Furnished holiday lets after April 2025: the new rules

The furnished holiday lettings (FHL) regime was abolished by Finance Act 2024 with effect from 6 April 2025 for income tax and CGT (1 April 2025 for corporation tax). From that date the special tax treatment of qualifying holiday accommodation has gone, and properties that used to sit inside the FHL regime are taxed as ordinary UK property businesses. This guide sets out, for advisers running through transition with clients, what was lost, what survives, and what the practical post-abolition picture looks like.

What the FHL regime used to do

Under ITTOIA 2005 ss323–326, a property qualified as an FHL if it was furnished, let commercially with a view to profit, available for letting for at least 210 days in the tax year, and actually let for at least 105 days (ignoring lets to the same person of more than 31 days, up to the 155-day longer-occupation cap). Qualifying properties were treated, for several specific purposes, as if the letting were a trade rather than a property business.

That gave the owner six material advantages:

• Full mortgage interest deduction. FHLs were outside the Section 24 finance cost restriction (ITTOIA 2005 s272A), so 100% of finance costs reduced taxable profit at the marginal rate.
• Capital allowances on furniture and equipment. Under CAA 2001 Part 2, FHL owners could claim plant and machinery allowances — including the annual investment allowance — on sofas, beds, white goods, hot tubs, the lot. Ordinary residential lets cannot.
• Relevant UK earnings for pensions. FHL profits counted as relevant UK earnings under FA 2004 s189, so they supported tax-relieved pension contributions. Ordinary rental profit does not.
• Business asset rollover relief on disposal (TCGA 1992 s152, brought in by s241).
• Gift hold-over relief on gifts of FHL property (TCGA 1992 s165, brought in by s241A).
• Business asset disposal relief (BADR, the former entrepreneurs’ relief — TCGA 1992 s169I/s169S) on disposal of the FHL business, taxing qualifying gains at 10% up to the £1m lifetime limit.

What changed on 6 April 2025

Finance Act 2024 repealed Chapter 6 of Part 3 of ITTOIA 2005 (the FHL chapter) and the related TCGA 1992 provisions. From 6 April 2025, properties that previously qualified as FHLs are taxed as part of the owner’s ordinary UK property business (or overseas property business, for EEA FHLs). HMRC’s guidance Changes to the furnished holiday lettings tax regime sets out the position. In practical terms:

1. Section 24 now bites

Finance costs on a former FHL — mortgage interest, loan arrangement fees on relevant loans — are no longer fully deductible against profit. They are restricted under s272A and relieved as a 20% tax reducer instead. For a higher-rate owner, this is the same structural hit landlords have been absorbing since 2017. See our Section 24 guide for the mechanics.

2. No more capital allowances on furniture

The plant and machinery regime under CAA 2001 ceases to apply to the furniture and equipment in a former FHL. In its place the owner can claim replacement of domestic items relief under ITTOIA 2005 s311A — a deduction for the cost of replacing (not initially buying) sofas, beds, white goods and similar furnishings, restricted to the cost of a like-for-like replacement and net of any sale proceeds from the old item. The first-time fit-out of a new let is not deductible against rental profit. Existing pools carried forward continue to attract writing-down allowances until exhausted on assets owned at the transition date, under the transitional rules.

3. Profit no longer counts for pensions

From 2025/26, FHL profit is property income for FA 2004 s189 purposes — not relevant UK earnings — so it does not support tax-relieved personal pension contributions. Clients who were routing FHL profit into pension contributions need an alternative source of relevant earnings, or contributions are capped at the £3,600 gross basic-amount limit.

4. Rollover and gift hold-over relief gone

A disposal of a former FHL on or after 6 April 2025 cannot attract rollover relief or gift hold-over relief under the TCGA 1992 routes that depended on FHL status. The gain falls into ordinary residential property CGT — 18% / 24% from 6 April 2024 onwards — payable on the standard 60-day UK Property CGT Return for residential disposals.

