Furnished Holiday Let Tax Regime Abolished: What Changed
The Furnished Holiday Let tax regime was abolished from April 2025. What this means for existing FHL landlords, lost tax advantages, and alternative strategies.
The Latch Team
Editorial
The Furnished Holiday Lettings (FHL) tax regime was one of the most generous tax advantages available to UK property owners. It allowed qualifying short-term let properties to be treated as a trade for tax purposes, granting benefits including full mortgage interest relief, capital allowances on furniture, capital gains tax reliefs, and pension contribution allowances based on rental profits.
From 6 April 2025, the FHL regime was abolished. Properties that previously qualified as furnished holiday lets are now taxed under the same rules as standard residential lettings. This represents a significant tax increase for many holiday let owners, particularly those with mortgages, and has prompted a fundamental rethink of strategy for thousands of landlords.
This guide explains what the FHL regime was, exactly what changed from April 2025, the financial impact on former FHL owners, and the strategic options available in 2026. If you owned a furnished holiday let, understanding these changes is essential for making informed decisions about your property's future.
What Was the Furnished Holiday Lettings Regime?
The FHL regime was a special set of tax rules that applied to qualifying short-term holiday lets. To qualify, a property had to meet three conditions in each tax year:
| Condition | Requirement | Detail |
|---|---|---|
| Availability condition | Available for letting 210+ days per year | Available to the public as holiday accommodation |
| Letting condition | Actually let for 105+ days per year | Periods of longer-term occupation (31+ days) did not count |
| Pattern of occupation | No single letting exceeding 31 consecutive days | Must total no more than 155 days of longer-term lets |
Properties meeting these conditions were treated as a trade, which unlocked a suite of tax benefits not available to standard rental properties.
The Tax Benefits That Were Lost
The abolition of the FHL regime removed several significant tax advantages. Here is what changed from 6 April 2025:
| Tax Benefit | Under FHL Regime (Before April 2025) | Standard Letting Rules (From April 2025) |
|---|---|---|
| Mortgage interest deduction | Full deduction against rental profits | Restricted to 20% tax credit (Section 24) |
| Capital allowances | Available on furniture, fixtures, and equipment | Not available — only replacement domestic items relief |
| Capital gains tax — Business Asset Disposal Relief | Available (10% CGT rate on first £1m of gains) | Not available — standard 18%/24% CGT rates |
| Capital gains tax — Rollover Relief | Could defer CGT by reinvesting proceeds in another business asset | Not available |
| Capital gains tax — Gift Hold-Over Relief | Could gift property without immediate CGT charge | Not available for residential property |
| Pension contributions | FHL profits counted as relevant UK earnings for pension contribution limits | Rental income does not qualify as relevant earnings |
| Loss relief | FHL losses could be carried forward against future FHL profits | Property losses carried forward against all property income |
| National Insurance | Not liable on FHL profits (a benefit over standard trading) | No change — rental income not liable to NI |
The biggest impact: For mortgaged holiday lets, the loss of full mortgage interest relief is the most significant change. A higher-rate taxpayer with £20,000 of mortgage interest now pays up to £4,000 more in tax per year compared to the old FHL rules. This alone has made many holiday let operations financially unviable.
Financial Impact: Before and After Comparison
The following example illustrates the tax impact of the FHL abolition for a higher-rate (40%) taxpayer with a typical holiday let property:
| Item | Under FHL Regime | Under Standard Rules (2025/26) |
|---|---|---|
| Gross rental income | £30,000 | £30,000 |
| Running costs (excl. mortgage) | £8,000 | £8,000 |
| Mortgage interest | £12,000 | £12,000 |
| Taxable profit | £10,000 (income minus all costs) | £22,000 (income minus costs, but mortgage interest not deducted) |
| Income tax at 40% | £4,000 | £8,800 |
| Section 24 tax credit (20% of mortgage interest) | N/A | -£2,400 |
| Net tax liability | £4,000 | £6,400 |
| Additional tax per year | £2,400 | |
| Capital allowances (furniture etc.) | £2,000 (saving £800 in tax) | £0 (replacement relief only) |
| Total additional annual cost | £3,200 |
For this example property, the owner pays £3,200 more in tax per year under the new rules. Over a 10-year holding period, that is £32,000 of additional tax. For owners with larger mortgages or multiple holiday lets, the impact is proportionally greater.
Impact on Capital Gains Tax
The loss of Business Asset Disposal Relief (BADR) is the second most significant change for FHL owners who plan to sell. Under the FHL regime, qualifying owners could pay just 10% CGT on the first £1 million of lifetime gains when selling their holiday let. This has been replaced by the standard residential property CGT rates.
| CGT Scenario | Under FHL (BADR) | Standard Rules (2025/26) |
|---|---|---|
| Gain on sale | £100,000 | £100,000 |
| Annual exemption | £3,000 | £3,000 |
| Taxable gain | £97,000 | £97,000 |
| CGT rate (higher-rate taxpayer) | 10% (BADR) | 24% |
| CGT liability | £9,700 | £23,280 |
| Additional CGT | £13,580 |
The loss of BADR more than doubles the CGT bill on disposal for higher-rate taxpayers. This has implications for exit timing — some owners accelerated sales before April 2025 to lock in the lower rate, but those who did not must now plan disposals carefully.
