Holiday Let Tax in 2026: What Changed After the FHL Abolition

Quick answer: From 6 April 2025 the Furnished Holiday Lettings (FHL) tax regime was abolished, so holiday lets are now taxed like any other residential rental property. In practice that means: mortgage interest is no longer fully deductible (you get a 20% basic-rate tax credit instead), capital allowances on new furnishings are gone (replaced by Replacement of Domestic Items Relief), the 10% Business Asset Disposal Relief capital gains rate no longer applies (standard 18%/24% residential rates do), and profits no longer count towards pension contributions. Making Tax Digital for Income Tax also begins phasing in from April 2026. This guide explains each change, what it means in pounds, what survives, and the deadlines.

If you own a holiday let, or you're about to, the tax position is the thing that changed most in the last two years, and a lot of advice still online describes a regime that no longer exists. This is a focused companion to our broader guide to starting a holiday let; here we go deeper on tax specifically. None of it is a substitute for advice on your own situation, and we'll say plainly where you should talk to an accountant.

What the FHL regime was, and why its loss matters

Until 5 April 2025, a holiday let that met certain occupancy conditions (broadly, available 210 days and actually let 105 days a year) qualified as a Furnished Holiday Letting and was treated, for tax, more like a trading business than a rental property. That brought four valuable advantages:

• Full deduction of mortgage interest against rental income.
• Capital allowances on furniture, appliances and fixtures.
• A 10% capital gains rate on sale, via Business Asset Disposal Relief.
• Profits that counted as relevant earnings for pension contributions.

The FHL regime was abolished from 6 April 2025 (Finance (No. 2) Act 2024), applying to income tax accounting periods beginning on or after that date, and 1 April 2025 for companies. From the 2025/26 tax year, a holiday let is taxed under the standard UK property income rules, the same as a buy-to-let. HMRC folded the treatment into its general property income manual (PIM4000, updated November 2025). Here is what each change actually means.

Change 1: Mortgage interest relief (the big one)

This is the single biggest financial change, and it bites hardest if you have a mortgage and pay higher-rate tax.

Under the FHL rules you deducted mortgage interest in full from rental income before calculating tax. Now you can't. Instead you get a basic-rate (20%) tax credit on your finance costs, the same restriction long-term residential landlords have had since 2020.

For a basic-rate taxpayer the effect is roughly neutral. For a higher-rate taxpayer it's a real increase. To put numbers on it: on £8,000 of annual mortgage interest, full deduction at 40% was worth £3,200; the 20% credit is worth £1,600. That's an extra £1,600 of tax on the same property, every year, purely from this one change. The more you borrowed, the bigger the hit.

Change 2: Capital allowances replaced by Replacement of Domestic Items Relief

Under the FHL regime you could claim capital allowances on the cost of furnishing the property (beds, sofas, white goods, fixtures), often writing off the whole cost in the year of purchase via the Annual Investment Allowance.

For new expenditure from April 2025, that's gone. In its place, holiday lets now get Replacement of Domestic Items Relief, which lets you deduct the cost of replacing furniture, appliances and similar items on a like-for-like basis (less anything you got for the old item), but not the cost of kitting out a property for the first time.

One transitional point worth knowing: if you have an existing capital allowances pool from spending before 6 April 2025, you can generally continue to claim writing-down allowances on that pool until it's exhausted. New purchases, though, fall under the replacement-relief rules. This is exactly the kind of detail worth checking with an accountant rather than guessing at.

Change 3: Capital gains tax on sale

Selling used to be tax-advantaged. A former FHL could qualify for Business Asset Disposal Relief, giving a 10% CGT rate up to the lifetime limit, and in some cases Rollover Relief or Gift Hold-Over Relief to defer the gain.

