UK Furnished Holiday Lets (FHL) Abolition Guide (2026/27)

Tax planning is fact-sensitive. This guide explains the legislative and HMRC-guidance position for 2026/27. The right response for any individual FHL owner depends on the property, the debt structure, other income, the owner's age, retirement plans, exit horizon and family circumstances. For a specific decision speak to a qualified tax adviser with property-tax experience. Nothing on this page is regulated financial or tax advice.

1. Overview and why abolition

The furnished holiday lettings distinction was introduced in 1984 and gave short-term holiday lets more favourable tax treatment than other property lettings. To qualify, a property had to be furnished, let commercially and pass three occupancy tests (210 days available, 105 days actually let, and no more than 155 days in lets longer than 31 days).

HMRC's policy paper gives the objective as fairness: aligning the rules for furnished holiday lettings with those for other property businesses by removing the tax advantages FHL landlords had over other residential landlords. The official costing (Table 5.2 of Autumn Budget 2024, certified by the Office for Budget Responsibility) is an Exchequer gain of £35 million in 2025-26, rising to £210 million in 2028-29 and £190 million in 2029-30 (HMRC policy paper).

The legal effect: from 6 April 2025, FHL profits and losses form part of the owner's UK or overseas property business, the finance cost restriction applies to FHL mortgage interest, capital allowances stop for new spending, capital gains reliefs for trading business assets are withdrawn, and FHL profits no longer count as relevant UK earnings for pension tax relief. The rest of this guide takes each effect in turn, with the transitional rules that soften them.

2. Pre-April 2025 FHL benefits recap

HMRC groups the old advantages into four areas. Understanding each is the baseline for seeing what the abolition removes.

1. Full mortgage interest deduction. FHL profits were calculated after deducting mortgage interest and other finance costs in full. The finance cost restriction (often called Section 24), phased in for other residential landlords from 6 April 2017 and fully in place from 6 April 2020, replaces that deduction with a basic-rate tax reduction; HMRC's announcement expressly excluded FHL landlords. A higher-rate FHL owner with £8,000 of mortgage interest therefore got relief worth £3,200 a year, against £1,600 under the restriction.

2. Plant and machinery capital allowances. Furniture, white goods, kitchen equipment and similar plant in an FHL qualified for capital allowances, including the Annual Investment Allowance. An ordinary residential letting business cannot claim plant and machinery allowances on plant for use in a dwelling-house (Capital Allowances Act 2001 s.35, as HMRC's clarification note explains); its relief for furnishings is Replacement of Domestic Items Relief, which covers replacements only and not the first purchase.

3. Profits counted as relevant UK earnings for pensions. Tax relief on an individual's own pension contributions is limited to 100% of relevant UK earnings, or £3,600 gross if higher. FHL profits counted as relevant UK earnings; ordinary rental profits do not. A semi-retired owner with £30,000 of FHL profit and no other earnings could get relief on up to £30,000 of personal contributions. After abolition the same owner is limited to £3,600 gross a year.

4. Capital gains reliefs for business assets. FHLs were treated as trading assets for Business Asset Disposal Relief, roll-over relief, gift relief and relief for loans to traders. BADR taxed qualifying gains at 10% up to 5 April 2025, 14% in 2025/26 and 18% from 6 April 2026, within a £1,000,000 lifetime limit. Without BADR, gains are taxed at 18% within the basic-rate band and 24% above it.

FHL losses were more restricted than the other benefits suggest: from 2011-12 a loss of an FHL business could only be carried forward against future profits of the same FHL business, not set against other income (PIM4120).

The qualifying tests, which remained material for 2024/25, were: the property had to be furnished and let commercially, available for short-term letting for at least 210 days, actually let commercially for at least 105 days, and lets of more than 31 continuous days could not total more than 155 days. Averaging and period of grace elections could help a property that fell short of the letting test. Full HMRC guidance is at PIM4110.

3. Abolition mechanics: 6 April 2025

The legislation is Finance Act 2025, section 25 and Schedule 5. Schedule 5 omits Chapter 6 of Part 3 of ITTOIA 2005 (which defined the commercial letting of furnished holiday accommodation), omits ITA 2007 ss.127 and 127ZA (which treated UK and EEA FHL businesses as trades), omits TCGA 1992 ss.241 and 241A, removes FHL profits from relevant UK earnings in FA 2004 s.189, and makes the corresponding changes for Corporation Tax.

