Holiday Lets vs Long-Term Lets — Which Is More Tax-Efficient?

If you own a rental property — or you're thinking about buying one — one of the biggest decisions you'll face is whether to let it on a long-term basis or operate it as a holiday let. The lifestyle appeal of a holiday cottage in Cornwall or a lodge in the Lake District is undeniable, but there's a harder-headed question lurking behind the dream: which option is more tax-efficient?

The honest answer is that it depends on your circumstances, your income level, and — crucially — the recent changes to the tax rules around furnished holiday lettings. Let's walk through the key differences so you can make an informed decision.

The Old Regime — Why Holiday Lets Were Favoured

For years, furnished holiday lettings (FHLs) enjoyed a genuinely privileged tax position compared to ordinary rental properties. If your property met the qualifying conditions, it was treated as a trade rather than a passive investment for tax purposes. This distinction unlocked several significant benefits:

• Capital allowances on furniture and equipment. FHL owners could claim capital allowances (including the Annual Investment Allowance) on items like furniture, white goods, and fixtures. Ordinary landlords couldn't.
• Business Asset Disposal Relief (formerly Entrepreneurs' Relief). When selling an FHL property, you could potentially qualify for the reduced ten per cent CGT rate on gains up to the lifetime limit, rather than the standard residential property CGT rates of eighteen or twenty-four per cent.
• Loss relief flexibility. Losses from an FHL could be offset against other income in some circumstances, whereas ordinary rental losses can only be carried forward against future rental profits.
• Pension contribution relevance. FHL income counted as "relevant earnings" for pension purposes, meaning you could make larger tax-relieved pension contributions based on your FHL profits.
• Mortgage interest relief. FHL owners could deduct mortgage interest in full as a business expense, avoiding the Section 24 restriction that limits ordinary landlords to a basic rate tax credit.

That last point was enormous. For higher-rate and additional-rate taxpayers, the Section 24 mortgage interest restriction significantly increased the effective tax on rental income from ordinary lets. FHL owners were exempt from this restriction, which made holiday letting considerably more tax-efficient for those with substantial mortgages.

The 2025 Changes — A Levelling of the Playing Field

The government announced the abolition of the FHL tax regime in the Autumn Statement 2024, with the changes taking effect from April 2025. This was a seismic shift for property investors.

From the 2025/26 tax year onwards, furnished holiday lettings no longer receive their special tax treatment. They're now taxed in essentially the same way as ordinary rental properties. This means:

• No more capital allowances on furniture and equipment (replaced by the Replacement of Domestic Items Relief, available to all landlords)
• No more Business Asset Disposal Relief on the sale of an FHL property
• No more full mortgage interest deduction — FHL mortgage interest is now subject to the same Section 24 basic rate tax credit as other residential lets
• FHL income no longer counts as relevant earnings for pension purposes
• Loss relief follows the same rules as ordinary property income

These changes have fundamentally altered the tax comparison between holiday lets and long-term lets. The playing field is now much more level, and the decision between the two needs to be made primarily on commercial and lifestyle grounds rather than tax advantages.

You can read more about the detail of these changes and what they mean for existing FHL owners in our furnished holiday lettings guide.

Income Potential — Holiday Lets vs Long-Term

Tax efficiency isn't just about the rules — it's also about the income you generate. And this is where holiday lets can still have an edge, depending on location and demand.

A well-located, well-presented holiday let in a popular tourist area can generate significantly higher gross income than the same property on a long-term let. In peak season, a week's holiday letting income might equal a month's regular rent. Over a full year with good occupancy, the difference can be substantial.

However, higher gross income doesn't automatically mean higher net profit. Holiday lets come with considerably higher running costs:

• Marketing and listing fees. Platforms like Airbnb and Booking.com charge commissions of fifteen to twenty per cent. Holiday letting agencies may charge similar amounts or more.
• Cleaning and changeover costs. Every guest departure requires a professional clean, fresh linen, and a property check. For a busy property, this can easily run to £100 or more per changeover.
• Utilities. You pay the gas, electricity, water, and broadband — not the guest. On a long-term let, the tenant typically covers these.
• Furnishing and maintenance. Holiday let guests expect a higher standard of furnishing and decoration than long-term tenants. Wear and tear is more intensive due to higher turnover.
• Insurance. Holiday let insurance is typically more expensive than standard landlord insurance.
• Management time. Even with a management company, holiday lets demand more of your attention — guest enquiries, reviews, key handovers, emergency maintenance between bookings.

