A cottage in St Ives that used to earn its owners a tidy annual profit and a decent chunk of pension contributions on the side now does neither — not because the bookings dried up, but because HMRC redrew the rules underneath it. Furnished holiday lets (FHLs) spent decades as one of the few property investments that behaved, for tax purposes, almost like a small business: full mortgage interest relief, proper capital allowances on the sofa and the dishwasher, and access to reliefs normally reserved for trading assets. That all ended on 6 April 2025, and this summer — the second full holiday season under the new rules — is when most owners are finally feeling the difference in their numbers rather than just reading about it in an accountant's email.
What actually changed on 6 April 2025
The abolition itself was announced by Jeremy Hunt at the Spring Budget in March 2024, then confirmed in the Finance Act 2025, and it did more or less exactly what it said it would: it folded furnished holiday lettings into the ordinary property business rules that already applied to every other landlord in the country. Before the change, a qualifying FHL — one let commercially, available for at least 210 days a year and actually let for at least 105 of them — sat in its own separate tax category, taxed more like a trade than like rental income. After the change, none of that separation survives. Income and expenses from a former FHL are now pooled with whatever other UK property income the owner has, whether that's a buy-to-let flat in Leeds or a static caravan in Pembrokeshire. For owners with only one holiday property and no other lettings, the practical effect is that four specific advantages disappeared at once. Owners who also have ordinary rental property, though, catch a genuine upside buried in the reform — one worth getting to before the list of losses, because it's the one part of this story that actually helps some people.
That upside is loss relief. Under the old rules, a loss on a furnished holiday let could only be carried forward and set against future FHL profits from the same business — no use at all if the losses came in a slow year and the owner also had a profitable buy-to-let sitting right alongside it. Since 6 April 2025, losses on what used to be an FHL can be set against other UK property income in the same tax year, which has quietly rescued a number of owners who had been sitting on unused FHL losses from a sluggish post-pandemic season with nothing to offset them against.
The reliefs that disappeared overnight
For everyone else, the reform reads as a straightforward list of things that used to be available and no longer are. None of these losses are unique to holiday lets in isolation — they simply bring FHL taxation into line with the rules ordinary landlords have lived under since 2020, which is exactly why the change stings for people who structured their finances around the old treatment.
- Full deduction for mortgage interest and other finance costs, replaced by the same 20% basic-rate tax credit that has applied to ordinary landlords since the Section 24 changes
- Capital allowances on furniture, kitchen equipment and fixtures — an FHL owner could previously write off the full cost of a new boiler or a replacement bathroom suite against profits; now only the more restrictive "replacement of domestic items relief" applies, and that covers swapping out an existing item rather than buying the first one
- Recognition as relevant UK earnings for pension contribution purposes, so profits from the property can no longer be used to justify tax-relieved pension payments
- Access to Business Asset Disposal Relief, rollover relief and gift hold-over relief on disposal, among the reliefs that used to let an FHL owner pay a lower rate of Capital Gains Tax on sale than an ordinary landlord would
Transitional protection exists for contracts exchanged before 6 March 2024 that complete later, and anti-forestalling rules were written specifically to stop owners rushing through sales in the gap between the announcement and the actual implementation date.
Why the timing bites this July
Most owners didn't notice much last summer.
They noticed it in January instead, when the 2024/25 self-assessment return still carried the old FHL rules for most of the year and the pain was effectively postponed by twelve months. This year is different. The 2025/26 tax year was the first full year under the new regime, which means the profit figure landing on this year's self-assessment return — and the 31 July payment on account calculated from it — reflects the finance-cost restriction and the lost capital allowances for the whole period, not a partial one. A holiday cottage that used to show a modest paper profit after deducting full mortgage interest can easily show a considerably larger taxable profit under the new rules even when the actual cash income hasn't moved at all, simply because only 20% of the interest now comes back as a tax credit rather than being deducted before profit is worked out in the first place. Owners who based their July payment on account on last year's figures, or on a rough guess, are the ones most likely to get a shortfall notice from HMRC once the full 2025/26 return goes in.
What owners are actually doing about it
Three responses show up repeatedly among letting agents and accountants handling holiday-let clients this year. Some owners are incorporating — moving the property into a limited company, where corporation tax rules still allow full deduction of interest as a business expense and where the FHL abolition doesn't bite in quite the same way, because the reform was always aimed at unincorporated owners' income tax and Capital Gains Tax position rather than at companies. Others are converting the property to a long-term residential let, accepting a lower headline rent in exchange for fewer void periods, less cleaning and changeover cost, and a business that at least doesn't pretend to be something it no longer is for tax purposes. A smaller group is selling outright, often prompted by the realisation that the Capital Gains Tax reliefs they were counting on to soften an eventual sale are gone — a Cornwall or Pembrokeshire cottage bought a decade ago for, say, £180,000 and now worth £320,000 faces a taxable gain charged at 18% or 24% depending on the owner's other income, with no 10% concessionary rate to fall back on.
Incorporation isn't the automatic answer it sounds like — moving a property you already own into a company usually triggers a disposal for Capital Gains Tax purposes and a Stamp Duty Land Tax charge on the transfer, so the sums only work for owners planning to hold for many more years, or for someone buying a new holiday let from scratch inside a company structure. If you own one property and no other lettings, converting to a standard residential tenancy is usually the more workable move: don't chase the FHL-era numbers on a spreadsheet that no longer reflects reality — model the property as an ordinary rental from day one, and decide what to do next from that honest starting point.
Getting the bookkeeping right for the transition year
The practical bookkeeping challenge is less about the tax rules themselves and more about the mid-year switch a lot of owners are still catching up with. Software set up to track an FHL as a distinct business — separate from the rest of a rental portfolio, with its own capital allowances pools and a discrete profit-and-loss figure — needs restructuring so the property reports as part of the wider UK property business instead, and that's a different chart of accounts in most bookkeeping software, not just a relabelling exercise. Anyone using Xero, QuickBooks or FreeAgent should check that the property is now coded under the standard UK property business category rather than left in a legacy FHL tracking category from before April 2025, because leaving it miscoded is the easiest way to end up filing a return that still claims capital allowances the software calculated automatically from old defaults. Cleaning, linen, management fees and utilities are all still fully deductible exactly as before — none of that changed — so there's no need to relitigate every line of the expense list, only the finance costs, the capital allowances treatment and how any loss carries forward. Anyone still working from a paper spreadsheet built around the old FHL categories should rebuild the template for this tax year rather than patch the old one; the categories genuinely don't map across cleanly, and a patched template is where a fair number of the errors HMRC flags during compliance checks actually originate. A holiday cottage that switched from an FHL spreadsheet to a standard property-income template halfway through the 2025/26 tax year, for instance, needs its opening figures reconciled by hand, because software migrations rarely split a part-year FHL claim from a part-year ordinary-letting claim without manual intervention.
None of this means the holiday let itself stopped being a decent asset — cottages in the right coastal spots are still booking out solid weeks through August. It means the tax treatment finally caught up with what these properties actually are: rental property, not a small trading business with better perks attached.