the landlord will no longer need to satisfy availability and letting conditions – properties let to holiday makers are simply treated as a residential let.

Where the interest and finance costs for the year cannot be relieved in full (for example, because the profits of the property business or the landlord’s adjusted net income are lower than the interest and finance costs), the unrelieved interest and finance costs are carried forward for relief in a future tax year when income and profits allow.

Impact

The measure will affect landlords with mortgages on their holiday lets. Deducting interest and finance costs in the calculation of taxable profits provides relief for those

costs at the landlord’s marginal rate of tax. However, where relief is given as a basic rate tax reduction, relief is given at 20% regardless of the rate of tax that the landlord pays. For landlords paying tax at the higher and additional rates, this reduction in relief effectively increases the cost of their borrowings.