Holiday Let Tax 2026/27

FHL Abolition from April 2025

The furnished holiday lettings regime was abolished from 6 April 2025 following the 2024 Autumn Budget. From the 2025/26 tax year onwards, all income from short-term holiday lettings is treated as standard property income under the UK property business rules. This means holiday let owners are now subject to the same rules as buy-to-let landlords, including: the Section 24 mortgage interest restriction (only 20% basic-rate tax relief on finance costs), the replacement of domestic items relief instead of capital allowances, no eligibility for Business Asset Disposal Relief (BADR) on sale of the property (meaning full CGT rates of 18%/24% apply), and no gift relief for transfers between spouses or into trusts. The abolition has significant implications for existing FHL owners, particularly those who have claimed capital allowances (which may be subject to clawback on disposal of the property) and those who structured their affairs around FHL preferential treatment. Owners who were relying on BADR to reduce CGT on sale from 24% to 10% have lost that benefit for disposals after 5 April 2025. The government included transitional provisions in the legislation, but the overall impact is a significant increase in the tax burden on holiday let businesses.

Old FHL Qualifying Conditions

Before abolition, a property qualified as a furnished holiday letting if it met all of the following conditions. Understanding these conditions remains important for transitional issues and for determining the tax treatment of holiday lets in earlier years. Location condition: the property must be situated in the UK or the European Economic Area (EEA). Furnished condition: the property must be fully furnished for immediate occupation by holidaymakers. Commercial letting condition: the letting must be made on a commercial basis with a view to profit. Availability condition: the property must be available for commercial letting to the public for at least 210 days (30 weeks) during the tax year. Occupancy condition: the property must be actually let for at least 105 days (15 weeks) during the tax year. Short-term lettings of 31 consecutive days or less to the same guest counted towards the 105 days. Lettings longer than 31 days counted for the availability condition but not the occupancy condition. There was also a pattern of occupation condition: no more than 155 days of longer-term occupation (over 31 days) in the year, and for at least 7 months, the property was not occupied by the same person for more than 31 days. These conditions were notoriously strict and required careful record-keeping to demonstrate compliance. Many holiday let owners fell foul of the occupancy condition, particularly in poor weather years or during the COVID-19 pandemic. HMRC published guidance on its interpretation of the conditions, and there was extensive case law on what constituted a genuine commercial holiday letting.

Capital Allowances vs Replacement Relief

One of the most valuable benefits of the FHL regime was eligibility for capital allowances on plant and machinery, including furniture, appliances, kitchen equipment, and fixtures such as heating systems and bathroom fittings. FHL owners could claim Annual Investment Allowance (AIA) on qualifying expenditure, writing off the full cost against profits in the year of purchase. Under the post-abolition rules, capital allowances are no longer available for holiday let properties. Instead, owners must use the replacement of domestic items relief, which only allows the cost of replacing existing items (not the initial cost of furnishing the property). This is a significant disadvantage for holiday let owners who regularly upgrade their furnishings to maintain high standards for guest satisfaction. Capital allowances claimed in previous years may be subject to clawback when the property is sold or ceases to be used as an FHL. The disposal value of the assets on which capital allowances were claimed is treated as a balancing charge, increasing the taxable profit on sale. Professional advice is essential for FHL owners who have claimed capital allowances in the past, as the interaction between the abolition and the capital allowance rules is complex and the transitional provisions require careful handling.

Business Rates vs Council Tax

Holiday lets are subject to either business rates (non-domestic rates) or Council Tax, depending on their rateable value and the number of days they are available for letting. If a holiday let has a rateable value of less than £15,000 (in England) and meets the conditions for small business rates relief, the owner may pay no business rates at all. If the rateable value is between £15,001 and £51,000, the standard business rate multiplier applies, with small business rates relief available for properties up to £15,000. If the property is let for 140 days or more per year, it is treated as a self-catering holiday let and qualifies for business rates rather than Council Tax. If the property is not let for 140 days or more, it is treated as domestic property and is subject to Council Tax instead. This 140-day threshold is separate from the old FHL 105-day occupancy condition. Holiday let owners who do not meet the 140-day letting threshold face Council Tax bills on their properties, which can be higher than business rates. Some local authorities apply a premium on second homes and holiday lets, increasing the Council Tax bill by up to 100%. The abolition of the FHL regime does not directly affect the business rates vs Council Tax distinction, which continues to be determined by the 140-day letting test. Holiday let owners should check their local authority's policy on holiday let Council Tax to understand their liabilities.

VAT on Holiday Lets

VAT is chargeable on holiday let income if your total VAT-able turnover exceeds the VAT registration threshold (currently £90,000 in 2026/27). Unlike long-term residential lettings (which are exempt from VAT), holiday lettings are treated as provision of accommodation and are standard-rated for VAT purposes. If you are VAT-registered, you must charge 20% VAT on your holiday let income and account for it to HMRC through your VAT returns. You can also reclaim VAT on your business expenses, including furnishings, refurbishments, and agent fees. For holiday let owners with multiple properties, the combined income may exceed the VAT threshold even if each property individually generates less than £90,000. You can voluntarily register for VAT even if your turnover is below the threshold, which may be beneficial if you have significant VAT-able expenses. The abolition of the FHL regime does not affect the VAT treatment of holiday lets — they remain standard-rated supplies of accommodation. However, the interaction between VAT, income tax, and business rates creates complexity for holiday let owners, particularly those with larger portfolios. Professional advice on VAT registration and partial exemption rules (if you have mixed supplies) is recommended.

FAQs

Has the FHL regime been abolished?

Yes. The separate FHL tax regime was abolished from 6 April 2025. Holiday lets are now taxed under the standard property income rules, including the Section 24 mortgage interest restriction.

Can I still claim capital allowances on my holiday let?

No. Capital allowances are no longer available for holiday lets from 2025/26. You must use the replacement of domestic items relief instead, which only covers the cost of replacing existing furnishings.

Do I pay business rates or council tax on my holiday let?

If your holiday let is available for letting for 140 days or more per year, it qualifies for business rates (which may be lower than Council Tax). If it is let for fewer than 140 days, it is treated as domestic property and subject to Council Tax.

Is holiday let income subject to VAT?

Yes, if your total VAT-able turnover exceeds the £90,000 registration threshold. Holiday let income is standard-rated for VAT (20%), unlike long-term residential lettings which are exempt.