Understanding the Taxation of FHLs in a Company

Before April 2025, a UK limited company holding qualifying Furnished Holiday Letting stock had a modest tax advantage over individual ownership. The personal-side regime already gave full mortgage interest deduction, Business Asset Disposal Relief at 10% on disposal, pension-relevant-UK-earnings treatment, and access to plant-and-machinery capital allowances. The corporate side offered marginally lower rates on retained profit and a more orderly disposal mechanic, but nothing structural. Finance Act 2025 Schedule 5 changed the calculation. Part 1 stripped the personal-side advantages (Section 24 ingress, BADR loss, pension cap collapse, no new capital allowances). Part 2 omitted the company-side FHL overrides for parallel symmetry. But the underlying corporate architecture (full mortgage interest deductibility, no Section 24, no personal-rate disposal premium) is unchanged. The result is a structural flip in the relative attractiveness of corporate holding.

This page is the steady-state position for a director or adviser who already holds, or is about to hold, former-FHL stock in a UK Ltd company. The companion transferring an FHL portfolio to a limited company page is the move-in route (s.162 incorporation relief, SDLT on transfer, anti-forestalling). This page is the post-incorporation tax architecture: the corporation tax rate stack, mortgage interest deductibility, ATED, capital allowances, and the disposal-side treatment.

The enabling legislation is FA 2025 Sch 5 Part 2, not FA 2024 Sch 5 (which is the museums and galleries Schedule). The position to cite is the enacted FA 2025 Sch 5 c.8, latest revision 20 March 2025.

Commencement and the company-side omissions

FA 2025 Sch 5 Part 2 omitted the company-side FHL overrides via amendments to CTA 2009 ss.202, 250A, 252, 748 and Schedule 4 and to CTA 2010 ss.65, 67A, 188DD, 188ED, 269ZF. The substantive effect is that the company's pre-abolition qualifying-FHL business ceased to be a separate property business and folded into the ordinary UK property business (or overseas property business for EEA FHLs).

Commencement under FA 2025 Sch 5 Part 5 paragraph 12 is accounting periods beginning on or after 1 April 2025 for corporation tax purposes. A company with a 31 December year-end therefore had a deemed-cessation at the 31 March 2025 boundary and a new property business commenced on 1 April 2025; the calendar 2025 period for that company is split across the two regimes. Companies with a 31 March year-end transition cleanly into the post-abolition period from 1 April 2025 onwards.

Live CT rate architecture under CTA 2010 ss.18D-18M

The rate stack for rental profit (and chargeable gains) inside the company is:

• 19% small-profits rate on annual profit up to £50,000.
• 25% main rate on annual profit from £250,000.
• 26.5% marginal rate on profit in the £50,000 to £250,000 band, produced by marginal relief.

The associated-companies rule at CTA 2010 ss.18D to 18M matters for landlord SPV structures. Where one beneficial owner controls multiple companies (a common pattern for landlord groups using one SPV per property or per cluster), the £50,000 and £250,000 thresholds are divided across the associated-company count. Six associated companies each get a £50,000 lower bound divided by six (£8,333) and a £250,000 upper bound divided by six (£41,667); each company's marginal-rate band is correspondingly compressed. The structural lesson: corporate fragmentation across multiple SPVs is rate-inefficient where the consolidated profit would otherwise fall comfortably within the small-profits band. A single company holding the same portfolio often pays less corporation tax than the equivalent multi-SPV chain, before any group-relief planning.

Mortgage interest deductibility in the company

Section 24 (the finance-cost-restriction mechanic at ITA 2007 s.272A) applies only to individuals, partnerships of individuals, and trusts. Companies are explicitly outside its scope. Mortgage interest is deductible in full against rental profit under CTA 2009 s.272 (with s.298 for connected-party debt where applicable). For a leveraged former-FHL landlord whose personal-side post-abolition tax position is hurting on the Section 24 ingress, full corporate deductibility is the headline mechanic that incorporation preserves.