From 6 April 2025, in practical terms:

• FHL profits and losses form part of the owner's UK or overseas property business (depending on where the property is).
• Mortgage interest and other finance costs are no longer deducted from rental profit. The owner instead gets a 20% basic-rate tax reduction, worked out on the lowest of the finance costs, the property profits and adjusted total income, as for other residential landlords.
• No capital allowances on new spending from the operative date. Replacement of Domestic Items Relief applies to replacement furnishings and appliances.
• FHL profits no longer count as relevant UK earnings for pension tax relief from 2025/26.
• Disposals on or after 6 April 2025 no longer qualify for BADR, roll-over relief or gift relief as FHL assets, subject to the transitional rules below.
• Roll-over relief is withdrawn for acquisitions of former FHL property on or after the commencement date (FA 2025 Sch 5 para 13(2)).

For Corporation Tax, an accounting period that straddles 1 April 2025 is split into two periods, with amounts apportioned on a time basis or, where that is unjust or unreasonable, on a just and reasonable basis (FA 2025 Sch 5 para 15). For Income Tax the changes apply to the tax year 2025-26 onwards.

4. Transitional rules

Part 5 of Schedule 5 and HMRC's clarification note set out the transitional rules that soften abolition.

Existing capital allowances pools survive. Where qualifying expenditure was in a capital allowances pool by 5 April 2025, writing-down allowances, balancing allowances and balancing charges can continue to be claimed on that pool until it is used up or a small pool claim is made. Spending from 6 April 2025 on replacement furnishings falls under Replacement of Domestic Items Relief instead. Illustration: a £15,000 main pool at the cut-off gives £2,700 of writing-down allowance in 2025/26 at 18%, then £1,722 in 2026/27 and £1,481 in 2027/28 at the 14% main rate that applies from 6 April 2026.

FHL losses carry forward. An FHL loss not yet relieved at the end of 2024-25 is treated as a loss of the corresponding property business and carried forward under ITA 2007 s.118 against future property business profits (FA 2025 Sch 5 para 16; companies have a matching rule from 1 April 2025). A UK FHL loss goes to the UK property business and an EEA FHL loss to the overseas property business. This widens what the losses can be used against: before abolition they could only be set against profits of the same FHL business.

BADR for businesses that ceased before abolition. Where the FHL business ceased before 6 April 2025, a disposal within the normal 3 years after cessation can still qualify for BADR (FA 2025 Sch 5 para 19). HMRC's clarification stresses that abolition is not itself a cessation: the business ceases only when there are no more bookings or lettings and no intention to resume.

Anti-forestalling for unconditional contracts. For Capital Gains Tax a disposal under an unconditional contract normally takes place when the contract is made. Where the contract was made between 6 March 2024 and 5 April 2025 and the property is conveyed on or after 6 April 2025, a claim to BADR, roll-over relief or gift relief succeeds only if no purpose of the contract was to avoid the change, the contract was either entered into wholly for commercial reasons or made between unconnected parties, and the claim includes a statement that these conditions are met (FA 2025 Sch 5 para 14). For companies the window ends on 31 March 2025.

What is not protected. Relevant UK earnings status ends for 2025/26 with no transitional period. The finance cost restriction applies in full from the same date. New spending gets no capital allowances.

5. Worked impact: three scenarios

Three illustrative owners. Each uses the 2026/27 rest-of-UK Income Tax rates from the site ruleset and isolates the effect of the finance cost restriction: the residual capital allowances pool is deducted on both sides because it survives abolition. Scottish taxpayers pay Scottish rates on property income, so their figures differ. These are illustrations, not filings.

Scenario A: small operator, single rural cottage

Owner whose other income already uses the basic-rate band, so the whole property profit is taxed at 40%.

• Gross rent: £25,000
• Mortgage interest: £4,000
• Other allowable expenses (agent fees, cleaning, insurance, safety checks, utilities): £6,000
• Writing-down allowance on the existing pool: £1,200

Pre-abolition: taxable profit = £25,000 - £4,000 - £6,000 - £1,200 = £13,800. Tax at 40% = £5,520.

Post-abolition: taxable profit = £25,000 - £6,000 - £1,200 (no interest deduction) = £17,800. Tax at 40% = £7,120, less the basic-rate tax reduction (20% × £4,000 = £800). Net tax = £6,320.

Difference: £800 more tax a year, which is (40% - 20%) × £4,000 of interest.

Scenario B: medium operator, £30k profit before interest + £8k interest

Higher-rate owner. The property makes £30,000 of profit before finance costs, with £8,000 of mortgage interest.

Pre-abolition: taxable profit = £30,000 - £8,000 = £22,000. Tax at 40% = £8,800.

Post-abolition: taxable profit = £30,000. Tax at 40% = £12,000, less the tax reduction (20% × £8,000 = £1,600). Net tax = £10,400.

Difference: £10,400 - £8,800 = £1,600 more tax a year. Tax as a share of the £22,000 cash profit after interest rises from 40% to 47.3%.

Scenario C: large operator, four-property portfolio

Owner whose other income is already above £125,140, so the whole property profit is taxed at 45%.

