Furnished holiday lets | What property owners need to know about inheritance tax & business property relief

Furnished holiday lets (FHLs) have long been a popular investment, offering owners the opportunity to generate income through short-term rentals while also offering tax advantages, particularly in relation to Inheritance Tax (IHT). However, recent legal decisions and upcoming legislative changes have significantly altered the landscape, making it essential for property owners and prospective investors to understand the implications.

Business Property Relief and FHLs

Business Property Relief (BPR), as set out in the Inheritance Tax Act 1984, provides relief from IHT on the transfer of qualifying business assets. If eligible, these assets can be passed on either during a person’s lifetime or through their estate with reduced or no IHT liability. Crucially, BPR does not apply to businesses that are primarily investment-based, such as those that derive income from holding and letting property.

This distinction lies at the heart of whether FHLs qualify for relief.

The question of whether an FHL constitutes a trading business, or an investment has been the subject of significant debate. The answer largely depends on the nature and extent of services provided as part of the letting activity.

What is an FHL?

Before we look further, it is worth a quick reminder of who is going to be affected. To qualify as an FHL, a property must be based in the UK or the European Economic Area (EEA), furnished and let on a commercial basis, and the following conditions need to be met:

1. The property must be available for letting for 210 days a year.
2. It must actually be let for 105 days a year (the let days test).
3. The property must not normally be let for periods of more than 31 consecutive days to the same person, but if it is, those let days don’t count towards the number of let days in point two above.
4. The total of all lettings which exceed 31 days also can’t exceed 155 days.

The Pawson Case

A key case in this area was HMRC v Nicolette Vivian Pawson. In this case, the late Mrs Pawson held a share in a property in Suffolk which was let on a short-term basis as a holiday home. Her estate claimed BPR, arguing that the letting business involved sufficient activity to constitute a trading operation.

The First-tier Tribunal initially accepted this position, concluding that the provision of services such as cleaning and utility management went beyond simple investment. However, HMRC appealed, and the Upper Tribunal overturned the decision. It found that the letting activity was essentially investment-based, and the services provided were not substantial enough to alter the character of the business. As such, BPR was denied.

This case set a precedent and confirmed HMRC’s stance that most FHLs do not qualify for BPR unless the level of additional service is significant and comparable to a hotel-type operation.

The impact of the Pawson ruling was reaffirmed in the 2025 First-tier Tribunal decision involving the estate of Gertrud Tanner. The case concerned a portfolio of five self-catering holiday lets in Whitby, Yorkshire, with services such as welcome baskets, concierge support, and restaurant bookings provided as part of the accommodation package.

Despite this, the tribunal found that these services were ancillary to the primary purpose of providing accommodation. HMRC argued successfully that the business constituted an investment activity under section 105 of the Inheritance Tax Act 1984. The judge held that although the services were actively managed and required significant time, they were insufficient to transform the business into one eligible for BPR and resulted in a tax bill of £1,168,801.

The tribunal cited Pawson directly, noting that actively managed property still retains its investment character unless the level of additional services approaches that of a trading enterprise like a hotel. The appeal was dismissed, reinforcing the precedent that substantial service provision is required to claim relief.

Upcoming Changes to the FHL Regime

In the Spring Budget 2024, the government announced the abolition of the furnished holiday lettings tax regime with effect from 6^th April 2025 (1^st April 2025 for companies). The aim is to equalise the tax treatment of FHLs with other types of residential property letting. As a result, a number of tax advantages currently available to FHL owners will be withdrawn, including:

• Full deduction of mortgage interest against rental income
• Access to Business Asset Disposal Relief, Rollover Relief and Gift Relief for capital gains
• The ability to treat profits as relevant earnings for pension contributions

These changes will significantly alter the financial landscape for FHL operators and may affect the long-term viability of maintaining such properties purely for tax planning purposes.

Capital Allowances for FHL owners

Capital Allowances provide tax relief for businesses that invest in qualifying assets such as machinery, equipment or vehicles.

In the UK, these allowances are generally not available for residential properties due to the ‘dwelling exclusion’. FHLs have historically been an exception to this rule, allowing owners to claim relief on eligible expenditure. However, from April 2025 this entitlement will be removed. From that point onwards, FHL owners, whether operating individually or through a company will no longer be able to claim Capital Allowances on the initial purchase of assets such as moveable furniture, household appliances etc. The ability to claim tax relief will apply only to replacements.

Conclusion

FHLs have historically provided certain inheritance tax advantages, but the decision in Pawson and HMRC’s current guidance make it clear that, in most cases, these businesses will not qualify for BPR. Coupled with the forthcoming legislative changes, property owners should urgently review their tax planning strategies. Where the intention is to claim BPR, they will need to demonstrate that the level of service provided goes far beyond that of a typical holiday letting.