The Furnished Holiday Lettings (FHL) regime ended on 6 April 2025. There is no longer a separate set of rules, a separate calculation or a dedicated holiday let tax calculator, because a holiday let is now taxed exactly like any other residential rental. That single change reshapes the numbers for everyone who owns a cottage in Cornwall, a coastal flat in Whitby or a lodge in the Lakes, and the people it hits hardest are mortgaged higher rate owners who used to deduct their interest in full.
This guide gives you the actual calculation rather than a vague overview. We work through gross income, allowable expenses, the Section 24 mortgage interest credit, National Insurance, the capital gains position on sale, and what shifts again from April 2027, with worked figures at each step so you can run your own property through the same method.
What FHL abolition actually changed
Under the old regime, a qualifying holiday let was treated almost like a trade. Interest was fully deductible, furniture qualified for capital allowances, profit counted as relevant earnings for pension contributions, and a sale could attract Business Asset Disposal Relief at 10%. From 6 April 2025 all of that fell away. The table below is the fastest way to see what moved.
| Feature | Under FHL (to 5 April 2025) | From 6 April 2025 |
|---|---|---|
| Mortgage interest | Fully deductible from profit | Section 24: 20% tax credit only |
| Furniture and equipment | Capital allowances / AIA | Replacement of domestic items relief only |
| Profit for pension relief | Counted as relevant earnings | Does not count (property income) |
| Class 2 / Class 4 NIC | Often due (treated as trade) | Not due unless genuinely trading |
| CGT rate on sale | 10% via Business Asset Disposal Relief | 18% / 24% standard residential rates |
| Loss relief | Flexible FHL loss rules | Restricted to other property income |
The practical upshot is that most holiday lets now produce a higher tax bill on the same cash profit, because interest relief is capped and the favourable sale rate has gone. The calculation method below builds that in.
How to calculate your holiday let income tax, step by step
Step 1: Total your gross holiday let income
Start with everything the property earned in the tax year, not just the headline rent:
- Nightly and weekly rents received from guests
- Booking fees you retain when you take the booking directly
- Separate charges for cleaning, linen, utilities, hot tubs or pets
- Deposits retained against damage or cancellation
- Cancellation or insurance receipts that replace lost bookings
Use the date the income was earned, not the date it cleared your account, unless you are eligible for and have elected the cash basis (now the default for most unincorporated property businesses).
Step 2: Deduct allowable running expenses
Deduct the revenue costs of running the let to reach taxable profit before finance costs:
- Cleaning and changeovers: cleaners, laundry, consumables, welcome packs.
- Utilities and local charges: gas, electricity, water, broadband, TV licence, and council tax or business rates.
- Insurance and repairs: holiday let insurance, boiler servicing, routine maintenance and genuine repairs (not improvements).
- Letting and marketing: Airbnb and Booking.com commission, channel manager fees, photography, agent or management fees.
- Professional fees: accountancy and similar costs of running the business.
The big trap is furniture. Under FHL you claimed capital allowances on beds, sofas and white goods. That route closed on 6 April 2025. You now rely on replacement of domestic items relief, which gives relief for replacing furnishings on a like-for-like basis but gives nothing for the first time you furnish a property. New equipment purchases are no longer an immediate deduction.
Step 3: Apply the income tax rates to your profit
Holiday let profit is added to your other income and taxed at the rates for the band it falls in. For 2026/27 those are 20% basic, 40% higher and 45% additional. For a sense of how the disposal and income figures interact across a portfolio, our property capital gains tax calculator guide walks through band stacking in detail.
| Band (2026/27) | Total income | Income tax rate |
|---|---|---|
| Personal allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
Step 4: Apply the Section 24 mortgage interest credit
This is the step people get wrong. You do not deduct mortgage or finance interest from profit. Instead you work out the tax on the full profit, then knock off a credit worth 20% of the interest paid. Holiday lets are caught by Section 24 in exactly the same way as buy-to-lets. If you want the mechanics in isolation, our step-by-step Section 24 credit calculation sets out the order of operations.
Step 5: Check National Insurance and trading status
Because the profit is property income, there is no Class 2 or Class 4 National Insurance, and it no longer counts as relevant earnings for pension contributions. The exception is where the letting is a genuine trade, which we cover below.
Worked example: a mortgaged higher rate holiday let
A coastal cottage let through an agency. The owner already earns enough employment income to sit in the higher rate band, so all the holiday let profit is taxed at 40% for 2026/27.
