Furnished Holiday Let Tax Rules Abolished: 2026/27 Impact

The Furnished Holiday Let (FHL) tax regime, which gave owners of short-term holiday properties significant tax advantages over conventional landlords, was abolished from 6 April 2025. For thousands of owners of cottages, seaside apartments, and rural retreats across the UK, this change fundamentally alters how their rental income and eventual property sale are taxed.

What Was the FHL Regime?

Before April 2025, a property let as a furnished holiday let -- one that met specific availability and letting tests -- was treated as a trading activity rather than an investment for tax purposes. This meant FHL owners could:

• Claim capital allowances on furniture, equipment, and fixtures (instead of the replacement of domestic items relief available to ordinary landlords)
• Deduct finance costs (mortgage interest) in full against rental profits
• Treat FHL profits as relevant UK earnings, supporting personal pension contributions of up to £60,000 per year
• Qualify for Business Asset Disposal Relief on the eventual sale, paying CGT at the lower BADR rate rather than residential property rates
• In some circumstances, claim roll-over relief and gift relief on transfers

These advantages made FHL ownership particularly attractive to higher earners seeking to shelter income through pension contributions and to business owners planning their retirement. The government's decision to abolish the regime was driven by concerns that it created an unfair advantage for short-term holiday lets over the conventional long-term rental market.

How Income Is Taxed from April 2025

From 6 April 2025, income from former FHL properties is treated as standard UK property income. This means it is pooled with income from any other rental properties you own and taxed under the normal property income rules:

Finance costs. The full deduction for mortgage interest is gone. Instead, you receive a 20% tax credit on finance costs (mortgage interest and associated costs). For a higher-rate taxpayer, this means that where previously £10,000 of mortgage interest reduced tax by £4,000 (at 40%), it now reduces tax by £2,000 -- a real-terms cost increase of £2,000 per year for every £10,000 of interest paid.

Replacement of domestic items relief. You can deduct the cost of replacing furniture, furnishings, appliances, and kitchenware on a like-for-like basis. You cannot deduct the initial cost of purchasing these items for a property, and you cannot claim capital allowances on fixtures and fittings.

Losses. Property losses from former FHL properties are pooled with other UK property income. You cannot carry FHL losses forward separately, and losses from the final FHL years should have been dealt with in the transition.

Capital Allowances: What Survives and What Does Not

Under the old FHL rules, owners could claim capital allowances -- Annual Investment Allowance, plant and machinery allowances, and furniture allowances -- on expenditure on qualifying assets. From April 2025, this is no longer possible for new expenditure.

However, capital allowance pools created before April 2025 continue to run through the existing pool structure. If you had a capital allowances pool with an unrelieved balance on 5 April 2025, that balance continues to be relieved through writing-down allowances at 18% per year (main pool) or 8% per year (special rate pool) until fully relieved. No new additions can be made to the pool from April 2025 onwards.

This means former FHL owners will see diminishing capital allowance deductions year on year as the pool balance reduces, with no ability to refresh the pool with new expenditure. The replacement of domestic items relief will need to cover ongoing maintenance costs instead, though it is a more limited deduction.

Capital Gains Tax on Selling a Former FHL

This is arguably the most significant financial impact of the abolition for many owners. Under the old FHL rules, a qualifying FHL qualified for Business Asset Disposal Relief, meaning gains were taxed at the BADR rate (14% in 2025/26). From April 2025, FHL properties are treated as residential property for CGT purposes.

The residential property CGT rates in 2026/27 are 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers. On a £200,000 gain, the difference between the old 10% BADR rate (when BADR was 10%) and the current 24% is £28,000. Even compared with the current 14% BADR rate, a 24% charge represents £20,000 more tax on a £200,000 gain.

There is no transitional relief allowing former FHL properties to continue to benefit from BADR simply because they qualified before April 2025. The date that matters is the date of disposal. A property sold in May 2025 or later is taxed at residential property CGT rates regardless of its FHL history.

Pension Contributions and the Loss of Relevant UK Earnings

One of the most tax-efficient features of the FHL regime was that FHL profits counted as relevant UK earnings (RUK) for pension contribution purposes. This allowed higher earners whose income was primarily FHL profits to make large personal pension contributions, receiving tax relief at 40% or 45% while sheltering substantial income from tax.

From April 2025, FHL profits are treated as investment income. Investment income does not count as relevant UK earnings. This means that an individual whose only earnings are from a former FHL property can now only make pension contributions up to the greater of £3,600 (gross) or 100% of their actual relevant UK earnings from other sources (employment, self-employment).

For those who relied on FHL income to support large pension contributions, this change can dramatically reduce their annual pension funding capacity. Alternative strategies include using a spouse or partner's earned income to support pension contributions, or reinvesting in other trading activities that do generate relevant earnings.

Strategies for Existing FHL Owners

Review your financing structure. The shift to the 20% tax credit for mortgage interest hits higher-rate taxpayers hardest. If you own the property personally, consider whether a company structure would be more efficient -- companies can still deduct full mortgage interest as a business expense, though corporation tax at 25% applies.

Reassess your business model. Some owners may find that conventional long-term lets now make more financial sense than short-term holiday lettings, given the administrative burden of frequent changeovers and the loss of FHL tax advantages. Compare the after-tax return from holiday lettings versus a long-term assured shorthold tenancy.

Consider timing of any sale. If you are planning to sell, model the CGT liability carefully. Use the annual CGT exempt amount of £3,000, consider whether bed-and-ISA strategies on other investments can generate useful losses, and think about whether gifting to a spouse before sale (who might be a basic-rate taxpayer) could reduce the blended CGT rate.

Check your pension funding plan. If you relied on FHL profits to fund large pension contributions, work out your revised relevant UK earnings for pension purposes and ensure your pension contributions stay within the allowable limits to avoid an annual allowance charge.

The abolition of the FHL regime represents a significant tax increase for many owners of holiday properties. Planning ahead -- whether for income structuring, financing, pension contributions, or eventual sale -- is essential to managing the impact over the coming years.