The further restriction to be aware of is the corporate interest restriction (CIR) at TIOPA 2010 Part 10. The CIR caps net deductible interest at 30% of aggregate tax-EBITDA (the fixed-ratio rule), with a £2 million de minimis below which the restriction does not bite. A typical single-company landlord with one or two properties and modest leverage falls well below the de minimis and is unaffected. The CIR becomes relevant for:

• Consolidated landlord groups under one umbrella with aggregate interest expense above £2 million per year.
• Highly leveraged SPV structures (mortgage debt at 70%+ LTV across the portfolio).
• Groups with multiple associated companies aggregated for the £2 million test.

Where the CIR bites, the disallowed interest carries forward to subsequent years and can be released as the group's EBITDA recovers. The group-ratio rule (alternative to the 30% fixed-ratio) is occasionally relevant where the wider group's interest profile differs from the standalone landlord position. Modelling needs specialist input where the CIR computation is in play.

ATED at £500,000: the compliance gate most company-FHL operators miss

Annual Tax on Enveloped Dwellings (FA 2013 Part 3) is the recurring annual charge on residential property held by a non-natural person (broadly: a company, a partnership with a corporate member, or a collective investment scheme). The chargeable threshold is £500,000 per single dwelling, valued at the 2022 revaluation date (or acquisition date if later, until the next revaluation).

2026/27 chargeable amounts (verify current-year figures from the gov.uk ATED rates page at the planning date):

• £500,000 to £1m: £4,500 per year
• £1m to £2m: £9,150 per year
• £2m to £5m: £31,050 per year
• £5m to £10m: £72,700 per year
• £10m to £20m: £145,950 per year
• Over £20m: £292,350 per year

Relief is available under FA 2013 ss.132 to 152. For former-FHL stock the relevant relief is the property-rental-business relief, available where the property is let on a commercial basis to unconnected parties. The conditions are tightly drawn: arm's-length terms, no occupation by a connected person (the director-shareholder, family, or trust beneficiary cannot stay in the property even for a single night without breaking the relief), and ongoing commercial-letting activity. Other reliefs may apply to property used for charitable purposes, employee accommodation, or development trades; the property-rental-business relief is the workhorse for company-FHL operators.

Even where relief reduces the charge to nil, the annual ATED return must be filed by 30 April for the year ahead. The filing obligation persists; it is not waived by the relief. Missed returns attract penalties even where no charge is ultimately due.

The grandfathered capital allowances pool

Pre-1-April-2025 plant-and-machinery expenditure incurred for a qualifying UK or EEA FHL business sat in the company's FHL pool by reference to the now-omitted CAA 2001 s.15(1)(c) and (da) qualifying activities. At the commencement date, the pool balances transfer into the corresponding ordinary property business pool under FA 2025 Sch 5 Part 3, with HMRC's transitional guidance at CA20025 setting out a worked example (a £50,000 FHL pool merges with a £12,000 existing residential pool to form a £62,000 combined main pool, continuing to write down at 18%).

The key practical points:

• The grandfathered pool continues writing down indefinitely on the standard P&M rates (18% main pool, 6% special-rate pool) until exhausted or until the underlying property is disposed of.
• The CAA 2001 s.35 dwelling-house restriction is disapplied for the grandfathered pool only; the historic FHL position for the existing balance is preserved.
• New post-1-April-2025 plant spend on the former-FHL property is barred from plant-and-machinery allowances by s.35, regardless of corporate or individual ownership. The dwelling-house restriction bites in full on new spend.
• Revenue replacement of domestic items (white goods, soft furnishings, kitchen equipment) remains deductible under CTA 2009 s.250A where the replaced item meets the like-for-like criteria.
• Full expensing under CAA 2001 s.45S (companies-only, permanent from 1 April 2023, unused plant only) does not override s.35. New plant in a former-FHL property cannot access full expensing.

On disposal of the property, standard P&M disposal-event rules apply: any consideration attributed to the plant is brought into the pool and a balancing allowance or charge may arise. The deeper mechanics of the grandfathered pool are covered on our FHL capital allowances post-April-2025 page.

