Your holiday let is now an ordinary property business

The change in one paragraph

The furnished holiday lettings regime is abolished. The legislation is Schedule 5 of the Finance Act 2025, and it is operative for disposals and income arising on or after 6 April 2025 for income tax and capital gains tax, and from 1 April 2025 for corporation tax. There is no replacement regime and no grandfathering for existing owners. A property that met the old occupancy conditions is now simply part of your UK property business, or of your overseas property business if it is abroad, and it is taxed on exactly the same basis as a flat let on an ordinary tenancy down the road.

Nothing about how you run the let has to change. Everything about how it is taxed already has.

The four advantages that have gone

HMRC's own policy paper describes the abolition as doing four things. Each of the four was a reason people held property in the FHL regime in the first place.

1. Loan interest is now restricted to basic rate

The first change is applying the finance cost restriction rules so that loan interest is restricted to basic rate. Until 5 April 2025 an FHL sat outside the Section 24 restriction entirely and mortgage interest came off the profit in full. It no longer does. Interest and other finance costs are added back, and you get a basic rate tax reducer instead — 20% of the lowest of three figures: the finance costs not deducted (plus anything brought forward), the property business profits for the year, and adjusted total income above the personal allowance. The reducer cannot create a tax refund, and unrelieved finance costs carry forward.

The statutory home of the restriction is ITTOIA 2005 sections 272A and 272B, with sections 399A and 399B of ITA 2007 for partnerships. If the mechanics are new to you, our Section 24 guide sets them out from first principles, and the Section 24 calculator puts your own numbers through it.

2. Capital allowances are replaced by replacement of domestic items relief

The second change is removing capital allowances rules for new expenditure and allowing replacement of domestic items relief instead. This is the change holiday let owners feel most, because a furnished holiday cottage is full of exactly the sort of expenditure capital allowances used to cover.

Replacement of domestic items relief (ITTOIA 2005 s.311A for income tax, CTA 2009 s.250A for corporation tax) is a narrower thing. It covers the replacement of moveable furniture, furnishings, household appliances and kitchenware — not the initial purchase, and not fixtures. Baths, toilets, fitted furniture and boilers are fixtures and fall outside it. Where the replacement is like for like you get the full cost of the new item; where it is an improvement, the relief is the lesser of the cost of the new item and what a like-for-like replacement would have cost. Replace a £600 sofa with a £600 sofa and you deduct £600. Replace it with a £1,400 sofa where £600 would have bought the equivalent, and you deduct £600.

3. The chargeable gains reliefs for trading assets are withdrawn

The third change is withdrawing access to reliefs from taxes on chargeable gains for trading business assets. An FHL was treated as a trading asset for several capital gains purposes. It is not any more. HMRC's Capital Gains Manual at CG73505 is specific about which reliefs fall away and on what trigger:

• Rollover relief under section 152 TCGA 1992 — unavailable where the replacement asset is acquired on or after 6 April 2025.
• Loans to traders relief under section 253 TCGA 1992 — unavailable where the claim is made on or after 6 April 2025.
• Business Asset Disposal Relief — not available where there is a disposal of the whole or part of an FHL business on or after 6 April 2025.
• Gift holdover relief — withdrawn on the same basis, which matters to anyone who was planning to pass a holiday let to the next generation without crystallising the gain.

Note how differently the triggers are drawn. Rollover relief turns on the date the replacement asset is acquired; loans to traders on the date of the claim; BADR on the date of the disposal. They are not interchangeable, and a plan built on one date does not automatically work for the others.

4. The income no longer counts for pension relief

The fourth change is no longer including this income within relevant UK earnings when calculating maximum pension relief. FHL profits used to be relevant UK earnings; ordinary property income never has been. So a person whose income was mainly or wholly from holiday letting has lost the earnings figure that supported their personal pension contributions. What to do about that is a regulated financial planning question and belongs with an adviser authorised to answer it. The tax point on this page is narrower and simply factual: the earnings number has changed, and it changed on 6 April 2025.

What the interest change costs: a worked example

Worked example — illustrative, on 2026/27 rates. A higher-rate taxpayer owns one holiday cottage. Gross rent is £30,000, running costs are £8,000, and mortgage interest is £9,000. Assume the letting is her only property income and that her other income already uses her personal allowance and her basic rate band.

The extra tax is £1,800, and the arithmetic behind it is worth understanding because it generalises. The interest is taxed at 40% and relieved at 20%, so the cost is the 20-point gap applied to the interest: 20% of £9,000 is £1,800. Double the borrowing and you double the figure.

There is a second effect that does not show in the table. Taxable profit rose from £13,000 to £22,000 without a penny more cash coming in, and taxable profit feeds total income. That extra £9,000 of measured income is what pushes people over the £50,270 higher rate threshold, into the personal allowance taper above £100,000, or across the High Income Child Benefit Charge threshold. The tax bill on the letting is only part of what the change does.

The transitional rules that still work for you

Three things survive the abolition, and all three are easy to lose by not claiming them.

• Your existing capital allowances pool continues. The pool built up while the property was an FHL keeps attracting 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 instead. So the pool runs down as it always would, and nothing new goes into it.
• Former FHL losses are not lost. Losses carried forward from the FHL business may be carried forward and set against future years' profits of either the UK or the overseas property business. Check that they have actually been carried into the right pot on your return, because an FHL loss and an ordinary property loss used to live in different boxes.
• Disposals before 6 April 2025 keep their reliefs. Under paragraph 13(2) of Schedule 5, a disposal that took place before 6 April 2025 keeps the reliefs even if the claim, or completion, comes later. The date that matters is the disposal, not the paperwork that follows it.

The anti-forestalling rule reaches back to 6 March 2024

This is the part that catches people who thought they had acted in time. Paragraph 14 of Schedule 5 contains an anti-forestalling rule that applies from 6 March 2024 — more than a year before the regime ended, and before most owners had heard of the change.

Where a contract was made on or after 6 March 2024 and the disposal takes place on or after 6 April 2025, rollover relief, gift holdover relief and Business Asset Disposal Relief are denied — unless the claim includes a statement that the conditions are met, namely that the contract was entered into for genuine commercial reasons and that the parties are unconnected. In other words, an unconditional contract exchanged early in 2024 to lock in the old treatment does not work on its own. The relief still has to be claimed with the statement, and the statement has to be true.

What to do about it now

• Re-do the numbers on the letting. The profit you are taxed on is now the profit before finance costs. If the cottage was bought with borrowing, the taxable figure has moved a long way from the cash figure.
• Check where your losses went. Former FHL losses belong in the property business carry-forward, not stranded in a category that no longer exists.
• Separate the pool from new spending. The old capital allowances pool carries on; new expenditure has to be tested against replacement of domestic items relief and against the repairs rules instead.
• Watch the qualifying income line. Holiday let turnover counts towards Making Tax Digital qualifying income in exactly the same way as any other rent — gross, before expenses. Our MTD guide explains the test, and the MTD checker answers it in about a minute.
• Look at what else lands next. The FHL change is one of about a dozen with a date attached between 2025 and 2028 — they are all listed in landlord tax changes 2026 to 2028.

If you want the position on a specific property set out properly rather than in general terms, our landlord tax return service covers the property pages, the finance cost reducer and the capital allowances position together, which is where holiday lets tend to go wrong when they are treated as three separate questions.