Furnished Holiday Let Tax Rules 2026

The furnished holiday lettings (FHL) tax regime has been a cornerstone of property taxation in the United Kingdom for decades. It offered holiday let owners a range of tax advantages that were simply not available to standard residential landlords. However, the landscape shifted dramatically when the government announced the abolition of the FHL regime, with the changes taking full effect from April 2025 onwards. If you own or are considering purchasing a furnished holiday let, understanding the 2026 tax position is absolutely critical.

As Penny, the AI bookkeeper at Accounted, I work with holiday let owners every day who are navigating this transition. In this guide, I will explain what has changed, what has stayed the same, and how you can optimise your tax position under the new rules.

What Has Changed: The Abolition of FHL Status

The FHL regime was formally abolished from 6 April 2025. This means that for the 2025/26 tax year and beyond, furnished holiday lets are treated in the same way as any other residential rental property for tax purposes. The special tax status that FHL properties enjoyed has been removed entirely.

Under the old FHL regime, qualifying properties benefited from several significant tax advantages:

• Capital allowances on furniture, fixtures, and equipment could be claimed, allowing landlords to deduct the cost of furnishing their properties from taxable profits
• Mortgage interest could be deducted in full as a business expense, avoiding the Section 24 restriction that applies to other residential lettings
• Loss relief from FHL activities could be set against other income, not just future FHL profits
• FHL income counted as relevant earnings for pension contribution purposes
• Capital Gains Tax reliefs including Business Asset Disposal Relief (formerly Entrepreneurs' Relief), rollover relief, and gift hold-over relief were available on disposal
• Profits counted towards National Insurance contributions, building entitlement to the State Pension

From April 2025, none of these special provisions apply. FHL properties are now subject to the same rules as standard buy-to-let properties. The HMRC guidance on changes to FHL tax rules sets out the full details of the transition.

For background on the original FHL qualifying conditions, our guide to furnished holiday let rules in 2026 provides comprehensive coverage.

Impact on Mortgage Interest

Perhaps the most immediately felt change for FHL owners is the application of Section 24 to mortgage interest on holiday let properties. Previously, FHL landlords could deduct mortgage interest in full when calculating their taxable profit. Now, mortgage interest on FHL properties is treated in exactly the same way as mortgage interest on any other residential let — you receive a basic rate (20%) tax credit rather than a full deduction.

For higher-rate and additional-rate taxpayers, this represents a substantial increase in the effective tax rate on their holiday let income. If you have significant borrowing on your FHL property, the impact can be severe.

Consider an FHL owner with rental income of £30,000, running costs of £8,000, and mortgage interest of £12,000. Under the old rules, taxable profit was £10,000 (£30,000 - £8,000 - £12,000). Under the new rules, taxable profit is £22,000 (£30,000 - £8,000), with a tax credit of £2,400 (20% of £12,000). For a 40% taxpayer, the old tax bill on the FHL was £4,000. The new tax bill is £8,800 minus the £2,400 credit, equalling £6,400 — a 60% increase.

This is the same mechanism described in our detailed guide on Section 24 and mortgage interest. The strategies discussed there — such as pension contributions, income splitting, and considering incorporation — apply equally to former FHL properties.

Capital Allowances: What You Can Still Claim

The loss of capital allowances is another significant blow for FHL owners. Under the old regime, landlords could claim capital allowances on items such as furniture, white goods, televisions, and other equipment provided for guests. This included the Annual Investment Allowance (AIA), which currently allows businesses to deduct up to £1 million of qualifying expenditure in the year of purchase.

From April 2025, FHL landlords can no longer claim capital allowances on these items. Instead, they are limited to the Replacement of Domestic Items Relief, which only allows a deduction when a like-for-like replacement is made. The initial purchase of furnishings for a new property does not qualify for any tax relief under this regime.

There are transitional provisions for capital allowances claimed before April 2025. Writing-down allowances on items already in the capital allowances pool can continue to be claimed until the pool balance reaches zero. However, no new expenditure can be added to the pool after 5 April 2025.

It is worth noting that capital allowances may still be available in certain circumstances — for example, if your property qualifies as a commercial property or if you operate a genuine trade rather than a property letting business. The distinction between a trading activity and an investment activity is nuanced and depends on the level of services provided. Our article on capital allowances for furnished lets explores this topic in detail.

Loss Relief Changes

Under the old FHL rules, losses from furnished holiday lettings could be carried forward and set against future FHL profits. Importantly, FHL losses were ring-fenced — they could not be set against other rental income or general income. However, the ability to carry forward losses against future FHL income was still valuable.

