Transferring a Former FHL Portfolio to a Limited Company: The Post-Abolition Decision

The Furnished Holiday Lettings tax regime was abolished from 6 April 2025. Properties that previously enjoyed a near-trading tax treatment (full mortgage interest deduction, capital allowances on furniture and integral features, Business Asset Disposal Relief on sale at 10% CGT, pension-eligible earnings, the ability to split income freely between joint owners without a form 17 election) now sit firmly inside the standard residential rental regime. Section 24 mortgage interest restriction applies. BADR is gone. The pension link is broken. The freedoms are over.

For many former FHL owners, the question of whether to incorporate has flipped from "probably not worth it" to "needs serious modelling". The benefits of running residential property through a limited company (full interest deduction, lower corporation tax rate, no 2027 property income surcharge, employer pension extraction) have not changed; what has changed is the value of staying on the personal side, which has fallen sharply. This page walks through the post-abolition landscape, the trade-offs, the CGT and SDLT cost of the transfer, the ATED position for higher-value stock, and a worked example for a three-property portfolio.

For the wider context on FHL abolition and the locked tax positions across the regime, see our buy-to-let limited company complete guide. For the pure CGT mechanics on a property-to-company transfer, see our CGT on property transfer to limited company guide. For the personal-versus-company tax comparison generally, see our limited company vs personal ownership 2026 comparison.

What changed at abolition

The Spring Budget 2024 announced FHL abolition with effect from 6 April 2025. The detail was confirmed in the Finance (No.2) Act 2024. From that date:

• Section 24 applies. Mortgage interest on former-FHL property is no longer deductible from rental profit; a 20% basic-rate tax credit is granted instead, capped under the standard rules.
• BADR is no longer available. Disposals on or after 6 April 2025 pay residential CGT rates (18% or 24%) regardless of FHL history. BADR was the 10% (rising to 14%) rate available on disposals up to 5 April 2025.
• Capital allowances pools survive. Brought-forward pools continue to attract writing-down allowances in the new residential property business. New capital expenditure on furniture and integral features after 5 April 2025 is no longer allowance-eligible (the standard residential property rules deny capital allowances on residential lets).
• Pension link is broken. FHL profits no longer count as relevant UK earnings for personal pension contribution purposes.
• Joint-ownership 50/50 default returns. The flexibility to split FHL income between spouses in any agreed proportion is gone; the standard 50/50 default for non-FHL property applies unless a form 17 declaration is filed (which requires evidence of actual beneficial ownership in the declared proportions).
• Losses ring-fenced. Former-FHL losses are carried forward against future profits of the standard residential property business, not other income.

The transitional protections (capital allowance pools, loss carry-forward) soften the impact but do not change the headline tax cost. A leveraged former-FHL portfolio earning £40,000 of net rent before interest, paying £30,000 of mortgage interest, sees post-tax income drop materially when interest stops being deductible. A higher-rate-taxpayer owner of such a portfolio sees their effective tax rate on the rental profit jump from around 40% to closer to 60%.

The personal-side picture after abolition

For an unleveraged former-FHL portfolio (no mortgage), abolition is uncomfortable but not catastrophic. The owner loses BADR on future sale and the pension link, but the income-tax picture is broadly unchanged because there was no interest deduction to lose. Personal ownership continues to be a reasonable choice.

For a leveraged portfolio, abolition is materially negative. The S24 cap routinely produces effective tax rates above 50% for higher-rate-taxpayer owners where the interest cost is a large proportion of gross rent. The £100,000 personal allowance taper compounds the problem: rental profits added to total income (before the S24 credit) can push the owner above £100,000 and into the 60% effective marginal rate band. The compounding effect catches even owners who would not previously have been in the taper zone.