When you strip out all these additional costs, the net profit from a holiday let might not be as dramatically different from a long-term let as the headline figures suggest. In some cases — particularly in less popular locations or during quiet seasons — a long-term let can actually generate a better net return.

The Section 24 Question

One of the biggest tax disadvantages of ordinary long-term letting for higher-rate taxpayers is Section 24 — the restriction on mortgage interest relief. Under this rule, mortgage interest on residential lets is no longer a deductible expense. Instead, landlords receive a basic rate (twenty per cent) tax credit.

For a basic rate taxpayer, this makes no practical difference. For a higher-rate taxpayer (forty per cent) or additional-rate taxpayer (forty-five per cent), the effect can be dramatic. You're taxed on your gross rental profit (before mortgage interest), and then given a twenty per cent credit on the interest. The net effect is that mortgage interest is only relieved at twenty per cent, not at your marginal rate.

Since FHL properties are now also subject to Section 24, this disadvantage applies equally to both holiday lets and long-term lets. If you have a large mortgage, this is a significant factor regardless of which letting model you choose.

Some landlords have responded to Section 24 by transferring properties into limited companies, which can still deduct mortgage interest as a business expense. This route has its own complications — stamp duty, potential CGT on the transfer, and different tax rates on company profits and dividends — but it's worth considering if you have a substantial portfolio with significant borrowing. Your accountant can model the numbers for your specific situation.

Capital Gains Tax

When it comes to selling a rental property, the CGT position is now broadly the same for holiday lets and long-term lets. The loss of Business Asset Disposal Relief for FHLs means that holiday let properties are subject to the same residential property CGT rates as ordinary lets:

• Eighteen per cent for gains falling within the basic rate band
• Twenty-four per cent for gains falling within the higher rate band

There's no longer a ten per cent rate available for qualifying holiday let disposals, which removes what was once one of the strongest tax arguments in favour of holiday letting.

Both types of property also have the same CGT annual exempt amount (currently £3,000 per person), and both can benefit from any available reliefs such as letting relief (in limited circumstances) or Private Residence Relief (if you lived in the property at some point).

Practical Considerations Beyond Tax

Tax efficiency is important, but it shouldn't be the only factor in your decision. Here are some other things to weigh up:

Void periods. Long-term lets typically have much lower void rates. A good property in a decent area might sit empty for one or two weeks between tenancies. A holiday let, by contrast, will almost certainly have quiet periods — particularly outside peak season. You need enough peak-season income to compensate for the quiet months.

Tenant quality and stability. With a long-term let, you (or your agent) reference tenants and build a relationship over months or years. With a holiday let, you're dealing with a constant stream of strangers. Most will be wonderful, but the occasional problem guest is an occupational hazard.

Personal use. One advantage of a holiday let is that you can use it yourself during quiet periods. There's a certain appeal in having a ready-made holiday base. Just be aware that personal use days don't count towards the occupancy requirements and can affect your tax position if overdone.

Location dependency. Holiday lets work well in tourist hotspots but can struggle in areas without strong visitor demand. Long-term lets are more location-flexible — anywhere people want to live is a potential market.

Regulatory risk. There's growing political pressure to restrict short-term holiday lets in some areas, particularly in tourist towns where they're blamed for reducing the housing supply. Some areas have introduced or are considering licensing schemes and planning restrictions. Long-term letting faces less regulatory uncertainty on this front.

So Which Is More Tax-Efficient?

With the abolition of the FHL tax regime, the honest answer is that there's now very little difference in tax efficiency between holiday lets and long-term lets. The tax rules are essentially the same for both.

The decision should come down to:

• Net income potential in your specific location and market
• Your appetite for management and guest turnover
• Your borrowing position and the impact of Section 24
• Your long-term plans for the property (including eventual sale)
• Your lifestyle preferences and willingness to deal with the demands of holiday letting

Whichever route you choose, keeping accurate records of your income and expenses is essential. Accounted makes it easy to track rental income, categorise expenses, and stay on top of your tax obligations throughout the year. Penny can help you keep everything organised across multiple properties, so there are no surprises when your Self Assessment comes due.

For more detail on the expenses you can claim as a landlord — whether holiday or long-term — take a look at our guide to what expenses landlords can claim.

Related reading:

• Furnished Holiday Lettings Guide
• What Expenses Can Landlords Claim
• Landlord Insurance Tax Claims

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Accounted helps UK sole traders stay on top of their bookkeeping and tax. Start your free 30-day trial at getaccounted.co.uk.

Related Reading

• The Tax Implications of Converting Commercial Property to Residential
• Property Allowance — The £1,000 Tax-Free Amount Explained

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