Whether you’re a first-time host or a seasoned property owner, understanding tax on holiday lets in Wales is crucial.
From council tax and business rates to furnished holiday let tax rules, staying compliant ensures you maximise your income while avoiding costly mistakes.
This 2025 guide breaks down everything you need to know — including recent changes to FHL tax legislation, income tax rules, and available tax relief on holiday lets.
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Council Tax vs. Business Rates
One of the first considerations for holiday let owners is determining whether the property falls under council tax or business rates. This distinction depends on how frequently the property is rented out.
Council Tax
If your holiday let is available for rent for fewer than 140 days a year, it’s classified as a residential property and subject to council tax.
Local authorities in Wales can also charge a premium on second homes or empty properties, ranging from 50% to 300%, depending on location. This helps address housing shortages in popular tourist areas.
Business Rates
From April 2023, holiday lets available to rent for at least 252 days per year, and actually let for at least 182 days, qualify as self-catering properties and pay business rates instead.
Small Business Rate Relief: Properties with a rateable value up to £6,000 may qualify for 100% relief, with tapered relief available up to £12,000.
The Welsh Government has tightened letting thresholds, and from April 2025, the UK Government abolished the Furnished Holiday Let (FHL) tax regime.
This means:
- Holiday let income is treated the same as standard property income.
- CGT reliefs, capital allowances, and enhanced pension contributions no longer apply.
- Mortgage interest relief is limited to the basic rate of 20%.
Thinking of investing in a holiday home but not sure where to start? Check out our blog on holiday let mortgages.
Tax Treatment of Holiday Lets Post-FHL
Holiday let owners are required to pay income tax on profits generated from their properties, and profits are now calculated in line with normal property income rules.
Mortgage interest relief is now limited to the basic rate of 20%, and capital allowances can no longer be claimed. Instead, the Replacement of Domestic Items Relief applies for replacing furnishings.
CGT reliefs like Business Asset Disposal Relief and Rollover Relief are no longer available for holiday lets.
Pension contributions based on holiday let income are no longer permitted, as the income is not considered ‘relevant earnings’.
Income Tax on Holiday Let Income
Holiday let owners in Wales are required to pay income tax on the profits generated from their properties. From April 2025, the Furnished Holiday Let (FHL) regime has been abolished, and income is now treated the same as income from standard residential property lettings.
Profits Calculation: Profits are calculated by deducting allowable expenses from gross rental income. Allowable expenses include maintenance costs, utility bills, cleaning, insurance, and mortgage interest — though this is now only deductible at the basic rate of 20%, in line with standard property tax rules.
Profit Allocation: For jointly owned properties (e.g., between spouses), profits must now be split according to legal ownership shares, as is standard for other property income. The flexibility under FHL rules no longer applies.
Read our guide on running a successful holiday let business.
Capital Allowances
From April 2025, holiday let owners can no longer claim capital allowances on items such as furniture, fittings, or appliances. These properties are now treated the same as other residential lets.
Replacement of Domestic Items Relief: You can still deduct the cost of replacing domestic items (e.g., beds, sofas, fridges) when they are like-for-like replacements of worn-out items. This does not apply to initial purchases or property improvements.
Annual Investment Allowance (AIA): This no longer applies to holiday lets, as they are not classed as qualifying businesses for AIA purposes under the new rules.
Inheritance Tax (IHT)
Holiday lets may still potentially qualify for Business Property Relief (BPR), but achieving this has become significantly more challenging under current rules. To be eligible, the property must be operated as a genuine business, not simply as a passive investment. This means the owner must provide substantial additional services that go beyond basic accommodation, such as concierge services, catering, cleaning, linen changes, or personalised guest support.
Lettings that are largely passively managed, for example through an agency or online platform with minimal owner involvement, are very unlikely to meet the necessary threshold for BPR. The relief is intended for active businesses where the owner plays a significant role in delivering services to guests, rather than simply letting out a property for rental income.
Careful record-keeping and clear evidence of day-to-day operational involvement are essential for demonstrating that the holiday let qualifies as a trading business for BPR purposes. Without this, claiming the relief could be risky and may not stand up to scrutiny from HMRC.
Thinking of purchasing a holiday let in Wales? We’ve put together a comprehensive guide on buying a holiday let in South Wales.
Need a helping hand?
Owning and operating a holiday let in Wales can still be profitable, but the removal of FHL tax benefits and stricter letting thresholds mean owners must now navigate a more complex tax landscape. Tax reliefs such as CGT exemptions, capital allowances, and enhanced pension contributions no longer apply under the new system.
As always, it is highly recommended to consult a tax adviser or accountant to ensure you are complying with the latest legislation and making the most of any remaining tax reliefs available.
For more information about holiday let rules and regulations, and how we can help you make holiday letting as stress-free as possible, complete the form below to request contact from our team. You’ll also receive a copy of our FREE Owner Guide.
Please Note: The information contained in this article was accurate at the time of writing, based on our research. Rules, criteria and regulations change all the time, so please contact our prospective new owner team if you’d like to hear how. Nothing in this article constitutes the giving of financial, tax or legal advice to you; please consult your own professional advisor (accountant, lawyer etc). in this regard. If we have referred within the article to a third-party provider of unregulated holiday let mortgages, this is due to the fact that such mortgages aren’t currently regulated by the FCA.
As a helpful reminder, your home may be repossessed if you do not keep up repayments on a mortgage, so again anything you decide to do in this particular area this is one on which you should take your own professional advice on too, as we aren’t providing and can’t provide you with this.
As a holiday letting owner you are responsible for compliance with health & safety laws, regulations and guidance, and for having suitable insurances in place (not Sykes Holiday Cottages or its brands). From time to time, Sykes shares information with you on the topic of health and safety and insurance. When it does so, it is not providing you with advice (legal, financial, tax or otherwise); please seek your own as you see fit. In addition, it is not making any representations or warranties about the information being complete or free from errors or inaccuracies. Sykes shall not be liable for any loss or damage arising under or in connection with your reliance on it.
