Furnished holiday let owners feeling the impact of tax changes

More than a year after the government abolished the preferential tax regime for Furnished Holiday Lets (FHLs), the reality of these reforms is only now becoming fully apparent, and the 2025/26 tax return will be the first to reflect the new rules in practice.

The shift – to fully align the treatment of FHLs with other residential property income – may mean holiday let owners need to reassess both the structure and viability of their property portfolios.

The end of the FHL regime

FHLs ceased to be treated as a separate category of property business from April 2025, and now form part of an individual’s or company’s overall UK or overseas property business. This means all rental properties - whether holiday lets or long-term residential - are grouped together, and as a result, profits and losses are pooled across the entire portfolio.

How has holiday let income been reclassified?

One of the most significant changes is the reclassification of FHL income. Previously treated as ‘trading income,’ it is now regarded as 'investment income.’ As a result:

• Income is now taxed on the legal owner of the property, rather than potentially being shared between those running the holiday let.
•  FHL income no longer qualifies as relevant earnings for pension contributions

For many taxpayers, the last point is particularly impactful. Those who previously relied on FHL profits to support pension funding may find their annual contribution capacity reduced, requiring careful planning going forward.

Transitional rules now in effect

From 5 April 2025, any unused FHL losses were transitioned into the new regime. These losses are now pooled with other property losses, where applicable, and are available for relief against future property business profits.

For 2025/26, this represents the first year in which these merged losses can be utilised, and ensuring they are correctly reflected in tax returns will be an important compliance point.

Reduced tax reliefs and higher costs

The changes also remove a number of valuable tax reliefs that many FHL owners previously relied upon.

Capital allowances are no longer available for new expenditure incurred, although existing capital allowance pools as at 5 April 2025 continue, with writing-down allowances applied until fully relieved. Going forward, relief will generally be limited to the replacement of domestic items, such as furniture and appliances, meaning upfront investment costs of equipping a property are no longer deductible in the same way.

For many owners, the most immediate financial impact will come from the restriction of mortgage interest relief. As with other residential rental properties, finance costs can no longer be fully deducted when calculating taxable profits and instead attract basic rate tax relief only. For higher and additional rate taxpayers, this effectively increases the taxable rental profit, leading to higher overall tax liabilities and reduced net returns.

The changes also affect owners who are planning to sell. FHLs are now treated as investment assets rather than business assets, meaning reliefs such as Business Asset Disposal Relief (BADR) and Rollover Relief are no longer available. Capital gains will be taxed at 18% for basic rate taxpayers and 24% for higher rate taxpayers, meaning that disposal planning must now take into account the broader income position in 2025/26 and beyond.

Practical considerations

Higher taxable profits, driven by interest restrictions and reduced flexibility for pension planning, highlight the need to reassess ownership structures and profit allocation, as well as placing greater focus on exit strategies given the loss of CGT reliefs.

For some, the changes may prompt a fundamental rethink of whether operating a furnished holiday let remains commercially viable.