Introduction
Furnished Holiday Lets (FHLs) offer significant tax advantages during ownership, but what happens when it’s time to sell? Unlike standard buy-to-let properties, FHLs are treated as businesses for tax purposes, which can open the door to valuable Capital Gains Tax (CGT) reliefs and exemptions. However, failing to meet HMRC’s strict criteria could result in unexpected tax liabilities plus the abolishment of the FHL tax regime from April 2025 will remove many tax benefits.
This article breaks down CGT rules for selling an FHL, including applicable tax rates, key reliefs such as Business Asset Disposal Relief and Rollover Relief, and common pitfalls to avoid. Whether you’re planning an immediate sale or strategising for the future, understanding your tax position can make a substantial difference to your final profit.
1. Understanding Capital Gains Tax (CGT) on FHL Sales
What is Capital Gains Tax?
Capital Gains Tax (CGT) is a tax on the profit made when selling an asset that has increased in value. For property owners, this applies to residential and commercial properties, including Furnished Holiday Lets (FHLs). The tax is calculated on the gain (sale price minus purchase price and allowable expenses), not the total sale price.
How CGT Applies to Furnished Holiday Lets
FHLs are treated differently from standard residential buy-to-let properties. As they qualify as businesses under HMRC rules, they may be eligible for reliefs not available to traditional landlords. However, to benefit from these tax advantages, an FHL must meet strict criteria, including being available for holiday letting at least 210 days a year and actually let for at least 105 days. If these conditions are not met before the sale, the property may lose its FHL status, leading to higher CGT liabilities.
2. CGT Rates for Selling FHL Properties
Standard CGT Rates for Individuals and Companies
The Capital Gains Tax rate for selling an FHL depends on the seller’s tax status:
Individuals pay CGT at 18% (basic rate taxpayers) or 24% (higher rate taxpayers) for gains on qualifying FHLs.
Companies pay Corporation Tax on capital gains instead of CGT, with rates depending on the company’s overall taxable profits.
How Property Type and Ownership Affect Taxation
FHLs enjoy favourable tax treatment compared to standard rental properties. However, the tax treatment varies based on ownership:
Sole Traders and Partnerships may benefit from Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), reducing CGT to 18%.
Limited Companies face Corporation Tax but may have options for reinvestment to defer tax liabilities.
Tip
Ensuring the property maintains its FHL status up to the point of sale is crucial for securing lower CGT rates and exemptions.
3. Key CGT Reliefs & Exemptions for FHL Owners
Selling an FHL comes with potential tax reliefs that can significantly reduce your Capital Gains Tax liability. Here are the key exemptions and reliefs available:
Business Asset Disposal Relief (formerly Entrepreneurs’ Relief)
Reduces CGT to 18% on qualifying gains.
Available if you’ve owned the FHL as a business for at least two years before selling.
The property must meet FHL criteria at the time of sale.
Rollover Relief
Defers CGT if proceeds are reinvested in another qualifying business asset (e.g., a new FHL or commercial property).
The new asset must be purchased within three years of selling the original FHL.
Private Residence Relief (Limited Cases)
If you’ve used part of the FHL as your main residence, you may qualify for partial CGT exemption.
Relief applies only to the portion of the property used as your home, not the entire FHL.
Tip
Maximising these reliefs depends on proper planning and ensuring compliance with HMRC’s FHL rules.
4. Qualifying Criteria for FHL CGT Reliefs
To benefit from CGT reliefs when selling a Furnished Holiday Let, the property must meet strict HMRC requirements. Failing to comply can result in the loss of tax advantages.
HMRC Requirements for FHL Classification
A property must satisfy the following conditions to be considered an FHL:
Availability Test – The property must be available for holiday letting at least 210 days per tax year.
Letting Test – It must be let to the public for at least 105 days per year.
Pattern of Occupation Test – Longer-term lets (over 31 days) must not exceed 155 days per year.
Active Business Conditions for Tax Relief Eligibility
To qualify for Business Asset Disposal Relief and Rollover Relief, HMRC requires that:
The FHL is actively operated as a business, not just held as an investment.
The owner has been running the FHL for at least two years before the sale.
The FHL rules are met in the final 12 months before the sale to retain business asset status.
Did you know?
Failing to maintain FHL status before selling could result in the property being taxed at higher residential CGT rates rather than the lower business rates.
5. Planning for a Tax-Efficient Sale
Selling an FHL requires careful planning to minimise Capital Gains Tax and maximise profits. Here are key strategies to consider:
Timing Your Sale for Optimal Tax Benefits
Ensure your property meets FHL criteria in the final tax year before selling to retain business asset status.
Consider selling in a year when your income is lower to reduce the CGT rate (basic rate taxpayers pay 18% instead of 24%).