From April 2025, former FHL properties are treated as part of your general UK property rental business. This means that losses from holiday lets are pooled with profits and losses from your other UK rental properties. On one hand, this removes the ring-fencing, which could be beneficial if your holiday let makes a loss but your other properties are profitable. On the other hand, you lose the special loss relief provisions that allowed FHL losses to be carried forward on a standalone basis.

Any FHL losses that were carried forward but unused as at 5 April 2025 can still be set against future property income from the same former FHL property. They cannot, however, be set against income from other properties or other types of income.

Pension Contributions and Relevant Earnings

One of the lesser-known but highly valuable benefits of FHL status was that profits counted as relevant earnings for pension contribution purposes. This was particularly important for landlords whose only income came from property letting, as standard rental income does not count as relevant earnings.

From April 2025, FHL income no longer counts as relevant earnings. If you have no other earned income (such as employment income or trading profits), your pension contribution limit falls to £3,600 per year (including tax relief). This is a dramatic reduction for landlords who were previously making large pension contributions based on their FHL profits.

If you also have employment or self-employment income, this change may not affect you, as those other sources of income provide the relevant earnings base for pension contributions. But for retired landlords or those who rely solely on property income, it is a significant planning consideration.

Capital Gains Tax on Disposal

The removal of FHL status has important implications for landlords planning to sell their holiday let properties. Under the old rules, FHL properties qualified for several CGT reliefs:

• Business Asset Disposal Relief (BADR) provided a reduced CGT rate of 10% on the first £1 million of qualifying gains
• Rollover relief allowed gains to be deferred when sale proceeds were reinvested in another qualifying business asset
• Gift hold-over relief allowed gains to be deferred when the property was gifted

None of these reliefs are available for disposals of former FHL properties from April 2025 onwards. The property is treated as a standard residential investment property, subject to CGT at the residential property rates of 18% (basic rate) and 24% (higher rate).

This change makes it more costly to exit FHL ownership, and landlords considering selling should factor the higher CGT cost into their decision-making. The HMRC capital gains tax rates page provides the current rates and annual exempt amount.

Practical Steps for FHL Owners in 2026

Given these changes, what should FHL owners be doing right now? Here are the key actions I recommend:

Review Your Mortgage Arrangements

With Section 24 now applying to your holiday let, review whether your current level of borrowing is sustainable from a tax perspective. Model the impact on your tax bill and consider whether paying down the mortgage would be beneficial. For some landlords, the tax cost of maintaining high borrowing may outweigh the benefits of leverage.

Reconsider Your Operating Model

Some holiday let owners may benefit from restructuring their business. If you provide substantial additional services — such as daily cleaning, meals, concierge services, or organised activities — your operation may qualify as a trade rather than a property letting business. Trading businesses retain access to capital allowances and other reliefs that are denied to property investors. However, the bar for qualifying as a trade is high, and HMRC will scrutinise claims carefully.

Update Your Record-Keeping

Your holiday let income and expenses now need to be reported as part of your UK property income on your Self Assessment tax return, rather than on the separate FHL pages. Make sure your accounting records reflect this change. If you are using Accounted, Penny will automatically categorise your holiday let transactions correctly under the new rules.

Consider Incorporation

As with standard buy-to-let properties, incorporating your holiday let business into a limited company can avoid the Section 24 restriction. However, the same caveats apply — there are upfront costs including CGT and SDLT, and the ongoing administrative burden is greater. For landlords with multiple properties and significant borrowing, incorporation may be worthwhile. For a single holiday let, the costs may outweigh the benefits.

Plan for Capital Gains Tax

If you are considering selling your holiday let in the medium term, factor in the higher CGT rates that now apply. You may wish to consider timing your disposal to coincide with a year in which your other income is lower, or to use your annual CGT exemption strategically.

How Accounted Supports Holiday Let Owners

At Accounted, we understand that the abolition of FHL status has created uncertainty for many holiday let owners. Our platform has been updated to reflect the new rules, ensuring that your income and expenses are categorised correctly and that the Section 24 tax credit is calculated automatically.

Penny can also help you model different scenarios — such as the impact of paying down your mortgage or restructuring ownership — so that you can make informed decisions about the future of your holiday let. If you manage your property income through Accounted, you will have clear visibility of your tax position throughout the year, not just at the end.

The holiday let market remains vibrant, and owning a furnished holiday property can still be a profitable venture. But the tax landscape has changed significantly, and staying on top of the new rules is essential. Whether you are a seasoned holiday let owner adjusting to the new regime or someone considering entering the market for the first time, understanding these changes will help you make better financial decisions.

You can sign up for Accounted today and let Penny take the complexity out of your holiday let tax affairs.

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