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Buy-to-Let vs. Holiday Lets: A Breakdown of the Different Tax Rules.

Choosing between a traditional Buy-to-Let (BTL) and a Furnished Holiday Let (FHL) is one of the most significant decisions a property investor can make. While the rental income might seem similar, the tax treatments are dramatically different—and can be the deciding factor in your profitability.

This guide breaks down the key tax rules to help you understand which investment strategy aligns with your financial goals.

The Core Difference: An Investment vs. A Business

  • Buy-to-Let (BTL): Treated by HMRC as an investment activity. The tax rules are generally less generous, particularly with the introduction of Section 24.

  • Furnished Holiday Let (FHL): Treated as a trading business (similar to a small shop or service). This “trade” status unlocks a host of valuable tax reliefs not available to standard BTL landlords.

First, Does Your Property Qualify as an FHL?
To be eligible for the favourable FHL rules, your property must meet strict criteria:

  1. Furnished: It must be let with sufficient furniture for normal use.

  2. Availability: It must be available for commercial letting as holiday accommodation to the public for at least 210 days (30 weeks) per year.

  3. Actual Letting: It must be let to the public as holiday accommodation for at least 105 days (15 weeks) per year.

  4. Pattern of Occupation: No single let (by the same person) can exceed 31 continuous days. If it does, all lets exceeding 31 days in the year must total no more than 155 days.

Head-to-Head Tax Comparison

Tax Rule Buy-to-Let (BTL) Furnished Holiday Let (FHL)
Mortgage Interest Relief Restricted. You receive a 20% tax credit on your interest payments. This severely impacts higher-rate taxpayers. Full Relief. Mortgage interest is treated as a fully deductible business expense, reducing your profit before tax.
Capital Allowances Not Available. You cannot claim for furniture, appliances, or equipment. Available. You can claim Capital Allowances on items like furniture, white goods, and equipment (e.g., a lawnmower for the garden).
Capital Gains Tax (CGT) Reliefs Standard Rates. No special reliefs. CGT is paid at 18% or 28% on the gain. Access to Business Reliefs. Potentially eligible for Business Asset Disposal Relief (BADR), reducing the CGT rate to 10% on qualifying gains. May also qualify for rollover relief.
Pension Contributions No Special Treatment. Your rental income does not count as “relevant earnings” for pension contribution limits. Counts as Earnings. FHL profits are classed as “relevant earnings,” allowing you to make larger, more tax-efficient pension contributions.
Business Rates vs. Council Tax Pays Council Tax. Usually pays Business Rates. Many small FHLs qualify for 100% Small Business Rate Relief, meaning they pay nothing.
Profit Calculation Profit = Rent – Allowable Expenses (Excl. full mortgage interest). Profit = Rent – Allowable Expenses (Incl. full mortgage interest, utilities, cleaning, etc.).
National Insurance Generally, no National Insurance is payable on rental profits. If your profits are substantial, you may be liable to pay Class 2 and Class 4 National Insurance.

Detailed Breakdown of Key Differences

1. The Mortgage Interest Trap (Section 24)

This is the single biggest differentiator.

  • BTL: A higher-rate (40%) taxpayer with £20,000 rent and £10,000 mortgage interest can only deduct a 20% tax credit (£2,000). Their tax bill is based on the £20,000, significantly increasing their effective tax rate.

  • FHL: The same landlord deducts the full £10,000 interest from their income before calculating tax. Their profit is £10,000, and their tax bill is much lower.

2. Capital Expenditure: “Improvements” vs. “Allowances”

  • BTL: Replacing a worn-out sofa is a repair and is deductible. Replacing the entire kitchen is a capital improvement and is not deductible against income tax. You may only offset it against Capital Gains Tax when you sell.

  • FHL: You can claim Capital Allowances on capital items. This means you can write off the cost of the new kitchen, new beds, or a new hot tub against your profits over time, providing a valuable income tax break.

3. Selling the Property: The CGT Advantage

  • BTL: You pay CGT at the standard residential rates (18% for basic-ratepayers, 28% for higher-ratepayers).

  • FHL: If you qualify for Business Asset Disposal Relief (BADR), you pay CGT at just 10% on the first £1 million of gains in your lifetime. This can save you tens of thousands of pounds.

The Other Side of the Coin: Disadvantages of an FHL

The favourable tax regime exists for a reason: running an FHL is more like running a business.

  • Higher Running Costs: More frequent cleaning, laundry, maintenance, and utility bills.

  • Active Management Required: It demands constant marketing, guest communication, and key handling. Many owners use a agent, which takes a significant cut (15-25%).

  • Income Volatility: Income is seasonal and can be unpredictable. A BTL provides a steadier, more reliable income stream.

  • Stricter Regulations: You must comply with health and safety regulations, including gas safety, electrical checks, and fire safety.

The Verdict: Which is Right for You?

Choose a Buy-to-Let (BTL) if:

  • You want a passive, hands-off investment.

  • You prioritise a stable, predictable monthly income.

  • Your property is in an area with weak holiday demand but strong long-term rental demand.

  • You are a basic-rate taxpayer and the Section 24 impact is less severe.

Choose a Furnished Holiday Let (FHL) if:

  • You are willing to treat it as an active business and manage it intensively (or pay someone to do so).

  • You are a higher or additional-rate taxpayer and want to fully deduct mortgage interest.

  • The property is in a high-tourist-demand area.

  • Your goal is to maximize capital growth and you plan to eventually sell, making use of the 10% CGT rate.

  • You want to make large pension contributions from your property profits.

Final Word

The FHL tax benefits are powerful, but they are a reward for the hard work of running a hospitality business. The BTL offers simplicity and stability at the cost of less generous tax treatment.

Before deciding, crunch the numbers for your specific property and tax bracket. It is highly recommended to consult with an accountant who specialises in property investment. They can model the post-tax income for both scenarios and ensure you meet all the FHL qualifying criteria, making your investment both profitable and compliant.