The company-side picture

Holding former-FHL property through a limited company changes the income tax position fundamentally:

• Full mortgage interest deduction. Companies are not subject to S24. Interest is deductible as an expense of the property business or as a non-trading loan relationship debit, depending on classification.
• Corporation tax instead of income tax. Standard arm's-length BTL companies are not CIHCs and access the 19% small profits rate and marginal relief, subject to the associated-companies divisor (see our marginal relief guide). For most former-FHL portfolios with three or four properties and modest profit per property, the effective corporation tax rate is between 19% and 25%, materially below higher-rate income tax.
• No 2027 surcharge exposure. The 2% property income surcharge announced in Autumn Budget 2024 applies only to individual landlords. Company profits are unaffected.
• Employer pension contributions. The company can pay directly into the director's SIPP without the loss of FHL-as-relevant-earnings being relevant; employer contributions are not constrained by the personal earnings limit.
• Director's loan account flexibility. Pre-incorporation funding can build a credit DLA that is repayable tax-free over time; see our DLA mechanics guide for the worked extraction example.

The trade-offs run the other way too. BTL-via-company mortgage rates are typically 0.5 to 1 percentage point higher than personal BTL rates. ATED applies where individual property values exceed £500,000. SDLT on the transfer is paid at full residential rates plus the 5% additional dwellings surcharge. CGT is paid on the transfer to the extent s.162 incorporation relief does not roll the gain into the share base cost.

CGT on the transfer: section 162 mechanics

The headline CGT cost on transferring a portfolio worth £1.2 million with a base cost of £600,000 (gain £600,000) at residential CGT rates is roughly £140,000 (basic-rate portion at 18% plus higher-rate portion at 24%). Without relief, that cost alone deters most incorporations.

Section 162 TCGA 1992 rolls the gain over into the base cost of the shares received in the company, provided three conditions are met: the whole of the business (other than cash) is transferred, the transfer is in exchange wholly or partly for shares, and the activity transferred is a business in the relevant sense. The Ramsay v HMRC [2013] decision sets the active-business threshold for property letting: HMRC and the tribunal look at time spent, level of service, organisation, and whether the activity has the character of a commercial enterprise.

FHL operations historically met the threshold relatively comfortably because of the level of guest-facing service required (cleaning, linen, key handling, marketing, year-round turnover). Post-abolition, whether the activity continues to meet the threshold depends on how the properties are actually run from 6 April 2025. An operator who continues to provide hotel-like services to short-term guests probably still meets the test. An operator who has shifted to long-term assured shorthold lets probably does not, because passive ASTs look like investment, not business.

The proportion of consideration taken as shares versus as a director's loan matters. Full s.162 relief is only available where 100% of the consideration is shares. Where part is taken as a DLA credit (because the owner wants to draw it back tax-free over time, as in the worked example in our DLA mechanics guide), the gain attributable to the DLA portion crystallises. On a £600,000 gain with 70% shares and 30% DLA, £180,000 of gain crystallises at 18% or 24%, costing £32,000 to £43,000 of CGT.

SDLT on the transfer

SDLT is paid by the company on the market value of each property at the transfer date. Standard residential rates apply, plus the 5% additional dwellings surcharge (the surcharge applies to companies on any residential acquisition, regardless of whether the company has other dwellings). For a three-property portfolio:

• Property 1, £450,000 market value: SDLT plus 5% surcharge = standard band tax (£12,500) plus £22,500 (5% × £450,000) = £35,000.
• Property 2, £350,000 market value: £7,500 plus £17,500 = £25,000.
• Property 3, £400,000 market value: £10,000 plus £20,000 = £30,000.
• Total SDLT: £90,000.

For a portfolio of six or more dwellings transferred in a single transaction, the company can rely on the six-dwellings rule in section 116(7) Finance Act 2003 to treat the acquisition as non-residential and avoid both the standard residential rates and the additional dwellings surcharge. For a three-property portfolio, no such relief is available; the standard residential plus 5% surcharge applies.

ATED for higher-value stock

ATED applies where any single residential dwelling held by a company is worth more than £500,000 at the relevant valuation date. The bands run from £4,450 a year (for £500k to £1m) through to £292,350 (for over £20m). Where the property is let to unconnected tenants on commercial terms, the property rental business relief in section 133 Finance Act 2013 is available and reduces the chargeable amount to nil; however, the ATED return must still be filed by 30 April each year and the relief claimed annually.

