Furnished Holiday Lettings (FHL): UK Tax Rules After Abolition (2026)

The government has abolished the special tax regime for Furnished Holiday Lettings (FHL), a significant change that realigns the sector with the standard rules for residential property businesses. This measure took effect from 1 April 2025 for Corporation Tax and from 6 April 2025 for Income Tax and Capital Gains Tax.

The primary policy objective was to promote fairness by removing the tax advantages that FHL landlords held over those letting longer-term residential properties. The changes, enacted through Schedule 5 of the Finance Act 2025, repeal the specific FHL provisions in key tax legislation, including the Income Tax (Trading and Other Income) Act 2005 and the Taxation of Chargeable Gains Act 1992.

This guide explains the current tax treatment for properties that were formerly FHLs.

What the FHL Abolition Means in Practice

Effective from April 2025, income and gains from short-term holiday lets are no longer treated as arising from a trade. Instead, they form part of the person’s standard UK or overseas property business. This has fundamental consequences across income tax, capital allowances, and capital gains.

Income Tax and Corporation Tax

Several key advantages for income calculation have been withdrawn:

• Finance Cost Relief: Individual landlords now face the same finance cost restrictions as other residential landlords. You can no longer deduct all mortgage interest as a business expense; relief is now restricted to a basic rate tax reduction.
• Capital Allowances: Businesses can no longer claim plant and machinery capital allowances on furniture, fittings, and equipment for new expenditure incurred from April 2025. Instead, you may be able to claim Replacement of Domestic Items Relief.
• Pension Contributions: Income from former FHL properties no longer qualifies as ‘relevant UK earnings’ for the purpose of calculating maximum pension contributions.

Capital Gains Tax (CGT)

The treatment of an FHL as a trading asset for CGT purposes provided access to valuable reliefs. This access ceased for disposals made on or after 6 April 2025. The following key reliefs are no longer available for FHL disposals:

• Business Asset Disposal Relief (BADR).
• Business Asset Roll-over Relief.
• Gift Holdover Relief.
• Relief for Loans to Traders.

To prevent taxpayers from exploiting the old rules before their removal, the government introduced an anti-forestalling rule. This applies from 6 March 2024 and prevents the use of unconditional contracts to secure a disposal date before the new rules came into force.

Transitional Provisions

The legislation includes transitional rules to manage the move from the old regime to the new one.

Capital Allowances

If your FHL business had an ongoing capital allowances pool of expenditure prior to the abolition date, you can continue to claim writing-down allowances on that existing pool until it is exhausted.

Loss Relief

Under the old rules, you could only offset FHL losses against future FHL profits. A transitional rule now allows losses accrued under the FHL regime to be carried forward and set off against profits from the newly amalgamated property business. This provides a welcome and practical measure for businesses transitioning to the new system.

Summary of Key Changes

For detailed guidance on the transitional rules and the new tax treatment, refer to HMRC’s Property Income Manual at PIM4160 onwards and the Capital Gains Manual from CG73500 onwards.