Disposal: chargeable gain inside corporation tax

Companies do not pay capital gains tax; they pay corporation tax on chargeable gains. The gain on disposal of a former-FHL property is computed under TCGA 1992 in the standard way (consideration received minus base cost minus allowable enhancement and disposal costs) and brought into the company's CT computation under CTA 2010. The marginal rate that applies depends on the company's total profit for the period:

• Gain absorbed within the small-profits band: 19%.
• Gain within the marginal band (£50,000 to £250,000 of total profit): 26.5%.
• Gain pushing total profit above £250,000: 25%.

A material disposal in a year of otherwise modest rental profit can shift the company from the small-profits band into the marginal or main band for that year. The associated-companies divisor compounds the effect for group structures.

No Business Asset Disposal Relief is available. BADR sits at TCGA 1992 Schedule 7ZA and is a personal-side relief only; companies were never eligible. The personal-side BADR loss at FHL abolition does not apply to companies because there was no BADR exposure in the first place. Investors' Relief at Schedule 7ZB is similarly personal-only.

Rollover relief under TCGA 1992 s.152 is narrowly available. The relief requires the disposal of business assets used in a trade, with reinvestment into other trade-business assets within the qualifying window. A former-FHL holding company is a property investment company, not a trading company. Rollover into other investment properties is generally unavailable. Exception: where the company runs a genuine trading branch alongside the property investment activity (a serviced-accommodation operation that meets the trade-or-investment case law test for trading status, with daily housekeeping, breakfast service, and reception cover), rollover into trading-branch assets may be available. The test is fact-specific and the bar is high.

Indexation allowance was frozen from December 2017 (Indexation Allowance Order 2018). On disposals of property acquired before December 2017 the allowance gives some modest uplift to base cost; on acquisitions after that date the uplift is nil. The effect is to compress most disposal gains into the chargeable computation without significant inflation adjustment.

Non-UK parent groups: the compliance overlay

A common structure for higher-value former-FHL holdings is a UK Ltd subsidiary owned by an overseas (Jersey, Guernsey, BVI, Luxembourg) parent. The architecture has several distinct compliance gates:

• Non-Resident Landlord scheme (ITA 2007 Part 13 Chapter 3). The NRL scheme applies where the immediate landlord is non-UK-resident. A UK Ltd subsidiary is UK tax resident; the NRL scheme does not apply at the subsidiary level. Rental income is reported in UK corporation tax in the ordinary way. The overseas parent is not the landlord.
• Register of Overseas Entities (ECCTA 2022 + ECTEA 2022). The overseas parent must register on Companies House RoE, with annual updates and verifiable beneficial-ownership disclosure. Failure to register prevents the overseas entity from completing UK land transactions (a practical conveyancing block on any further acquisition or disposal in the subsidiary chain).
• ATED at the subsidiary level. The chargeable person under FA 2013 is the company holding the dwelling, which is the UK subsidiary. ATED returns are filed at the subsidiary level; reliefs apply on the standard commercial-let basis.
• PSC register at the UK subsidiary. Persons with Significant Control disclosure at Companies House, refreshed annually with the confirmation statement.
• Trust Registration Service (TRS). Where any trust sits between the overseas parent and the ultimate beneficial owner, TRS registration is required with HMRC.

Three or four compliance gates run in parallel with non-aligned filing dates (ATED 30 April, CT600 12 months after year end, PSC at confirmation statement anniversary, RoE annual update on registration anniversary, TRS update 90 days after a triggering event). Calendar the deadlines separately; a single compliance failure (a missed RoE update, for instance) can have material practical consequences disproportionate to the underlying tax position.

Worked example: 3-property former-FHL SPV before and after abolition

Operator BB Ltd, single-purpose UK company, holds three former-FHL cottages (Cornwall, Lake District, and Pembrokeshire). Total gross rent 2024-25: £180,000. Mortgage interest: £42,000. Operating costs: £38,000. Pre-abolition pool TWDV at 31 March 2025: £35,000 main pool plus £12,000 special-rate pool.

