Holiday Let Tax Changes 2025/26: Complete Guide to FHL Abolition

The Furnished Holiday Lettings (FHL) tax regime has been a cornerstone of UK holiday let investment for decades. It gave holiday let owners access to capital allowances, mortgage interest relief, and favourable capital gains tax treatment that standard buy-to-let landlords could only dream of. In the Autumn Budget 2024, the Chancellor confirmed that FHL status would be abolished from April 2025, bringing holiday lets in line with other residential property income.

If you own or manage holiday let properties in the UK, this is the most significant tax change in a generation. Here is what is changing, what the timeline looks like, and what you can do to prepare.

What is the FHL regime and why did it matter?

The FHL regime treated qualifying holiday lets as a trade rather than passive property investment. To qualify, a property needed to be available for commercial letting for at least 210 days per year and actually let for at least 105 days. In return, owners received several significant tax advantages.

Capital allowances allowed owners to claim tax relief on furniture, fixtures, and equipment purchased for the property. A new kitchen, quality beds, or a hot tub installation could all reduce your tax bill in the year of purchase.

Full mortgage interest relief meant that mortgage interest payments were deducted from rental income before calculating tax. Standard buy-to-let landlords lost this relief from 2020, receiving only a 20% tax credit instead. For higher-rate taxpayers, this difference was substantial.

Capital Gains Tax relief through Business Asset Disposal Relief (formerly Entrepreneurs' Relief) meant qualifying FHL owners could pay just 10% CGT on disposal, compared to the standard 18% or 24% for residential property.

Pension contributions could be calculated based on FHL income, as it counted as relevant UK earnings. This allowed holiday let owners to make larger pension contributions.

Timeline: what happens when

The abolition follows a clear timeline that property owners need to understand.

Tax year 2024/25 (ending 5 April 2025) is the final year where FHL rules apply in full. If your property qualifies, you can still claim capital allowances, full mortgage interest relief, and other FHL benefits for this tax year.

From 6 April 2025, the FHL regime ceases to exist. All holiday let income will be treated as standard property income. The key changes take effect immediately:

• Mortgage interest relief reduces to a 20% basic-rate tax credit (matching buy-to-let rules)
• Capital allowances are no longer available for new purchases
• Property income no longer counts as relevant UK earnings for pension contributions
• Business Asset Disposal Relief no longer applies to holiday let disposals
• Losses from FHL properties can no longer be offset against other income

Capital Gains Tax transitional rules provide some relief. For properties held before April 2025, a proportion of any gain may still qualify for the lower CGT rates, based on the period of FHL ownership. HMRC will provide detailed guidance on the time-apportionment calculations.

Practical implications: worked examples

Example 1: Higher-rate taxpayer with mortgage

Sarah owns a holiday cottage in the Lake District generating £30,000 in annual rental income. Her mortgage interest is £8,000 per year, and she is a higher-rate (40%) taxpayer.

Under FHL rules (2024/25): Taxable income = £30,000 - £8,000 = £22,000. Tax at 40% = £8,800.

Under new rules (2025/26): Taxable income = £30,000 (no deduction). Tax at 40% = £12,000, minus 20% tax credit on mortgage interest (£8,000 x 20% = £1,600). Net tax = £10,400.

Impact: £1,600 more tax per year. For Sarah, that is an additional £133 per month she needs to find from her rental business or other income.

Example 2: Portfolio owner planning a sale

James manages a portfolio of 5 holiday lets valued at £2 million total, with original purchase prices totalling £1.2 million. His potential capital gain is £800,000.

Under FHL rules: Business Asset Disposal Relief would tax the first £1 million of qualifying gains at 10%. Tax on £800,000 = £80,000.

Under new rules: Standard residential property CGT at 24% applies. Tax on £800,000 = £192,000.

Impact: £112,000 more in CGT. The transitional time-apportionment rules will soften this if James held properties during the FHL period, but the direction of travel is clear.

What you should do now

1. Review your mortgage structure

With mortgage interest relief dropping to a 20% credit, higher-rate and additional-rate taxpayers are disproportionately affected. Consider whether your current mortgage structure is optimal. Some owners may benefit from paying down holiday let mortgages more aggressively, though this depends on your overall financial position.

2. Accelerate capital purchases into 2024/25

If you have been planning to replace furniture, upgrade kitchens, or install new facilities, bringing these purchases forward into the 2024/25 tax year means you can still claim capital allowances. From April 2025, you will only be able to claim the replacement domestic items relief (replacing like for like), which is far more restrictive.

3. Consider your disposal timing

If you are thinking about selling a holiday let property, the transitional CGT rules mean earlier disposal may be advantageous. However, do not rush into a sale purely for tax reasons without considering the property market, your income needs, and the time-apportionment calculations.

4. Focus on revenue, not just tax

The most effective response to higher tax bills is higher revenue. Increasing your direct bookings by even a small percentage can more than offset the tax changes. If you are currently paying 15% to Airbnb on every booking, shifting some of those to direct bookings at 3% commission puts more money in your pocket before tax is even calculated.

5. Talk to your accountant

This article provides general guidance, but your specific situation matters. Incorporation, partnership structures, and other planning strategies may be relevant depending on your portfolio size, income level, and long-term plans. A qualified accountant who understands holiday lets is essential.

The silver lining

The FHL abolition is painful, but it does not change the fundamental economics of well-run holiday lets. UK domestic tourism continues to grow. Guests increasingly want unique, characterful properties with direct booking options. The operators who focus on building their brand, delivering great guest experiences, and reducing their dependency on OTAs will continue to thrive.

The tax advantages are going away, which means the operators who win will be the ones who run the best businesses, not the ones with the best tax structures. If your property has its own professional website, your owners have real-time visibility through a dedicated owner portal, and your guests keep coming back, the tax changes are a headwind, not a wall.

This article is for general information only and does not constitute tax advice. Consult a qualified accountant for advice specific to your circumstances. Tax rules and rates are subject to change.