UK Furnished Holiday Let Tax Rules After FHL Abolition 2026

The Furnished Holiday Let tax regime offered significant advantages over standard buy-to-let ownership for over four decades. From 6 April 2025, those advantages are gone. If you own a property that previously qualified as an FHL, understanding what has changed -- and what transitional provisions remain -- is essential for managing your tax position in 2026/27 and beyond.

What the FHL Regime Offered

To understand what has been lost, it helps to recap the benefits that made FHL status so attractive:

Full mortgage interest deductibility: unlike standard residential landlords who are restricted to a 20% tax credit on finance costs, FHL owners could deduct 100% of mortgage interest as a business expense, reducing taxable profit pound for pound. For higher rate taxpayers, this was worth an additional 20-25p per £1 of interest paid.

Capital allowances: FHL owners could claim capital allowances on furniture, fixtures, and equipment used in the property. This included plant and machinery allowances and the Annual Investment Allowance, allowing immediate 100% deduction of qualifying expenditure rather than the replacement furniture relief available to standard landlords.

Favourable CGT treatment: gains on FHL disposals qualified for Business Asset Disposal Relief (BADR), capping CGT at 10% on the first £1 million of lifetime gains. Standard residential property gains are taxed at 18% (basic rate) or 24% (higher rate) -- a dramatic difference for those with significant gains.

Pension contribution eligibility: FHL profits counted as "relevant UK earnings" for pension contribution purposes, allowing owners to make and receive relief on personal pension contributions based on their FHL income.

Loss relief: FHL losses could be carried forward and offset against future FHL profits. Standard property losses can also be carried forward but against property income only -- not other income.

What Has Changed From April 2025

From 6 April 2025, former FHLs are treated as standard UK residential lettings. The changes apply from the first day of the 2025/26 tax year with no grandfathering for existing properties.

Finance costs: mortgage interest and other finance costs are now restricted to a 20% tax credit, the same as for buy-to-let properties. If you are a higher rate taxpayer, this represents a significant increase in effective tax on your rental income. The finance cost restriction works by disallowing the deduction from income and replacing it with a basic rate credit against your tax bill.

Capital allowances: you can no longer claim capital allowances on new expenditure on furniture, equipment, or fixtures. Instead, you claim replacement furniture relief on a like-for-like basis (the cost of replacing an item, not improving it). However, any existing capital allowance pools -- items claimed in previous years that still have an unrelieved balance -- continue to attract writing-down allowances until the pool is exhausted. The transition did not wipe out existing pools.

CGT on disposal: gains from selling a former FHL are now taxed at standard residential property CGT rates. For 2026/27: 18% for basic rate taxpayers and 24% for higher rate taxpayers. BADR at 10% is no longer available.

Pension contributions: FHL rental profits no longer count as relevant UK earnings. If you relied on FHL income to justify large personal pension contributions, you need to review your pension strategy. You can still contribute up to £3,600 gross per year to a pension with no earnings, but contributions above that level require sufficient relevant earnings from other sources (employment, self-employment).

Transitional Considerations

The abolition took effect on 6 April 2025 with no transition period for most provisions. However, a few specific points are worth noting:

Existing capital allowance pools: as mentioned, any balance in existing main rate or special rate pools from FHL properties continues to generate writing-down allowances (18% and 6% per year respectively on the declining balance). You cannot add new assets to these pools under the FHL rules, but the existing balance is not lost.

Losses carried forward: FHL losses that had been carried forward as at 5 April 2025 are now treated as ordinary UK property losses and can be offset against other UK property income. This is actually a slight improvement for some landlords -- FHL losses previously could only be offset against FHL profits, not against other property income.

Overlap with existing planning structures: some FHL owners had structured their operations as trading businesses for other purposes. Where HMRC had accepted trading status (rare and fact-specific), the position may differ from standard FHL treatment. Specialist advice is required for these cases.

The Standard Buy-to-Let Position You Now Occupy

As a former FHL owner, your property income is now calculated on the same basis as any other residential letting:

Allowable expenses: you can deduct letting agent fees, property management costs, insurance, maintenance and repairs (not improvements), council tax while vacant, utility costs while vacant, accountancy fees, and a proportion of finance costs via the 20% credit.

Replacement furniture relief: when you replace a sofa, bed, cooker, or other domestic item on a like-for-like basis, you can deduct the replacement cost. You cannot deduct the cost of the original purchase (only replacements qualify) and you cannot deduct improvements (only like-for-like replacement).

Wear and Tear Allowance: this was abolished years ago for standard landlords and was not part of the FHL regime either -- do not confuse it with capital allowances.

