Holiday lets after April 2025: planning to pass the cottage on

For years, the family holiday cottage enjoyed a quiet tax advantage. If it was let commercially for enough weeks a year, the tax rules treated it more like a small trading business than an ordinary rental. That special status — the furnished holiday lettings regime — ended in April 2025. Many owners carried on letting exactly as before and barely noticed. But if you are hoping to pass a holiday let to your children one day, the change matters, and it is worth revisiting the plan.

This is not a tax lecture. It is about the practical question every owner of a holiday let eventually faces: who should own it, and what should happen to it when you are no longer here to run it?

What the old regime gave you

A property that qualified as a furnished holiday let was treated, for several purposes, as a trade. That brought a set of reliefs that ordinary landlords did not get:

• Business Asset Disposal Relief on a sale, with its lower rate of Capital Gains Tax on qualifying gains up to the £1m lifetime limit.
• Gift holdover relief under section 165, which allowed parents to give the property to their children and pass the gain across with it, so no Capital Gains Tax was paid at the time of the gift.
• Rollover relief, which let you sell one holiday let and reinvest in another without an immediate tax bill on the gain.
• Capital allowances on furniture, fittings and equipment.
• Full relief for mortgage interest, rather than the basic-rate credit that applies to other residential landlords.
• Profits counted as relevant earnings for pension contributions.

What has changed

The regime was abolished from 6 April 2025 for Income Tax and Capital Gains Tax, and from 1 April 2025 for companies. A former holiday let is now simply part of your ordinary UK (or overseas) property business, taxed in the same way as any other let property.

In practice, that means Business Asset Disposal Relief, gift holdover relief and rollover relief are no longer available on a holiday let disposed of after that date. Mortgage interest relief is restricted to the basic rate, as for other landlords. New spending on furniture and fittings falls under replacement of domestic items relief rather than capital allowances, and holiday letting profits no longer count towards the earnings figure that sets how much you can pay into a pension with tax relief.

There are some transitional rules worth knowing:

• If you already had a capital allowances pool at 5 April 2025, you can keep claiming writing-down allowances on it until it is used up.
• Losses carried forward from the holiday letting business can be set against profits of your wider property business.
• If a holiday letting business genuinely ceased before 6 April 2025, Business Asset Disposal Relief may still be available on a later disposal within the normal time limits. HMRC is clear that cessation means no bookings and no intention to resume — not simply a quiet season.
• An anti-forestalling rule stops people locking in the old reliefs through contracts entered into from 6 March 2024 that complete after the change.

HMRC has also confirmed that abolition did not, of itself, bring your business to an end. You can carry on letting to holidaymakers exactly as before. It is the tax treatment that has changed, not what you are allowed to do with the property.

Inheritance Tax was never the strong point

Here is the part that surprises many owners. Even under the old regime, a holiday let rarely qualified for Business Relief from Inheritance Tax. The furnished holiday lettings rules were income tax and capital gains rules; they never changed the Inheritance Tax test.

The leading case is HMRC v Pawson [2013] UKUT 050 (TCC). The family had let a seaside bungalow in Suffolk to holidaymakers for years, and the First-tier Tribunal allowed Business Relief. The Upper Tribunal reversed that decision. It accepted that there was a genuine letting business run for profit, but held that it was still mainly a business of holding property and letting it out, rather than a trade. The cleaning, changeovers and help with bookings did not change that.

Since then, Business Relief claims on holiday lets have generally struggled. A business offering substantial hotel-style services may be a different matter, but for the typical cottage, flat or lodge the safe assumption is simple: the full value sits in your estate for Inheritance Tax, alongside your home, savings and any other property.

A worked example

Take a Sussex couple — we will call them Martin and Helen, purely as an illustration. They own their home, a small portfolio of let flats, and a cottage in Cornwall that has been let to holidaymakers for fifteen years. The cottage is worth £450,000 and was bought for £200,000.

Before April 2025, if they had wanted to hand the cottage to their two daughters, they could have used gift holdover relief. The gain would have passed to the daughters with the property, and no Capital Gains Tax would have been due on the gift.

Today, a gift to the daughters is treated as a sale at market value. Martin and Helen would face Capital Gains Tax on a gain of around £250,000 straight away, even though no money has changed hands. The gift would also need them to survive seven years to fall fully outside their estate for Inheritance Tax.

If instead they keep the cottage until death, there is no Capital Gains Tax on death — the daughters inherit at the value at that date. But the cottage counts in full for Inheritance Tax. With a combined estate well above the up to £1m that a couple can usually pass free of Inheritance Tax (two nil-rate bands of £325,000 and two residence nil-rate bands of £175,000, frozen to 2030), the cottage could carry an Inheritance Tax charge of around £180,000 — 40% of its value. And if their estate approaches £2m, the residence nil-rate band begins to taper away too.

Neither route is automatically right. The point is that the decision now looks very different from the one they might have planned a few years ago.

The traps to watch

Giving it away but still using it

Many families give a holiday home to the children and carry on enjoying it for a few weeks each summer. If you keep using a property you have given away without paying a full market rent, it can be treated as a gift with reservation — and still counted in your estate for Inheritance Tax, however many years pass.

Assuming the children want it

A holiday let is a working asset. It needs managing, maintaining, insuring and marketing. One child may love the idea; another may live abroad, have no interest, or simply need the money. Leaving it to them all equally, without thinking about how they will make decisions together, is one of the most common sources of family friction we see.

Forgetting the cash for Inheritance Tax

Inheritance Tax is usually payable before the estate can be fully distributed. If the cottage is a large part of the estate and there is little cash, the family may have to sell it anyway — sometimes quickly, and not on their terms.

Treating it as separate from the portfolio

Since April 2025, the holiday let is just one more property in your letting business. It makes sense to plan for it together with your other lets: which properties are best kept, which might be sold or gifted in your lifetime, and how the whole portfolio is split between your beneficiaries.

What to do

Have the family conversation first. Ask your children directly whether they would want to keep the property, run it, or share it. Their answers shape everything else.

Check how it is owned. If you own it with your spouse or partner as Tenants in Common, each of you can leave your own share by Will. That gives flexibility — for example, leaving a share into trust, or to one child — and can help with Inheritance Tax planning across both estates.

Decide what your Will should say. There are several sensible options:

• Leave the property to the children as Tenants in Common, with clear guidance on how it is to be run or sold.
• Leave it to the one child who wants it, with other assets used to keep things fair between the children.
• Leave it to trustees, with the power to keep it for the family or sell it when the time is right.
• Direct that it be sold and the proceeds divided, if no one wants the responsibility.

Weigh lifetime gifts carefully. With gift holdover relief gone, gifting a holiday let outright now usually triggers Capital Gains Tax. In some cases a gain can still be held over when property goes into certain kinds of trust, but that comes with its own Inheritance Tax rules and needs proper advice before anything is signed.

Think about liquidity. If you want the family to keep the property, consider how any Inheritance Tax would be paid — from other assets, from savings, or through life cover written in trust.

If the property is abroad, it can still be dealt with in your UK Will. We include an express election under the European Succession Regulation (Brussels IV) so that English law governs your estate, including a holiday home in France, Spain or elsewhere in Europe.

In short

The holiday let has lost its special tax status, and for Inheritance Tax it never really had one. That does not mean you should sell it. It does mean the plan for passing it on deserves a fresh look — one that starts with what your family actually wants, and then puts the right ownership and Will provisions in place to deliver it.

If you own a holiday let and would like to talk through what happens to it next, book a Discovery Call — 30 minutes, £30, credited against our fees if you go on to instruct us.