5. BADR cut-off on disposal

BADR was available on disposals of an FHL business up to and including 5 April 2025. From 6 April 2025 there is no BADR on the disposal of what was the FHL business, because for income/CGT purposes the FHL business no longer exists. The Finance Act 2024 transitional rules confirm that where a disposal contract was unconditionally exchanged on or before 5 April 2025 but completed afterwards, BADR can still apply, subject to the usual anti-forestalling conditions.

Worked example: a higher-rate owner of a Cornish cottage

A higher-rate-taxpayer client owns one cottage that qualified as an FHL in 2024/25 with the following numbers. The same numbers in 2025/26 give a very different tax bill.

Cottage income statement

• Gross rental income: £32,000
• Cleaning, agent fees, utilities, council tax: £8,000
• Mortgage interest: £9,000
• New sofa and washing machine (replacement of items already in the property): £1,800

2024/25 (FHL). Taxable profit = £32,000 − £8,000 − £9,000 − £1,800 = £13,200. Income tax at 40% = £5,280. The £1,800 replacement is relieved through capital allowances (AIA on the appliances, replacement furniture relief on the sofa pre-abolition was itself available, but capital allowances would have covered the appliance), full mortgage interest deduction at 40%. Profit counts as relevant UK earnings for pension purposes.

2025/26 (former FHL, now ordinary residential let). The £9,000 of mortgage interest is no longer deductible. Taxable profit = £32,000 − £8,000 − £1,800 (replacement of domestic items, deductible) = £22,200. Income tax at 40% = £8,880, less a 20% tax reducer on mortgage interest of £9,000 × 20% = £1,800, giving a final income tax charge of £7,080. The cash position is identical; the tax bill rises by £1,800. Profit no longer supports a pension contribution.

Multiply this across a portfolio of three or four cottages and the cash-flow impact for an owner-managed family business is material. Where the property was held in a company, the finance-cost restriction does not apply (companies were unaffected by Section 24), but the loss of capital allowances and the BADR / rollover / gift hold-over reliefs on eventual disposal still hurts.

Transitional rules to flag for clients

Losses carried forward

Unrelieved FHL losses brought forward into 2025/26 are preserved and can be set against the profits of the property business that the former FHLs are now part of. UK FHL losses merge into the UK property business loss pool; EEA FHL losses merge into the overseas property business loss pool. They cannot be cross-pooled — a UK FHL loss does not become available against EEA property profits, and vice versa.

Capital allowance pools

A client who held qualifying plant and machinery in the FHL on 5 April 2025 keeps the existing pool. Writing-down allowances continue to be claimed in the property business until the pool is exhausted. New expenditure on plant and machinery from 6 April 2025 onwards generally does not qualify (dwelling-houses are excluded from plant and machinery allowances for property businesses — CAA 2001 s35), so the pool runs down and is not topped up.

BADR forestalling

For BADR specifically, HMRC published anti-forestalling rules to stop pre-6 April 2025 unconditional contracts being put in place purely to bank the relief without a genuine commercial basis. Where there’s a contract pre-6 April 2025 completing after, the adviser’s file needs to evidence commercial purpose and arm’s-length terms; HMRC has the power to deny relief otherwise.

Averaging and the “period of grace” election

The averaging election (across multiple FHLs in the same business) and the period-of-grace election (preserving FHL status through a year where lettings fell below the 105-day threshold) are gone. They had no application to 2025/26 and later years because the regime they sat inside no longer exists.

What this means in practice for firms

For most firms with FHL clients on the books, the transition conversation has three parts: re-explaining the cash-flow hit from Section 24 to higher-rate owners who weren’t feeling it before; re-running disposal planning for clients who were counting on BADR or rollover; and updating the standing treatment of furniture spend from capital allowances to replacement-of-items relief in the bookkeeping. The allowable expenses rules that already applied to residential landlords now apply to former FHLs too, with the same edges.

For clients now in their first full year of the new regime — 2025/26, with the Self Assessment return due by 31 January 2027 — the practical adviser job is to make sure that the property ledger is reconfigured before the year is over, not after. That includes splitting finance costs out for the s272A tax reducer, ring-fencing replacement-of-items deductions separately from initial fit-out, and tracking the BADR-window completion date for any disposal that contracted pre-April 2025.