Loss relief: property losses are carried forward against future property income only. They cannot be offset against employment income or other sources.

Should You Consider Incorporation?

The question of whether to incorporate -- transferring the property to a limited company -- has become more common since buy-to-let mortgage interest relief was restricted. For former FHL owners, the abolition adds another layer to this consideration.

A company pays corporation tax on profits (19% below £50k, 25% above £250k) and can deduct 100% of mortgage interest as a business expense. For higher rate taxpayers with significant mortgage interest, the arithmetic can favour a company structure.

However, incorporation itself triggers:

• A potential CGT charge on the deemed disposal at market value (some specific reliefs exist for genuine business incorporations)
• SDLT on the transfer (at standard residential rates plus the 5% additional dwelling surcharge)
• Legal and administrative costs

The numbers need to be modelled carefully for each property. The breakeven point depends on the value of the property, the mortgage size, the rental yield, and your personal tax position. There is no universal answer.

SDLT and Short-Term Rentals Going Forward

The SDLT position for buyers of former FHL properties is unchanged by the abolition of the FHL regime. If you purchase an additional residential property, you pay standard SDLT plus the 5% additional dwelling surcharge. There is no SDLT relief specific to short-term rental properties.

If you are buying a property specifically to run as a short-term rental through platforms such as Airbnb or similar, the property is simply a residential property for SDLT and tax purposes. Budget accordingly.

Frequently Asked Questions

Q: My property still operates as a short-term rental on Airbnb. Does it now qualify as FHL for any tax purposes? A: No. The FHL regime no longer exists. Short-term rental income is treated as ordinary property income regardless of how frequently guests turn over, the type of platform used, or whether the property is furnished. The distinction between FHL and standard letting is gone.

Q: I had been using my FHL profits to justify pension contributions. What are my options now? A: You can still contribute £3,600 gross per year (£2,880 net) to a pension without any relevant UK earnings. If you have other qualifying income -- from self-employment or employment -- you can base contributions on those earnings. Alternatively, if you operate through a limited company, employer pension contributions from the company do not require personal earnings.

Q: Can I still claim capital allowances on my old pool balance? A: Yes. The transition to standard letting did not extinguish existing capital allowance pool balances. You continue to claim writing-down allowances at 18% (main pool) or 6% (special rate pool) on the declining balance each year until it is exhausted. You simply cannot add new assets to the pool under FHL rules.

Q: I was planning to sell my FHL to claim BADR at 10%. Is it too late? A: BADR on FHL disposals ended on 5 April 2025. Any disposal from 6 April 2025 onwards is taxed at residential property CGT rates (18% or 24%). There is no transitional relief for planned but uncompleted sales.

Q: Does the FHL abolition affect non-UK properties that I rented out as holiday lets? A: Yes. The FHL regime applied to both UK and EEA properties. The Overseas FHL regime was also abolished at the same time. Rental income from overseas holiday let properties is now treated as overseas property income under standard rules.

Q: I only rented my property for part of the year as a holiday let. Was I ever genuinely within the FHL regime? A: To qualify as an FHL under the old regime, properties had to be available to let for at least 210 days and actually let for at least 105 days in the tax year, with no single letting exceeding 31 days continuously. If your property did not meet these tests, it was never within the FHL regime and nothing changes for you -- it was always treated as standard property income.

Q: Can the losses I built up under the FHL regime now be set off against my buy-to-let income? A: Yes. FHL losses carried forward as at 5 April 2025 are treated as UK property business losses from 2025/26 and can be offset against any UK property income, not just short-term rental income. This is a slight improvement in flexibility compared to the old position.

Q: How does the 20% finance cost credit work in practice? A: You calculate your rental profit excluding finance costs. If the profit falls within higher rate tax, you would pay 40% tax on it. You then receive a 20% tax credit equal to 20% of your finance costs. The net result is that higher rate taxpayers still pay an extra 20% on the portion of income covered by finance costs -- you do not get the deduction at 40%, only a credit at 20%.

Q: Should I keep detailed records of my short-term rental income and expenses separately from any long-term lettings? A: Yes. You should maintain separate records for each property or each type of letting. HMRC expects property income accounts to be kept accurately, and mixing income types can create complications when completing your Self Assessment return.

Q: Is it worth restructuring my rental business now, or should I wait to see if any future government reinstates FHL benefits? A: The abolition was legislated and took immediate effect. There is no indication of reinstatement. Making significant financial decisions (such as incorporation or disposal) based on the hope of future policy reversal is generally not advisable. Act based on the current rules and take professional tax advice specific to your circumstances.