Schedule 5 of the Finance Act 2025 abolished the furnished holiday lettings rules from 6 April 2025 for income tax and capital gains tax, and from 1 April 2025 for corporation tax. Your holiday let is now an ordinary property business, and four separate advantages went with it.
Article · 8 July 2026
If you own a holiday cottage, a coastal flat or a serviced apartment that qualified as a furnished holiday letting, its tax treatment changed on 6 April 2025 for income tax and capital gains tax, and on 1 April 2025 for corporation tax. The legislation is Schedule 5, Finance Act 2025. The property is now taxed as part of an ordinary UK or overseas property business, alongside your buy-to-lets.
The change was not a tidying-up exercise. Four distinct advantages went at once, and each of them was worth real money to a different kind of owner.
The first of those is the one that shows up every year; the third is the one that shows up once, usually at the worst possible moment.
Take a higher-rate owner of a holiday cottage with £14,000 of mortgage interest a year. The figures are illustrative.
From 6 April 2027 the property higher rate becomes 42% and the reducer is given at the property basic rate of 22%, so the gap between deduction and reducer stays at 20 points and the extra tax stays at £2,800 — but the tax on everything else in the letting rises by two points at the same time.
HMRC's Capital Gains Manual at CG73505 sets out which reliefs go and from when.
The BADR point is the expensive one. On a disposal before 6 April 2025 the relief was available at a 10% rate up to 5 April 2025. The BADR rate is 14% from 6 April 2025 and 18% from 6 April 2026. Without BADR at all, a residential gain is taxed at 18% within the basic rate band and 24% above it, with an annual exempt amount of only £3,000.
This is the part that catches people who thought they had acted in time. Under paragraph 14 of Schedule 5, where a contract was made on or after 6 March 2024 and the disposal takes place on or after 6 April 2025, rollover, gift and Business Asset Disposal Relief are denied — unless the claim includes a statement that the conditions are met, namely that the contract was made for genuine commercial reasons and between unconnected parties.
So an owner who exchanged contracts in the summer of 2024 specifically to secure BADR before abolition, and completed after 6 April 2025, does not get the relief automatically. They get it only if the claim carries the statement and the conditions are actually true. A contract entered into between connected parties, or entered into to obtain the relief, fails.
A disposal that took place before 6 April 2025 keeps the old reliefs even where the claim or the completion comes later, under paragraph 13(2) of Schedule 5. So the question is the date of the disposal itself, not the date on which the claim happens to be made — which is why establishing exactly when a disposal took place is the first thing to settle on any FHL sale straddling April 2025.
Capital allowances. An existing pool continues to attract writing-down allowances. What changes is new spending: any new expenditure incurred on or after the operative date must be considered under the property business rules, which means replacement of domestic items relief under section 311A ITTOIA 2005 rather than capital allowances. That relief covers the replacement of moveable furniture, furnishings, household appliances and kitchenware — not the initial purchase — and it specifically excludes fixtures such as baths, toilets, fitted furniture and boilers. Where the new item is an improvement, relief is the lesser of the cost of the new item and the cost of a like-for-like replacement.
That is a materially worse deal for a holiday let, because the whole model depends on furnishing and re-furnishing to a standard that ordinary lettings do not require, and the first fit-out of a new unit now gets nothing.
Losses. Losses accumulated under the old FHL rules are not lost. They can be carried forward and set against future years' profits of either the UK or the overseas property business. A cottage that had been running at a loss therefore still has something to show for it.
The finance cost restriction that now applies to your holiday let is covered in the Section 24 guide, and the position on a sale is in the capital gains tax guide. If the property is now simply part of an ordinary portfolio, landlord tax returns and capital gains tax on rental property set out what that involves. This is general information, not advice on a particular disposal.
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On 6 April 2025 for income tax and capital gains tax, and on 1 April 2025 for corporation tax. The legislation is Schedule 5 to the Finance Act 2025. From those dates a furnished holiday letting is taxed as part of an ordinary UK or overseas property business, with no separate regime and no separate rules. There is no grandfathering for existing properties and no transitional period for the income tax treatment: the finance cost restriction applies from the operative date, and so does the loss of capital allowances on new expenditure. The only genuine transitional provisions concern existing capital allowances pools, accumulated losses, and disposals that took place before the operative date.
Not on a disposal of the whole or part of an FHL business on or after 6 April 2025. HMRC's Capital Gains Manual at CG73505 states that directly. A disposal before that date keeps the relief even where the claim or the completion comes later, under paragraph 13(2) of Schedule 5. But the anti-forestalling rule in paragraph 14 catches contracts made on or after 6 March 2024 where the disposal takes place on or after 6 April 2025: relief is denied unless the claim includes a statement that the contract was made for genuine commercial reasons and between unconnected parties. Without the relief a residential gain is taxed at 18% or 24%.
The existing pool survives and continues to attract writing-down allowances. What changes is new spending: any expenditure incurred on or after the operative date has to be considered under the property business rules instead, which in practice means replacement of domestic items relief under section 311A ITTOIA 2005. That relief covers the replacement of moveable furniture, furnishings, household appliances and kitchenware but not their initial purchase, and it excludes fixtures such as baths, toilets, fitted furniture and boilers. Where the replacement is an improvement, relief is limited to the lesser of the new cost and the cost of a like-for-like replacement, so an upgrade is only relieved to the standard of what it replaced.
No. The transitional rules permit losses accumulated under the furnished holiday lettings rules to be carried forward and set against future years' profits of either the UK property business or the overseas property business. So a cottage that ran at a loss for several years still has value in those losses, they just now shelter ordinary rental profits instead of FHL profits. The practical risk is administrative rather than legal: when a property is reclassified in the records, brought-forward losses attached to the old classification are easy to drop. Check that the figure has actually carried across to the property business pages before the first post-abolition return is filed.
It depends on your rate and your interest, and the mechanism is the same one that applies to buy-to-lets. Illustratively, a higher-rate owner with £14,000 of mortgage interest used to deduct it in full, worth £5,600 at 40%. Now there is no deduction, and instead a basic rate tax reducer of 20% of £14,000, which is £2,800. That is £2,800 a year of extra tax on the same business. From 6 April 2027 the property higher rate becomes 42% and the reducer is given at the property basic rate of 22%, so the gap between the two stays at twenty percentage points while the tax on the rest of the profit rises.
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