UK Tax Rules for Short-Term Lets: A 2026 Guide Post-FHL Abolition

The tax landscape for short-term and holiday let properties in the UK has fundamentally changed following the abolition of the Furnished Holiday Lettings (FHL) tax regime. Effective from 1 April 2025 for Corporation Tax and 6 April 2025 for Income Tax and Capital Gains Tax, this measure realigns the taxation of short-term lets with that of standard residential property businesses.

This guide outlines the current tax rules for short-term lets and how other factors affect them.

Abolition of the Furnished Holiday Lettings (FHL) Regime

The FHL rules, previously contained in legislation such as the Income Tax (Trading and Other Income) Act 2005 and the Taxation of Capital Gains Act 1992, conferred several tax advantages on properties that met specific letting criteria. The primary policy objective behind their removal was to promote fairness and create a level playing field between landlords of short-term lets and those with longer-term residential properties.

As of April 2025, the special tax treatment for FHLs has been removed. Consequently, income and gains from these properties are now treated as arising from a standard UK or overseas property business.

Legislation affecting this change can be found in Schedule 5 to the Finance Act 2025, which repeals the relevant sections of TCGA 1992, CTA 2010, ITTOIA 2005, and CAA 2001.

Tax Rules for Short-Term Lets – What Is the Income Tax and Corporation Tax Treatment

Following the repeal, the calculation of profits from short-term lets is now fully integrated into the landlord’s wider property business. This has several key consequences.

Finance Cost Relief

Individual landlords operating short-term lets are now subject to the finance cost restriction rules. Previously, FHLs were exempt, allowing for a full deduction of mortgage interest as a business expense. Now, relief for finance costs is restricted to a basic rate tax reduction (currently 20%). This aligns the treatment with that for landlords of other residential properties.

Amalgamation of Profits and Losses

Previously, profits and losses from an FHL business had to be calculated separately and could not be offset against profits from other rental properties. But Tax Rules for Short-Term Lets have been updated. Now, the income from former FHL properties is simply part of the overall profit or loss calculation for the person’s UK or overseas property business.

A transitional rule applies to losses accrued under the FHL regime before its abolition. These losses can be carried forward and set off against future profits from the now-amalgamated property business.

Capital Allowances and Expenditure

The ability to claim plant and machinery capital allowances on furniture, fittings, and equipment within a short-term let was a significant advantage of the FHL regime. This is no longer available for new expenditure incurred from April 2025.

Replacement of Domestic Items Relief

In place of capital allowances, landlords can now claim the Replacement of Domestic Items Relief. This relief applies when an old domestic item is replaced with a new one.

Key conditions for the relief include:

• The new item must be for the sole use of the lessee.
• The old item must no longer be available for use.
• The relief covers the cost of a like-for-like replacement. If the replacement is a significant upgrade, the deduction is limited to the cost of an equivalent item.

This relief does not apply to fixtures, such as boilers or fitted kitchens, which are considered part of the dwelling itself.

Transitional Provisions for Existing Allowances

For businesses that had an ongoing capital allowances pool of expenditure prior to April 2025, there is a transitional provision. These businesses can continue to claim writing-down allowances on that existing pool until it is exhausted.

Capital Gains Tax (CGT) Treatment

The treatment of a qualifying FHL as a trading asset for CGT purposes provided access to several valuable reliefs. With the abolition of the regime, these reliefs are no longer available for disposals of short-term let properties from April 2025.

The reliefs that have been withdrawn are:

• Business Asset Disposal Relief (BADR): This relief, which provided a reduced 10% rate of CGT on qualifying disposals, is no longer applicable.
• Business Asset Roll-over Relief: Landlords can no longer defer a capital gain by reinvesting the proceeds into a new qualifying asset.
• Gift Holdover Relief: Relief on gifts of business assets under s.165 TCGA 1992 is not available.
• Relief for Loans to Traders: This relief under s.253 TCGA 1992 is withdrawn.

An anti-forestalling rule was introduced to apply from 6 March 2024. This rule prevents the use of unconditional contracts to crystallise a disposal date before April 2025 to gain a tax advantage under the old FHL rules.

Pensions

Income derived from an FHL business was formerly treated as ‘relevant UK earnings’ for the purposes of calculating an individual’s maximum pension contributions. This is no longer the case. Income from a short-term let is now treated as property income and does not qualify for pension contribution relief purposes.

Summary of Changes – Tax Rules for Short-Term Lets

To further advise on specific client circumstances, particularly those involving transitional arrangements for losses or capital allowances, it would be prudent to review HMRC’s updated guidance in the Property Income Manual at PIM4160 onwards and the Capital Gains Manual at CG73500 onwards.