For disposals after 5 April 2025, those reliefs no longer apply to holiday lets. Gains are now taxed at the standard residential CGT rates of 18% for gains within the basic-rate band and 24% above it (the 24% higher rate having applied since 30 October 2024). On a large gain that's a substantial difference from the old 10%, so the timing and structure of a sale now matters far more, and is firmly accountant territory.

Change 4: Pensions

Under the FHL regime, holiday let profits counted as relevant UK earnings, meaning they could support tax-relieved pension contributions. That no longer applies. If you were using holiday let income as the basis for pension contributions, that route has closed, which is easy to overlook but matters for retirement planning.

What survives

It's not all removal. Several things still apply:

• Allowable expenses: you can still deduct running costs incurred wholly and exclusively for the letting business, things like cleaning, letting-agent fees, insurance, utilities, repairs and maintenance. This is unchanged and remains the core of managing your taxable profit.
• Replacement of Domestic Items Relief, as above, for like-for-like replacements.
• Existing capital allowances pools can still be written down until exhausted.

Loss relief, however, is now restricted: holiday let losses can generally only be carried forward against future profits of the same property business, rather than set against other income, which is a tightening from the old position.

Making Tax Digital for Income Tax

Separate from the FHL abolition, Making Tax Digital (MTD) for Income Tax is changing how landlords report. It requires digital record-keeping and quarterly updates to HMRC using compatible software, rather than a single annual return.

The phasing, based on gross property and self-employment income, is:

• From 6 April 2026: mandatory for those with gross income above £50,000 (based on the 2024/25 return).
• From April 2027: the threshold drops to £30,000.
• From April 2028: it drops again to £20,000.

There are no late-filing penalties in the 2026/27 transitional year, after which a penalty-point system applies. The threshold is measured on gross property and self-employment income (it does not include employment, pension, dividend or savings income), so if your holiday let and any self-employment income together approach these levels, it's worth getting your record-keeping onto compatible software early.

Two more changes on the horizon

Worth planning for, because these are confirmed measures (announced at the Autumn Budget 2025 and legislated in the Finance Act 2026), not speculation:

• A 2% increase to income tax rates on property income is set for April 2027 (announced at the Autumn Budget 2025), taking the rates on property income to 22% at the basic rate, 42% at the higher rate and 47% at the additional rate. This applies to English, Welsh and Northern Irish taxpayers; Scotland sets its own income tax rates on this kind of income, so the position there differs. Either way, it further raises the tax on holiday let profits.
• Income tax thresholds are frozen until April 2031 (the personal allowance and higher-rate threshold, extended by three years at the Autumn Budget 2025), so as incomes rise more profit is dragged into higher bands over time, an effect known as fiscal drag.

Should you use a limited company?

Because the mortgage-interest restriction doesn't apply to companies, some owners explore holding holiday lets through a limited company, where finance costs remain fully deductible and different rules apply. It can make sense for larger portfolios or higher-income owners, but it is not a simple switch: transferring an existing property into a company usually triggers a capital gains event and possibly stamp duty and refinancing, so the upfront cost can be significant. Whether it's worth it depends entirely on your portfolio size, income and plans, and it's a decision to make with a qualified accountant, not off the back of a blog.

The bottom line

Holiday lets lost their special tax status in April 2025 and are now taxed like ordinary residential rentals, with more changes (MTD, a property-income tax rise, frozen thresholds) arriving between 2026 and 2028. The practical takeaways: if you have a mortgage and pay higher-rate tax, your bill has gone up; model any purchase or sale on the current rules, not the old FHL ones; keep good digital records ahead of MTD; and on anything involving a sale, incorporation, or your specific numbers, pay for an accountant who knows holiday lets. The fee is trivial next to getting a CGT or incorporation decision wrong.

This is a companion piece to our full guide to starting a holiday let, which covers planning, registration, safety, mortgages and running the property. And if you're weighing up the investment case, one practical way a holiday let can improve its returns is by billing guests for EV charging rather than absorbing the cost, which is what GuestCharge is built for.