Transitional Provisions
The government included limited transitional provisions for the FHL abolition:
- Capital allowances: Writing down allowances on existing FHL capital expenditure continue until fully written down. No new claims can be made from April 2025
- Losses: FHL losses brought forward from before April 2025 can still be set against property income (not just FHL income) going forward
- BADR: No transitional relief. Sales completing on or after 6 April 2025 do not qualify, regardless of when contracts were exchanged
- Overlap relief: Any overlap profits carried forward from the old FHL trade can be deducted from the final period of FHL trade profits
Important date: If you disposed of an FHL property before 6 April 2025, BADR applied to the gain. If you exchanged contracts before but completed after 6 April 2025, BADR does NOT apply. The completion date is what matters for CGT purposes.
What Should Former FHL Owners Do Now?
If you owned a furnished holiday let that no longer qualifies for FHL tax treatment, you have several strategic options:
Option 1: Continue as a Standard Holiday Let
You can continue to operate the property as a short-term holiday let. The letting model does not change — only the tax treatment. If the property generates sufficient income to remain profitable under the standard tax rules, this may be the simplest option.
- Short-term lets often generate higher gross income than long-term lets
- You still benefit from higher nightly rates in peak season
- No tenant management or tenancy agreement requirements for stays under 90 days
- But: higher running costs (cleaning, changeovers, booking platform fees, utilities) must be covered
Option 2: Switch to Long-Term Letting
Converting to a standard Assured Shorthold Tenancy provides stable, year-round income and avoids the operational complexity of short-term lets. This is particularly attractive if:
- The property is in an area with strong long-term rental demand
- You want reduced management burden (no changeovers, cleaning, or booking management)
- The gross income from long-term letting, while lower, provides better net returns once holiday let costs are removed
- You use Latch to manage the tenancy professionally with AI-powered rent collection and expense tracking
Option 3: Incorporate into a Limited Company
Transferring the property into a limited company restores full mortgage interest deductibility (Section 24 does not apply to companies). However, this triggers an immediate CGT charge on the transfer and SDLT on the company's purchase. It is only viable if:
- The property has little or no gain (minimising the CGT on transfer)
- You plan to hold long-term and the ongoing tax savings outweigh the transfer costs
- You take professional advice — this is a complex decision with significant upfront costs
Option 4: Sell the Property
Some former FHL owners will conclude that the property no longer makes financial sense under the new tax rules. If the numbers do not work, selling and reinvesting the capital elsewhere (other property, pension, ISA, other investments) may be the most rational decision.
Timing considerations: If you are selling, consider timing the sale to use your annual CGT exemption (£3,000 in 2025/26) and ensure the gain does not push you into a higher tax bracket. If you are a couple who jointly own the property, each person has their own exemption.
Impact on the Holiday Let Market
The abolition of the FHL regime has had observable effects on the holiday let market in 2025 and 2026:
- Increased supply of properties for sale: Many holiday let owners have listed their properties, particularly in popular areas like Cornwall, the Lake District, and Devon
- Reduced new entrants: The tax advantages were a significant draw for new investors. Without them, fewer investors are entering the holiday let market
- Shift to long-term letting: Some owners have converted holiday lets to standard rental properties, increasing rental supply in tourist areas
- Pricing adjustments: Nightly rates have increased in some areas as remaining holiday let operators pass increased costs to guests
- Regional impact: Areas heavily dependent on tourism (Cornwall, parts of Wales, Scottish Highlands) have been most affected
Managing Your Former FHL with Latch
Whether you convert to a long-term let or continue short-term, Latch helps you manage the transition and optimise your returns:
Expense Tracking
Accurately categorise and record all property expenses under the new tax rules. Latch ensures you claim every allowable deduction on your Self Assessment return.
Maximise deductions
Yield Analysis
Compare the actual returns from short-term versus long-term letting based on your real income and expense data, helping you make an informed decision about your property strategy.
Data-driven decisions
Bank Reconciliation
Automatically match income from booking platforms or tenant payments to the correct property and period.
Accurate records
Manage Your Property Portfolio with Latch
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Get Started with LatchDisclaimer: This guide is for informational purposes only and does not constitute tax or financial advice. The FHL regime was abolished by Section 17 and Schedule 2 of the Finance Act 2025, effective from 6 April 2025. Tax rates and allowances quoted are for the 2025/26 tax year and may change in future years. The impact of FHL abolition depends on your individual circumstances including income level, mortgage arrangements, and ownership structure. Always consult a qualified accountant or tax adviser before making decisions about your property. Last updated February 2026.