For former FHL stock in tourist hotspots, the £500,000 threshold is routinely exceeded. A Cornish or Lake District cottage that operated as an FHL may carry a market value of £600,000 to £900,000. The ATED filing obligation is a small but recurring administrative cost of holding such stock in a company, and the connected-party-let exclusion from the relief is a real risk if the owner stays in the property for personal holidays during void periods.

Worked example: three-property former-FHL portfolio

Helen owns three former-FHL cottages in Devon. Aggregate market value £1.2 million. Aggregate base cost £600,000. Aggregate gain £600,000. The portfolio generated £45,000 of net rent before interest in 2024/25; mortgage interest of £30,000 on £700,000 of borrowing. Helen is a higher-rate taxpayer.

Personal-side picture, 2026/27 (first full year post-abolition):

• Rental profit (before interest, post-S24): £45,000.
• Income tax at 40% on £45,000: £18,000.
• S24 credit: 20% × £30,000 = £6,000.
• Net income tax: £12,000.
• After-tax rental income (cash): £45,000 minus £30,000 interest minus £12,000 tax = £3,000.

Company-side picture, 2026/27 (assuming incorporation completed in early 2026 and one HoldCo + three SPVs structure with associated-companies divisor):

• Rental profit (after interest deduction): £15,000 (£45,000 minus £30,000).
• Per-SPV profit at three SPVs: roughly £5,000 each.
• With £50,000/3 = £16,667 lower threshold per SPV (sharing with HoldCo brings divisor to 4 and lower limit to £12,500), each SPV's £5,000 is below threshold; small profits rate at 19% applies.
• Corporation tax on £15,000: roughly £2,850.
• After-tax retained profit: £12,150.

The company structure leaves £9,150 a year more cash (within the company, available for reinvestment or extraction via DLA repayment or dividend). Over a 5-year hold, that is around £45,000 of net cash retained, against upfront one-off costs of perhaps £45,000 to £55,000 of CGT (on the DLA-share portion not covered by s.162) and £90,000 of SDLT. The breakeven is around 10 to 12 years on the pre-2027 picture.

The 2027 surcharge changes the breakeven materially. From 6 April 2027, Helen's personal-side income tax on the £45,000 rental profit jumps to 42% (the surcharge-inclusive higher rate), increasing tax by £900 a year. Over a 10-year hold the surcharge alone adds £9,000 of personal tax compared to the company route. The breakeven moves to around 7 to 8 years.

Decision framework

The strongest cases for incorporating a former-FHL portfolio:

• Higher-rate taxpayer with substantial mortgage debt where S24 takes a large bite annually.
• Long holding intention (5+ years) where ongoing annual savings repay the upfront one-off transfer costs.
• Continuing genuine business activity (serviced accommodation, holiday-let-style turnover) that supports s.162 and reduces the upfront CGT cost.
• Intention to reinvest profits into further property acquisitions, where corporate retained earnings work harder than post-tax personal cash.
• No imminent disposal plans (because the BADR-loss point is symmetric: BADR is gone on the personal side too, so transferring doesn't lose anything that was still available).

The weakest cases:

• Basic-rate taxpayer where S24 has minimal effect.
• Unleveraged or lightly-leveraged portfolios where the interest-deduction advantage of the company is small.
• Short holding horizon (under 5 years) where upfront SDLT and CGT costs do not have time to repay.
• FHL stock that has shifted to long-term ASTs, failing the s.162 active-business test and crystallising the full gain on the transfer.
• Single-property portfolios where ATED filing obligations are administratively disproportionate to the saving.

For most of the middle cases, the answer is sensitive to assumptions about the next 5 to 10 years. Reasonable people can land on either side. The discipline is to model the decision over a multi-year horizon (not a single year), to use realistic assumptions about void periods and interest rates, and to factor in the 2027 surcharge that materially shifts the balance toward incorporation for higher-rate taxpayers.