• Combined gross rent: £120,000
• Combined mortgage interest: £30,000
• Combined other allowable expenses: £10,000
• Writing-down allowances on existing pools: £4,000

Pre-abolition: taxable profit = £120,000 - £30,000 - £10,000 - £4,000 = £76,000. Tax at 45% = £34,200.

Post-abolition: taxable profit = £120,000 - £10,000 - £4,000 = £106,000. Tax at 45% = £47,700, less the tax reduction (20% × £30,000 = £6,000). Net tax = £41,700.

Difference: £7,500 more Income Tax a year on the same activity, before the BADR loss on an eventual sale (section 7) and the loss of relevant-earnings status (section 8).

6. Capital allowances lost

Under the FHL rules, plant and machinery in a holiday let (furniture, kitchen equipment, white goods, fixtures) qualified for capital allowances, including the Annual Investment Allowance. After repeal, capital allowances are no longer available on fixtures, furniture or furnishings in the property, because plant for use in a dwelling-house does not qualify for a property business (CAA 2001 s.35). HMRC's clarification note confirms that a holiday home used for holiday letting is a dwelling-house for this purpose, so even a purchaser's section 198 fixtures election does not unlock allowances.

Replacement of Domestic Items Relief (ITTOIA 2005 s.311A), which applies to other residential lets and now to former FHLs, is narrower: it covers the cost of replacing a domestic item such as furniture, furnishings or appliances, limited to a like-for-like replacement, and gives nothing for the first purchase of an item or for the improvement element of a replacement.

What survives from the old pool. Expenditure already pooled by 5 April 2025 continues to be written down (main pool 14% a year from 6 April 2026, 18% before; special rate pool 6%) until it is used up or a small pool claim is made. See the worked pool figures in section 4. Sources: gov.uk capital allowances rates and pools and HMRC's FHL clarification note.

7. BADR loss on disposal

Business Asset Disposal Relief (formerly Entrepreneurs' Relief) applies a reduced CGT rate to qualifying business disposals, up to a £1,000,000 lifetime limit. FHL businesses qualified because TCGA 1992 s.241 treated them as trades for these purposes. Finance Act 2025 omitted s.241 for disposals from 6 April 2025, so former FHLs no longer qualify except under the transitional rules in section 4.

The rate gap. BADR was 10% for disposals up to 5 April 2025. Autumn Budget 2024 raised it to 14% from 6 April 2025 and 18% from 6 April 2026. Without BADR, gains are taxed at 18% within the basic-rate band and 24% above it. In 2026/27 the BADR rate equals the basic CGT rate, so BADR would only have helped on gains above the basic-rate band: on a £1,000,000 gain all taxed above the band, the difference is £60,000.

Illustration. A £400,000 gain on a single FHL property, within the BADR lifetime limit, for a seller whose income already uses the basic-rate band:

• Disposal on or before 5 April 2025 with BADR at 10%: tax = £40,000.
• Disposal in 2025/26 that still qualified under a transitional rule (business ceased before 6 April 2025, or a protected contract) at 14%: tax = £56,000.
• Disposal in 2026/27 with no BADR, at 24%: tax = £96,000.

Cliff edge. On a £400,000 gain the difference between the pre-April 2025 BADR rate and the post-abolition rate is £56,000. A disposal under an unconditional contract is made when the contract is made, so a contract made before 6 March 2024 was outside the anti-forestalling rule, and a contract made from 6 March 2024 that completed before 6 April 2025 was a pre-abolition disposal anyway. Contracts made from 6 March 2024 that completed on or after 6 April 2025 needed the conditions and statement in FA 2025 Sch 5 para 14.

Roll-over relief also goes. Before abolition an FHL owner who sold one property and reinvested in another qualifying business asset within the roll-over window (12 months before to 3 years after the disposal) could defer the gain. From the commencement date a former FHL is neither a qualifying old asset nor a qualifying new asset. Source: PIM4160 and FA 2025 Schedule 5.

8. Pension contribution cap impact

Tax relief on an individual's own pension contributions is limited to 100% of relevant UK earnings, or £3,600 gross if that is higher (gov.uk pension tax relief). Separately, total contributions above the annual allowance of £60,000 trigger a tax charge. The allowance is tapered where threshold income exceeds £200,000 and adjusted income exceeds £260,000, falling to £10,000 at adjusted income of £360,000 or more. FHL profits were listed as relevant UK earnings in FA 2004 s.189(2); Finance Act 2025 omitted them from 2025/26.

Who this hits hardest. Owners whose FHL profit was their main or only earned income: semi-retired owners using holiday-let income before drawing pensions, and a spouse or civil partner with an FHL profit share but little other earned income.