Pre-abolition (accounting period to 31 March 2025). CT profit before allowances: £180,000 minus £42,000 minus £38,000 equals £100,000. WDA on main pool: 18% multiplied by £35,000 equals £6,300. Special-rate WDA: 6% multiplied by £12,000 equals £720. CT taxable profit: £100,000 minus £7,020 equals £92,980. Marginal-band rate (no associated companies, £50,000 to £250,000 band): approximately £20,840 of CT.

Post-abolition (accounting period from 1 April 2025). CT profit before allowances unchanged at £100,000 (interest still fully deductible under CTA 2009 s.272; Section 24 does not bite companies). Grandfathered pools continue under FA 2025 Sch 5 Part 3; WDA figures unchanged at £6,300 and £720. CT taxable profit £92,980; CT charge approximately £20,840. Post-abolition CT position essentially unchanged for the company. The contrast with the personal-side position (where the equivalent owner loses Section 24 deduction, pension headroom, and BADR) is the structural lift that drives the relative-attractiveness flip.

One genuine change for the company: new post-1-April-2025 plant spend on the former-FHL property (a new boiler, a new dishwasher) is barred from P&M allowances by s.35. Where the spend is on a like-for-like replacement of an existing domestic item, the s.250A revenue replacement relief is available. Where the spend is on new fit-out or capital improvement, the spend goes onto the base cost for future CGT computation but does not generate any immediate corporate tax relief.

Worked example: ATED exposure on a £750,000 luxury acquisition

Operator BB Ltd acquires a £750,000 freehold cottage in Cornwall in 2026 for letting on commercial holiday-let terms. Two charges at acquisition.

SDLT under FA 2003 Schedule 4A: the 15% SDLT super-charge applies because the acquisition is by a non-natural person of a single dwelling above £500,000. SDLT equals £750,000 multiplied by 15% equals £112,500. The standard residential rate ladder is not applied; the 15% flat charge supersedes the rate-by-rate computation above the £500,000 threshold for company acquisitions of single dwellings. Property-rental-business relief from the 15% charge is available where the property is held for a qualifying commercial-letting activity, but the relief is claimed via the SDLT return and is subject to the same connected-party-occupation prohibition that applies to ATED relief.

ATED annual charge 2026/27: property value £750,000 falls in the £500,000 to £1m band, generating a £4,500 annual ATED charge before relief. Where the property is let on commercial terms to unconnected parties, property-rental-business relief reduces the charge to nil. Annual return still due by 30 April for the year ahead. Relief claim made on the return; any subsequent breach of the connected-party-occupation rule retrospectively forfeits the relief.

Post-acquisition CT position: rental income inside the company's ordinary property business; full interest deductibility under CTA 2009 s.272; no grandfathered pool because the acquisition is post-commencement (no inherited pool to roll forward); new fixture/fitting spend caught by the s.35 dwelling-house restriction.

Cross-references

The incorporation-transfer mechanic is covered on our transferring an FHL portfolio to a limited company page, including s.162 incorporation relief, SDLT on transfer with the 5% additional-dwellings surcharge and the 15% Sch 4A super-charge above £500,000, and the anti-forestalling provisions. The personal-side post-abolition action checklist is on our FHL abolition action checklist page. The pension-impact depth is on our FHL abolition pension contributions page; the salary plus employer-contribution restoration route described there depends on the company architecture set out above. The capital allowances grandfathering treatment is on our FHL capital allowances post-April-2025 page. The post-abolition rules overview is on our FHL tax rules, abolition and what happens now page.

HMRC's commentary sits at PIM4160 (contents), PIM4170 (commencement), PIM4180 (capital allowances post-abolition), and CG73505 (CGT-side treatment including the anti-forestalling provisions). The ATED rates and reliefs are at the gov.uk ATED chargeable amounts page; the CT rate architecture sits in the gov.uk corporation tax rates page.