Taxation of furnished holiday lets and Airbnb – where are we now? | Insights

In the last Budget, the Chancellor announced a number of proposed changes to the taxation of furnished holiday lets (FHLs) including Airbnb type lettings, but before looking at these it is probably worthwhile reminding ourselves of the existing rules.

Tax advantages of FHLs

Since the special tax rules were introduced in 1984, FHLs have become increasingly popular with landlords, particularly in tourist areas.

Whilst landlords letting property on assured shorthold tenancy basis have seen their tax benefits reduced (notably the reduction in mortgage interest tax relief), qualifying FHLs let on a commercial basis have benefited from a number of tax advantages including:

Full tax relief on mortgage interest
Capital allowances on the purchase of furniture, fixtures and fittings used in the business
Availability of Business Asset Disposal Relief, gift hold-over relief and roll-over relief
Profits can be shared between spouses and civil partners in a tax efficient manner
Profits count as earnings for pension contribution purposes.

To qualify for these beneficial tax breaks, the basic conditions are that the property is available for letting for at least 210 days in the tax year, is actually let for at least 105 days in the tax year and the property must not be let for periods of longer-term occupation (more than 31 continuous days) for more than 155 days during the year.

Tax deductions

Typical expenses that might be allowable against profits are:

Advertising costs: Fees for listing the property on platforms like Airbnb
Management fees: Fees paid to agencies or individuals for managing the property
Maintenance and repairs: Costs of maintaining and repairing the property (not improvements)
Utilities and services: Bills for electricity, gas, water, and internet services
cleaning and laundry: Costs of cleaning the property between lets and laundering bed linens and towels
Insurance: Costs of insuring the property, including public liability insurance.
Mortgage interest: Interest on loans used to buy or improve the property (subject to restrictions)
Council tax and rates: Local authority taxes and rates related to the property
Travel expenses: Costs of travelling to the property for management purposes.

Meanwhile, non-deductible expenses would include:

Capital expenditure: Costs of improvements or additions to the property (these can be claimed as capital allowances or added to the property's base cost for capital gains tax purposes)
Personal expenses: Any costs not directly related to the holiday letting business, such as personal travel or entertainment.

VAT

Often overlooked is that If the holiday letting business income exceeds the VAT threshold (£90,000 as of 2024), it may need to register for VAT and charge VAT on the lettings.

Losses

Any UK FHL losses can only be carried forward and set off against future UK FHL profits.

Proposed changes to the rules

The favourable tax treatment has arguably skewed the lettings market particularly in popular holiday regions where families struggle to find homes to rent, during a time of a severe national housing crisis.
In part, as a recognition of this, the Chancellor Jeremy Hunt announced that changes would take effect from 6 April 2025 to put short-term lets on an equal footing with longer-term lets. From that date, FHL would be taxed as any other property business. In particular:

Mortgage interest relief would be restricted to the basic rate
Capital allowances would not be available on the initial purchase of equipment but only on replacement of existing assets
Business Asset Disposal Relief, gift hold-over relief and roll-over relief would no longer be available
Profits must be split between spouses and civil partners in the same proportion as ownership of the property
Profits would no longer count as earnings for pension contribution purposes.

Into the great unknown

These rules will not be legislated before the election. We do not know how high on the priority list these proposed changes will be for a new Government and whether they may be tweaked or rejected altogether.
Perhaps the most likely change is the reduction in tax relief on mortgage interest to basic rate. If you are concerned about this possibility, then it may be worth running the numbers to see just how much this could cost you in terms of extra tax.

One thing that we do know is that it is an uncertain time for owners of FHLs and being able to turn to a firm of tax advisors with experience and up to date knowledge in this area is essential.