Magnitude. An owner with £30,000 of FHL profit and no other earnings could previously get relief on up to £30,000 of personal contributions a year. Carry-forward of unused annual allowance does not raise that limit: carry-forward only increases the annual allowance, while relief on personal contributions stays capped at 100% of the year's relevant earnings. From 6 April 2025, the same owner can get relief on £3,600 gross a year. At the 40% rate, relief on £30,000 was worth up to £12,000, against £720 on £3,600 at the basic rate.

Other routes. Employer contributions are not limited by the member's earnings (they count towards the annual allowance), and salary or self-employed profits still count as relevant UK earnings. Rental income received through a company does not count for the shareholder, but a salary the company pays does. Each route has its own tax and administrative cost. See the pension tax relief guide.

9. Options for FHL owners

Practical options for an owner of a former FHL. None is a default; the right answer depends on the property, other income, the exit horizon and the debt.

Option 1: keep letting under the ordinary rules. HMRC's clarification notes that repeal does not require any change in how the property is let: the Income Tax and Corporation Tax rules are now the same whether it is let as holiday accommodation or long-term, and VAT, Council Tax and business rates rules are unchanged.

Option 2: incorporate into a limited company. A company is not subject to the finance cost restriction, so it deducts interest in full against Corporation Tax. It cannot claim plant and machinery allowances on furnishings in a dwelling-house any more than an individual landlord can (CAA 2001 s.35). The costs: the transfer is a disposal at market value for CGT (deferrable under TCGA 1992 s.162 only where a whole business is transferred as a going concern for shares), the company pays SDLT (or LBTT / LTT) on the acquisition, normally at the higher rates for additional dwellings, and profits extracted later are taxed again as dividends or salary.

Option 3: reduce borrowing. The restriction bites on the pound amount of finance costs. For a higher-rate owner, £8,000 of interest costs £1,600 a year more than it did under the FHL rules (40% relief lost, 20% reduction gained); halving the interest halves that cost. Whether paying down debt is worthwhile depends on the alternative uses of the money. The mortgage calculator can model the repayments.

Option 4: convert to a long-term residential let. The tax treatment is the same either way after abolition: the finance cost restriction applies and gains are taxed at 18% / 24%. The choice turns on rent, running costs and voids for the particular property, not on tax.

Option 5: genuine serviced accommodation. Where the owner lives on site and provides services well beyond those a landlord normally provides, the activity may be a trade (see section 10). That is a change to the business itself, not a relabelling, and HMRC applies the test strictly.

10. Serviced accommodation as trade: when it actually qualifies

Whether an activity is a trade is decided on the facts. HMRC's Business Income Manual explains the "badges of trade": the 1955 Royal Commission on the Taxation of Profits and Income reviewed the case law and identified six badges, since refined (BIM20201).

HMRC's position on furnished lettings. BIM22001 says income from furnished lettings is rarely trading income, even when the landlord works full time running the business. It is treated as a trade only where the landlord remains in occupation of the property and provides services substantially beyond those normally provided by a landlord, for example bed and breakfast or running a hotel or guesthouse. HMRC's clarification on abolition adds that FHL income was always property income, not trading income; the FHL rules only granted specific reliefs.

The leading holiday-let case. In HMRC v Lockyer and another (personal representatives of Pawson) [2013] UKUT 50 (TCC), an Inheritance Tax business relief case about a single holiday bungalow on the Suffolk coast, the Upper Tribunal held that the business was mainly one of holding an investment. Finding occupants, collecting rent, repairs, garden maintenance and insurance were investment activities, and services such as cleaning, heating and hot water, a welcome pack and being on call for queries did not change that. Henderson J relied on the Court of Appeal's approach in IRC v George [2003] EWCA Civ 1763, a caravan-park case, of looking at the business in the round (IHTM25278). These are Inheritance Tax cases rather than trading cases, but they show how high the bar for services is.

What does not qualify. Self-catering with cleaning between guests, check-in instructions and a welcome pack is property letting. So is a short-let property with a manager who takes bookings and arranges cleaners. An owner considering the trade route needs specialist advice and a genuinely different business, not a new label.

11. Related calculators and guides

• UK landlord tax guide - Section 24, Rent-a-Room, MTD and SDLT for residential landlords.
• Business Asset Disposal Relief (BADR) guide - the BADR rate, lifetime limit and qualifying conditions.
• Capital Gains Tax calculator - model the CGT bill on a former FHL disposal.
• Capital allowances calculator - capital allowances for qualifying business plant.
• Corporation Tax calculator - Corporation Tax on company profits.
• Stamp Duty calculator - SDLT including the higher rates for additional dwellings.
• Pension tax relief guide - relevant UK earnings and the annual allowance.
• Self-employed calculator - where an activity is a genuine trade.
• £100,000 tax trap - the Personal Allowance taper, which higher taxable property profit can trigger.
• SalaryTax methodology - how figures on this site are sourced.