Furnished residential lets vs Furnished Holiday Lets – The tax situation

If you’ve invested in a property to let and furnished it, you will be liable to pay tax on the income you receive from letting the property out.

However, you may be able to claim some allowable tax reliefs and deductions.

The level and type of relief will depend on the purpose of the property – namely whether it is intended as a Furnished Holiday Let (FHL) or as a longer-term residential property.

FHL or residential let?

A furnished residential let is simply a residential property which is furnished at the time it was let. Properties can be fully furnished or partially furnished.

On the other hand, FHLs must meet certain criteria:

• It is furnished sufficiently for normal occupation
• It is in the UK or European Economic Area (EEA)
• It must be let and intended to make a profit
• It is available for letting as an FHL at least 210 days out of the year
• It is let commercially as an FHL for at least 105 days in the year
• Long-term lets (more than 31 continuous days) don’t exceed 155 days of the year.

Both options have significant benefits and certain drawbacks, particularly from a tax perspective.

Tax considerations on furnished residential lets

From 6 April 2020, Income Tax relief for residential property financial costs was limited to the basic rate of Income Tax.  They are also limited to the lowest of mortgage interest, furnished let income or your adjusted total income.

One of the other considerations you must make with a residential let is whether the property will be furnished or not.

From a tax perspective, this is less important than it used to be, since the 2016 abolition of ‘wear and tear allowance’, which allowed landlords to deduct a certain amount from their taxable earnings.

This has now been replaced with ‘replacement of domestic items relief’.

You can claim specific items as expenses, plus disposing of the old item and minus any improvement and gains on selling the old item.

Tax considerations on FHLs

From April 2025, Furnished Holiday Let allowance will be abolished, removing much of the beneficial tax treatment currently enjoyed by FHL owners.

FHL owners currently benefit from significant tax benefits in the form of:

• Capital allowances – FHL owners can currently claim up to £1 million of capital expenditure under the Annual Investment Allowance (AIA).
• Financial costs – Costs such as mortgage interest is currently fully deductible from rental income as a way to reduce taxable profits, but this is limited on non-FHL rentals.
• Capital Gains Tax – FHL owners may be eligible for Business Asset Disposal Relief instead of CGT, if their operations can be classed as a business, which is charged at a lower rate.
• Relevant earnings – FHL income is considered earned, so it is currently eligible for relief at the owner’s highest rate of Income Tax.

When these rules are abolished, it is likely that tax regulations for FHLs will be brought in line with residential property lets, with similar business allowances if you are letting out multiple properties and operating as a business.

For advice on property letting taxes, please contact our team today to discuss your needs.