If you let a holiday property, the tax rules you've relied on for years have gone. The furnished holiday lettings (FHL) regime was abolished from 6 April 2025, and your cottage, lodge or seaside flat is now taxed like any other rental.
That sounds dry, but the cash impact is real. The reliefs that made holiday lets attractive (full mortgage interest deduction, capital allowances, generous capital gains tax breaks and pension headroom) have largely disappeared.
This guide walks through exactly what changed, who's affected, and what you can still do. It's written for individual landlords and couples who hold one or a handful of holiday lets. We'll keep it plain, show you the numbers with an illustrative example, and point out the traps we see most often.
<h2 id="what-was-the-fhl-regime">What was the FHL regime, and why did it end?</h2>
For decades, a property that met the FHL conditions (broadly, furnished, in the UK or EEA, and available and actually let to the public for set numbers of days) was taxed almost like a trading business rather than ordinary rental.
That brought several perks: full relief on mortgage interest, capital allowances on furniture and equipment, profits that counted towards pension contributions, and access to business capital gains tax reliefs.
The government announced at Spring Budget 2024 that the regime would be scrapped to bring holiday lets in line with other residential lettings. The change took effect from 6 April 2025 for income tax and capital gains tax, and from 1 April 2025 for companies within corporation tax.
<h2 id="what-changed">What actually changed on 6 April 2025?</h2>
From that date your holiday let income simply forms part of your ordinary UK (or overseas) property business. The headline changes are:
| Area | Under the old FHL regime | After abolition (from 6 April 2025) |
|---|---|---|
| Mortgage and loan interest | Deducted in full from profit | Restricted to a 20% basic-rate tax reducer |
| Capital allowances | Available on furniture, fixtures and equipment | No new claims; replacement of domestic items relief instead |
| Losses | Ring-fenced to the FHL business | Pooled with the rest of your property business |
| Pension contributions | Profits counted as relevant earnings | No longer count as relevant earnings |
| Capital gains tax reliefs | Business Asset Disposal Relief, rollover and gift holdover | Generally taxed as residential property |
Each of these matters in its own way. Let's take the ones with the biggest cash effect.
<h2 id="mortgage-interest">How does the mortgage interest change affect me?</h2>
This is the change most owners feel first.
Under the old rules you deducted all your mortgage and loan interest from your rental profit before tax. Now, in line with other residential landlords, you can't deduct it at all. Instead you get a tax reducer worth 20% of your finance costs.
If you're a basic-rate taxpayer, the effect is broadly neutral. If you pay tax at the higher rate of 40% or the additional rate of 45% for 2025/26, you've effectively lost relief on the slice above basic rate (see the income tax rates and thresholds).
There's a second sting. Because the interest no longer reduces your taxable profit, your profit figure is higher on paper. That higher figure can push you over the £100,000 mark where the personal allowance starts to taper, or tip you into a higher tax band. We see this catch out landlords who assumed the change only affected the relief rate, not their headline income.
To see how the bands stack up against your other income, our income tax calculator is a quick way to sense-check the position.
<h2 id="capital-allowances">What happened to capital allowances?</h2>
You can no longer make new capital allowances claims on furniture, fixtures or equipment in a former holiday let. That route closed on 6 April 2025.
Two points soften the blow:
- If you already had a capital allowances pool, you can keep claiming writing down allowances on that brought-forward balance until it's used up. You just can't add new qualifying spend to it.
- For replacing furnishings (sofas, beds, white goods and similar), you can now use replacement of domestic items relief, the same relief available to ordinary residential landlords. It covers the cost of a like-for-like replacement, not the initial purchase.
In practice, that means kitting out a brand-new holiday let no longer attracts upfront tax relief on the contents the way it once did. Replacing worn-out items still gives relief, but the first fit-out doesn't.
<h2 id="capital-gains">How are capital gains taxed now?</h2>
This is where the long-term planning shifts most.
While the regime applied, selling a holiday let could qualify for business capital gains tax reliefs, including Business Asset Disposal Relief (BADR), rollover relief and gift holdover relief. From 6 April 2025 a former holiday let is generally treated as residential property for CGT.
For 2025/26 that means a gain (after the annual exempt amount of £3,000) is taxed at 18% within your basic-rate band and 24% above it (CGT rates on residential property).
