The furnished holiday let tax changes: what was abolished in 2025

The furnished holiday lettings (FHL) tax regime, which for years gave qualifying holiday lets a set of advantages over ordinary rental property, was abolished from April 2025. This is one of the most important recent changes for anyone buying, owning or selling a holiday let, because it removed the specific tax reliefs that made holiday lets attractive to many higher-rate taxpayers. If you are weighing a holiday let, understanding what changed is essential.

This guide explains what the FHL regime was, what was abolished, why it matters, and the limited company response that many owners are now considering. We arrange holiday let finance as a broker and introducer, not a lender, and we are not tax advisers. This is general information only; the detail of how the changes affect you depends on your circumstances, so take advice from a qualified accountant.

What was the FHL regime?

For decades, a property that met the furnished holiday lettings conditions, broadly being furnished, available to let for a set number of days and actually let commercially for a minimum period each year, was treated for tax more like a trading business than a rental property. That special status carried a bundle of advantages that ordinary buy to lets did not get, which is why holiday lets had a distinct tax appeal.

The main FHL advantages were: full deductibility of mortgage interest and finance costs against rental profits, rather than the restricted basic-rate relief that buy to lets had been moved to; capital allowances on furniture, fixtures and equipment; treatment of profits as relevant earnings for pension contribution purposes; and access to certain capital gains tax reliefs on disposal, including reliefs aimed at business assets. Together these could make a holiday let materially more tax-efficient than an equivalent buy to let, particularly for a higher-rate taxpayer carrying borrowing.

What was abolished, and from when?

From April 2025, the FHL regime was abolished, and qualifying holiday lets lost their special status. In practical terms, holiday lets are now taxed broadly in line with other residential property businesses. The full deduction of mortgage interest is replaced by the restricted basic-rate tax reduction that already applied to buy to lets, so a higher-rate taxpayer can no longer deduct all their finance costs from rental profit. The specific capital allowances treatment, the pension-relevant-earnings status and the FHL-specific capital gains reliefs were removed.

The change applies to income and gains from the relevant date onward, with transitional provisions for some items. The headline effect is that the tax wrapper that distinguished holiday lets from ordinary rental property has gone, and a holiday let is now, for most tax purposes, treated much like any other let residential property. The exact mechanics, transitional rules and the treatment of any losses or allowances carried forward are detailed and individual, which is precisely why this is a question for an accountant rather than a broker.

Why does it matter for holiday let owners and buyers?

The most significant practical effect is on the after-tax return of a geared holiday let held personally by a higher-rate taxpayer. Where finance costs were previously fully deductible, they now attract only a basic-rate reduction, which raises the effective tax on the income and can meaningfully reduce the net return, especially on a property with a large mortgage. The loss of the FHL capital gains reliefs also changes the tax position on an eventual sale for some owners.

For buyers, this means the investment case for a holiday let now rests more on strong net income and capital growth than on tax efficiency. A property that only worked because of the old FHL reliefs may look very different on a post-2025 basis, so any projection or appraisal written before April 2025 should be rebuilt. The change does not make holiday lets bad investments, but it removes a tailwind that many investors had relied on, which is why we encourage clients to model the numbers on current tax rules and take proper advice.

The limited company response

The most common response, mirroring what the buy to let market did when its own interest relief was restricted years ago, is to consider holding holiday lets through a limited company. Inside a company, finance costs are deductible against profits in the normal way, so the restriction that now applies to individuals does not bite in the same manner, and profits can be retained within the company for reinvestment rather than drawn out and taxed personally.

A company is not automatically better, though. It brings corporation tax, the cost and complexity of extracting profits, administration, and considerations around moving an existing personally-held property into a company, which can itself trigger tax. The right answer depends on your income, your plans for the property and your wider position, and it is a decision for an accountant. On the finance side, lending to a property-holding company is well established, and investors weighing the structure often speak to our colleagues at Limited Company Property Finance. We arrange the mortgage once the structure is chosen; we do not advise on which structure to use.