Your possible objectives over the next 5–10 years:
- Replace lost Furnished Holiday Lettings benefits with genuine trading status to preserve interest deductibility and BADR
- Secure VAT registration to recover input tax on fit-out and running costs
- Structure operations for 10%/14%/18% Business Asset Disposal Relief on exit
Chat to Caira 24/7. Upload your serviced accommodation tax calculations, trade-status documentation, or VAT records for Caira to review. She can explain the trade vs property business test, draft clearer questions for your tax adviser, and help you spot issues in your spreadsheets. Free trial, no credit card required, privacy first.
The Furnished Holiday Lettings regime vanished on 6 April 2025. Before that date, landlords letting furnished holiday cottages could access full interest deductibility, capital allowances, and BADR without running a hotel-style operation. That shortcut is gone. The only remaining route to those reliefs is genuine trading status — meaning more services, shorter stays, active management. Serviced accommodation and aparthotels operated as trades are now the primary vehicles for hospitality investors seeking FHL-like treatment.
The trade vs property business test. HMRC Business Income Manual BIM55700–BIM55715 sets out the framework. The key factors are: level of services provided, frequency of guest turnover, and the nature of the occupation. Serviced apartments with staffed reception, housekeeping, linen change, utilities included, and short minimum stays are treated as trades. Passive lets with minimal services are property businesses. The distinction matters because trades qualify for full interest deductibility, capital allowances, BADR, and rollover relief — property businesses do not.
Full interest deductibility. Under s.24 ITTOIA 2005, finance costs on residential property businesses are restricted to a 20% credit. This restriction does not apply to trades. Serviced accommodation operated as a trade can deduct 100% of finance costs against trading income. For highly leveraged portfolios, this is a material difference in after-tax cash flow.
Capital allowances. Serviced accommodation fixtures, fittings, and integral features throughout the units qualify for capital allowances. Kitchens, bathrooms, furnishings, HVAC, and smart-home systems are plant. The AIA (£1,000,000 per year) provides 100% first-year relief. For companies, full expensing applies to main-pool assets. The asset mix in serviced accommodation is more favourable than long-term residential lets because of higher turnover and more frequent refurbishment cycles.
BADR on exit. Business Asset Disposal Relief taxes qualifying gains at 10% (rising to 14% in 2025, 18% in 2026), subject to a £1,000,000 lifetime cap. The asset must have been owned for at least two years and the business must be a trade. Serviced accommodation operated as a trade qualifies. Property businesses do not. The rate differential versus standard CGT (24% for residential property from April 2025) is meaningful on larger exits.
VAT treatment. Serviced accommodation is generally standard-rated for VAT under VATA 1994 Sch. 6 para 9, which treats hotels and "similar establishments" as standard-rated supplies. This means an operator can recover input VAT on fit-out and running costs, unlike VAT-exempt residential letting. VAT registration above £90,000 annual turnover is mandatory, but many operators register voluntarily to recover input tax earlier. The standard-rate position also means output VAT is charged on room rates, affecting pricing strategy.
Why this matters post-FHL. Before April 2025, a landlord letting a holiday cottage for 10 weeks a year could access FHL benefits without providing services. That option no longer exists. Investors moving up from simple holiday lets toward serviced-accommodation-style operations — more services, shorter stays, active management — are effectively repositioning themselves as hospitality trades. This is one of the most direct post-2025 planning responses to the FHL abolition.
Illustrative numbers. A £2,000,000 serviced apartment building with 60% allocated to qualifying plant and fixtures (£1,200,000). A company claims full expensing on the main-pool portion (£900,000) and 50% FYA on special-rate items (£150,000). Total first-year allowance is £1,050,000. At 25% corporation tax, the Year 1 tax shield is £262,500 — 13% of purchase price in year one. On exit after five years with a £500,000 gain, BADR at 14% (2025 rate) results in £70,000 tax, versus £120,000 at standard 24% CGT.
Documentation and risk. HMRC actively challenges borderline cases. Self-catering "serviced apartments" with minimal actual services have been reclassified as property businesses on enquiry. The services provided must be genuine and documented: staff rotas, service specifications, guest correspondence, and evidence of actual service delivery. Third-party property management arrangements can complicate the trade-status argument if the manager does not provide sufficient services.
Business rates. Serviced accommodation is assessed for non-domestic (business) rates, not council tax, if it meets the occupancy thresholds: available for short-term letting ≥140 days in the previous and current year, and actually let ≥70 days in the previous 12 months. Business rates are typically higher than council tax, but Small Business Rates Relief (up to 100% for properties with rateable value under £12,000) can mitigate the impact.
Feature | Property Business | Trade (Serviced Accommodation) |
|---|---|---|
--- | --- | --- |
Interest deductibility | 20% credit only | 100% deductible |
Capital allowances | Limited (mostly fixtures) | Broad (fixtures, fittings, integral features) |
BADR on exit | No | Yes (10%/14%/18%) |
VAT | Exempt | Standard-rated (input VAT recoverable) |
For institutional investors. PE sponsors building serviced accommodation platforms need to embed service delivery into the operating model from day one. Centralised housekeeping, reception, and guest services are not optional for tax purposes — they are the core of the trade-status argument. Pension funds investing in serviced accommodation via direct ownership or funds should verify that the operator's service level supports a trade-status claim, as this materially affects after-tax returns.
Caira is always with you — in board meetings, on site at properties, or reviewing complex tax spreadsheets late at night. Upload your serviced accommodation business plans, trade-status documentation, or VAT records for instant analysis. She can explain complex rules, flag risks in your documents, and help you prepare for adviser meetings. Free trial, no credit card required.
Bottom line. Serviced accommodation is the primary post-FHL route to hospitality-style tax treatment. The trade vs property business distinction is the critical determinant of whether interest deductibility, capital allowances, BADR, and rollover relief are available. Services must be genuine and documented. VAT registration adds complexity but enables input VAT recovery. Professional advice is essential to structure operations correctly from the outset.
Upload your serviced accommodation business plans, tax calculations, or trade-status documentation to Caira for instant review. She can explain the trade vs property test, identify risks in your documents, and help you prepare questions for your tax adviser. Caira works 24/7, even when you are in board meetings or on site visits. Free trial, no credit card required, privacy first.
Disclaimer: This article is general information, not legal, financial, tax or medical advice.