There's an important transitional point on BADR. HMRC's guidance confirms that BADR can still apply where your FHL business actually ceased on or before 5 April 2025 and you dispose of the assets within the normal post-cessation window, subject to the usual conditions. The BADR rate is 14% for disposals in 2025/26 (CGT rates and allowances). Rollover relief is no longer available where a replacement asset is bought on or after 6 April 2025 for a holiday lettings business.
This is genuinely technical, and getting the cessation date and timing right can be the difference between a 14% and a 24% rate. It's worth a conversation with a tax adviser before you sell.
<h2 id="pension">Does my holiday let still help my pension?</h2>
Possibly not, and this one is easy to miss.
FHL profits used to count as relevant UK earnings, which is the figure that sets how much you can pay into a pension and still get tax relief. From 6 April 2025 holiday let income no longer counts.
If your holiday let was your main or only source of earned income, the amount you can contribute to a pension with tax relief may now be limited to the basic £3,600 floor (gross) unless you have other relevant earnings. If you've been making larger personal contributions on the back of holiday let profits, review them before the next contribution.
<h2 id="worked-example">Illustrative example: a higher-rate landlord before and after</h2>
Illustrative example. Priya owns one holiday cottage in Cornwall. She has a salaried job, so her rental profit is taxed at the higher rate of 40% for 2025/26. Her cottage produces:
- Rental income: £24,000
- Running costs (cleaning, insurance, agent fees, repairs): £7,000
- Mortgage interest: £6,000
Under the old FHL rules, interest was deductible:
- Taxable profit = £24,000 - £7,000 - £6,000 = £11,000
- Tax at 40% = £4,400
After abolition (2025/26), interest is not deductible but gives a 20% reducer:
- Taxable profit = £24,000 - £7,000 = £17,000
- Tax at 40% = £6,800
- Less interest tax reducer: 20% x £6,000 = £1,200
- Tax due = £6,800 - £1,200 = £5,600
So Priya's income tax on the same cottage rises from £4,400 to £5,600, an increase of £1,200 for the year. The gap is the lost higher-rate relief on her £6,000 of interest: at 40% that relief was worth £2,400, and she now gets only £1,200.
Figures are illustrative and use 2025/26 rates and thresholds. Your own position depends on your total income and costs.
<h2 id="what-to-do">What should holiday let landlords do now?</h2>
A few practical steps:
- Recalculate your real return. Rework your profit with interest treated as a 20% reducer, not a deduction, so there are no surprises at filing time.
- Check your tax band. The higher paper profit can push you into the higher rate or start tapering your personal allowance above £100,000.
- Review pension contributions if the holiday let was your main earned income.
- Plan any sale carefully. The CGT treatment and the BADR cessation timing can materially change the bill.
- Consider ownership structure. For jointly owned property, how profits are split and whether a company makes sense are now live questions, and the answer is rarely one-size-fits-all.
These changes also feed straight into your tax return. If you're new to declaring rental income the ordinary way, our guidance for landlords and our self-assessment service can take the filing off your plate.
For the background detail on the regime that's now gone, see our explainer on furnished holiday letting.
Not sure how the FHL changes hit your numbers? Book a free 20-minute call with a Zmartly accountant and we'll model your holiday let under the new rules and flag any quick wins. Get in touch.
<h2 id="faqs">Frequently asked questions</h2>
When exactly did the FHL regime end?
The furnished holiday lettings regime was abolished from 6 April 2025 for income tax and capital gains tax, and from 1 April 2025 for companies within corporation tax.
Can I still claim mortgage interest on my holiday let?
Not as a deduction from profit. From 6 April 2025 finance costs are restricted to a basic-rate tax reducer worth 20% of the interest, the same as for ordinary residential lettings.
Will I pay more capital gains tax when I sell?
Usually yes. A former holiday let is generally treated as residential property, so gains above the £3,000 annual exempt amount are taxed at 18% within the basic-rate band and 24% above it for 2025/26. Business Asset Disposal Relief at 14% may still apply if your FHL business actually ceased on or before 5 April 2025 and you meet the conditions.
Does my holiday let income still count for pension contributions?
No. From 6 April 2025 holiday let profits no longer count as relevant earnings for pension tax relief, so check your contributions if this was your main earned income.
Can I still claim capital allowances?
You can't make new claims on a former holiday let. You can keep claiming writing down allowances on an existing pool until it runs out, and you can use replacement of domestic items relief when you replace furnishings.
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