If possible, stagger sales over multiple tax years to take advantage of annual CGT allowances.
Record-Keeping and Professional Advice
Maintain detailed financial records, including purchase costs, renovation expenses, and letting history, to support CGT relief claims.
Work with a tax advisor to explore eligibility for Business Asset Disposal Relief or Rollover Relief.
Plan reinvestment strategies if using Rollover Relief to defer tax liabilities.
Proper planning can make a significant difference in the final tax bill when selling your FHL.
6. Common Pitfalls & How to Avoid Them
Failing to meet HMRC’s requirements or miscalculating tax liabilities can lead to unexpected costs. Here are some common mistakes and how to avoid them:
Losing FHL Status Before the Sale
If the property doesn’t meet FHL criteria in the final 12 months, it may be taxed at higher residential CGT rates (up to 24% instead of 18%).
Solution:
Ensure the letting and occupancy conditions are satisfied in the tax year leading up to the sale.
Misreporting Gains and Triggering Penalties
Incorrectly calculating CGT liabilities or failing to report the sale on time can result in penalties from HMRC.
Solution
Keep accurate records of purchase costs, improvement expenses, and sale details. File your CGT return within 60 days of completion to avoid fines.
Missing Out on Available Reliefs
Overlooking tax reliefs like Business Asset Disposal Relief or Rollover Relief can mean paying more CGT than necessary.
Solution
Consult a tax advisor before the sale to ensure all available reliefs are claimed correctly or look at incorporating the furnished holiday lets business into a Family Investment Company.
By staying informed and planning ahead, FHL owners can avoid costly mistakes and make the most of available CGT exemptions.
What to do after April 2025
The upcoming abolishment of the FHL tax regime for privately owned properties and lost of Business Asset Disposal Relief (BADR) means FHL investors should look into incorporating the business into a Family Investment Company to regain access to BADR.
How can a Family Investment Company help Furnished Holiday Let Landlords?
A Family Investment Company (FIC) can offer several benefits to Furnished Holiday Let (FHL) landlords, particularly in terms of tax efficiency, asset protection, and succession planning. Here’s how it could work for FHL owners:
1. Tax Efficiency
FICs are typically set up as limited companies that hold family assets. By using an FIC, FHL landlords can benefit from corporate tax rates rather than personal income tax rates, which can be advantageous when the property generates significant rental income or capital gains.
Corporation Tax Rates: The current Corporation Tax rate (19% as of 2025) is lower than the higher Income Tax rate for individuals (up to 45% for the highest earners). This can reduce the overall tax burden for FHL owners, particularly those in higher income tax bands.
Retained Earnings: An FIC allows you to retain profits within the company rather than distributing them as income, which can help in deferring tax liabilities.
Dividends: When profits are distributed to shareholders (typically family members), dividend tax rates are lower than income tax rates, potentially saving money if structured appropriately.
2. Capital Gains Tax (CGT) Benefits
An FIC can also help minimise CGT when selling FHL properties.
Business Asset Disposal Relief: If the FHL qualifies as a business, an FIC can benefit from Business Asset Disposal Relief, reducing CGT on the sale of shares to 18%. This is an advantage compared to selling the property personally, where CGT could be higher.
Inheritance Tax (IHT) Planning: Using an FIC enables you to transfer shares in the company to future generations without triggering a large tax bill. By gifting shares, you can reduce the value of your estate for Inheritance Tax purposes, potentially passing on assets more tax-efficiently.
3. Asset Protection
FICs can provide a layer of protection for your assets, separating personal and business risks.
Limited Liability: By holding FHLs in a company, the owners' personal assets are protected from potential business liabilities (e.g., legal disputes, debts).
Family Control: An FIC structure allows you to retain control over the FHL portfolio while transferring equity or voting rights to family members in a controlled manner. This is particularly useful in multi-generational property businesses.
4. Succession Planning and Flexibility
FICs offer significant advantages for succession planning.
Generational Wealth Transfer: You can pass on shares to children or other family members, enabling long-term ownership of the property portfolio without needing to sell the assets.
Flexibility in Distribution: The structure of the company allows for flexible income distribution. Different family members can be allocated different levels of income or capital gains, depending on their shareholding, which is ideal for family wealth planning.
5. The Downsides
While FICs offer advantages, there are some considerations to keep in mind:
Administrative Costs: Setting up and maintaining an FIC can involve significant legal and accounting fees, as well as ongoing compliance requirements.
Tax on Sale of Shares: When you sell shares in an FIC, you could face CGT, though Business Asset Disposal Relief may reduce the tax liability.
Conclusion
For FHL landlords, a Family Investment Company can provide significant tax savings, asset protection, and a strategic approach to succession planning. It’s important to seek advice from a qualified tax professional or financial advisor to ensure the structure is set up correctly and aligns with long-term goals.
