How Holiday Lets Are Taxed After the FHL Abolition

Following the enactment of the Finance (No. 2) Act 2024, the specialised Furnished Holiday Lettings (FHL) tax regime was officially abolished on 6 April 2025. Consequently, UK holiday lets are now treated as standard residential property businesses, losing their unique commercial tax advantages. This change shifts your holiday let income into the same restrictive tax category as long-term residential buy-to-let properties.

Key Takeaways: Crucial changes at a glance

• Section 24 Mortgage Restriction: Full mortgage interest deductions are gone, replaced by a basic rate tax credit.
• Capital Gains Tax (CGT): Business asset reliefs are removed, meaning disposals are taxed at standard residential rates.
• Pension Contributions: Holiday let profits no longer count as relevant UK earnings for tax-relieved pension contributions.
• Joint Ownership: Married couples can no longer split profits flexibly without a formal Form 17 submission.

What is the status of the FHL regime after April 2025?

The FHL tax regime has officially ended, and holiday lets are now treated as standard UK residential property income.

Under the provisions of the Finance (No. 2) Act 2024, the classification of FHLs as a commercial trade for income tax purposes has ceased. This transition applies to all UK holiday lets, meaning owners must now declare their earnings on the standard property income pages of their annual self-assessment tax returns.

How is your UK holiday let taxed under the new rules?

What tax reliefs and benefits have you lost?

Holiday let owners have lost five major tax advantages, which fundamentally changes the profitability profile of running a short-term rental business.

Why is the Section 24 mortgage interest restriction a major blow?

Transitioning to the Section 24 regime means you receive a flat 20% tax credit rather than a full deduction for finance costs.

This rule change disproportionately impacts higher-rate (40%) and additional-rate (45%) taxpayers in the UK. Because finance costs can no longer be deducted directly from your gross income, your reportable profit will increase, which may push you into a higher tax bracket or trigger the High Income Child Benefit Charge.

What happens to Capital Gains Tax (CGT) when you sell?

Disposals of former FHL properties are now subject to the standard 24% residential property CGT rate with no transitional relief.

You can no longer claim Business Asset Disposal Relief (BADR), which previously secured a 10% tax rate on gains, nor can you use Rollover Relief to defer tax by buying another business asset. The Finance (No. 2) Act 2024 applied these strict measures immediately to all sales completed on or after 6 April 2025.

How does the change affect your pension contributions?

Holiday let profits are no longer classified as relevant UK earnings, reducing your capacity to make tax-relieved pension contributions.

If your primary source of income is your holiday cottage, you will find your maximum tax-relieved personal pension contribution severely limited. Without other employment or self-employment earnings, your tax-relieved contributions will be capped at a basic gross limit of £3,600 per year.

What tax relief rules and allowances still remain available?

While the specialized holiday let benefits have ceased, several standard property rules and transitional allowances remain available to owners.

1. Allowable Revenue Expenses: You can still deduct day-to-day operational costs, including letting agent fees, property insurance, cleaning, and advertising.
2. Replacement of Domestic Items Relief: You can claim relief for the cost of buying replacement furniture, white goods, and kitchenware on a like-for-like basis.
3. Business Rates Eligibility: If your property meets local criteria, such as being let for at least 70 days and available for 140 days, you can still register for business rates instead of council tax.
4. Existing Capital Allowances: You are permitted to keep writing down balances in your existing capital allowance pools that were established before the transition.
5. FHL Losses Carried Forward: Under transitional rules, cumulative FHL losses generated before April 2025 can be carried forward to offset future profits from the same property.

What practical steps should holiday let owners take now?

Landlords must adjust their financial planning immediately to mitigate the sudden reduction in net yields caused by the new tax landscape.

1. Review your 2025/26 liabilities: Model your projected tax liabilities early so you are fully prepared for the self-assessment payment due by 31 January 2027.
2. Evaluate mortgage structures: Calculate how the Section 24 restricted interest relief will alter your net yield, particularly if you are in the higher tax bracket.
3. Consider incorporation options: Explore if transferring your holiday let into a limited company structure makes sense to bypass Section 24, noting possible stamp duty and CGT costs.
4. File Form 17 for joint ownership: Submit a Form 17 declaration to HM Revenue and Customs if you and your spouse own the property in unequal shares to align tax declarations with beneficial ownership.
5. Prepare for Making Tax Digital (MTD): Set up compliant digital record-keeping systems if your gross property income exceeds £50k, ahead of the mandatory transition.