- Gross income: £35,000 (£32,000 rent + £2,000 cleaning charges + £1,000 retained booking fees)
- Allowable running expenses: £12,000
- Mortgage interest: £6,000
The calculation runs like this:
| Line | Amount |
|---|---|
| Taxable profit (£35,000 less £12,000) | £23,000 |
| Income tax at 40% | £9,200 |
| Less Section 24 credit (£6,000 × 20%) | (£1,200) |
| Net income tax due | £8,000 |
| National Insurance (property income) | £0 |
Under FHL, the £6,000 interest would have been a full deduction, leaving £17,000 of profit taxed at 40%, a tax bill of £6,800. The same cottage, the same cash, now costs £8,000. That £1,200 gap is Section 24 working exactly as intended, and it widens with the size of the mortgage.
Splitting ownership with a spouse can soften this. If half the profit fell into a basic rate spouse's band, part of it would be taxed at 20% rather than 40%. Where shares are unequal, a Form 17 election backed by a declaration of beneficial ownership is needed to move away from the default 50/50 split.
Trading or property income: why it matters and how to tell
The line between a let and a trade decides whether National Insurance applies, whether trading reliefs are available, and how losses behave. It is rarely as simple as "I provide a welcome pack". HMRC looks at the level and continuity of services, not the booking platform.
| Points to a trade | Points to property income |
|---|---|
| Daily housekeeping during the stay | Clean between guests only |
| Meals, breakfast or catering | Self-catering, guests cook for themselves |
| Concierge, tours, on-site reception | Keys and basic instructions |
| Very short stays, hotel-like turnover | Multi-night and weekly bookings |
| Owner present and providing services | Guests have exclusive use |
A self-catering cottage or apartment, even one booked nightly through Airbnb, is almost always property income. You generally only reach a trade with something closer to a guest house or aparthotel where staff provide continuous services. If you genuinely trade, profit attracts income tax and National Insurance but you regain access to trading reliefs and the profit counts for pension contributions, so the classification cuts both ways.
Capital gains tax when you sell a holiday let
The sharpest cost of FHL abolition often lands on sale. Holiday lets no longer qualify for Business Asset Disposal Relief, so the 10% rate is gone. A disposal is now taxed at the standard residential rates under section 1H of TCGA 1992: 18% to the extent the gain sits in your basic rate band, and 24% above it. The annual exempt amount is £3,000.
| Step | Figure |
|---|---|
| Sale proceeds | £280,000 |
| Less original cost (2020) | (£200,000) |
| Gross gain | £80,000 |
| Less annual exempt amount | (£3,000) |
| Taxable gain | £77,000 |
| CGT at 24% (higher rate) | £18,480 |
| For comparison, old 10% BADR rate | £7,700 |
That is more than £10,000 of extra tax on the same gain, purely because the favourable disposal rate has gone. A UK residential property disposal must also be reported and the tax paid within 60 days of completion. The deeper mechanics, including part-disposals and improvement costs, sit in our complete guide to property capital gains tax.
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Making Tax Digital for holiday let owners
Making Tax Digital for Income Tax is live. From 6 April 2026 you must keep digital records and file quarterly updates if your combined gross self-employment and property income exceeds £50,000. The threshold falls to £30,000 from 6 April 2027 and £20,000 from 6 April 2028, so most active holiday let owners will be inside it within two tax years.
The test is on gross income, not profit, which catches holiday lets particularly hard because turnover is high relative to profit once cleaning, commission and utilities are stripped out. A property grossing £55,000 but netting £18,000 is still over the threshold. Our guide to the qualifying income test (gross versus net) explains exactly what counts, and the April 2026 MTD deadline for landlords sets out the filing rhythm. Start the digital record-keeping before you are mandated, not in the quarter you cross the line.
What changes again from April 2027
Finance Act 2026 (Royal Assent 18 March 2026) introduced separate income tax rates for property income from 6 April 2027: 22% basic, 42% higher and 47% additional, replacing 20%, 40% and 45%. These apply in England, Wales and Northern Ireland. Scotland sets its own rates and is carved out for 2027/28.
Two points matter for your planning. First, the Section 24 finance cost reducer rises in step from 20% to 22%, so no new wedge opens for basic rate landlords. Second, a higher rate owner with £23,000 of holiday let profit moves from 40% (£9,200) to 42% (£9,660), a £460 increase before any interest credit. It is not dramatic in isolation, but across a portfolio and a long hold it compounds.
Should the property sit in a company?
The combination of full Section 24 exposure on holiday lets and the 2027 rate rise pushes more higher and additional rate owners to ask whether a limited company is better. A company pays corporation tax, is outside Section 24, and can deduct interest in full, but incorporating an existing property triggers capital gains tax and stamp duty on transfer and adds annual running costs and extraction tax when you draw the profit out.
There is no single right answer. It turns on your marginal rate, gearing, how long you intend to hold, and whether you are buying new or transferring something you already own. The trade-offs are set out in our guide to buy-to-let limited companies and the timing question in when to incorporate a property portfolio. For a related view of how the post-FHL rules treat short-term and serviced lets, see serviced accommodation tax after FHL abolition.
Pulling the calculation together
The method has not changed since the regime did: gross income, less running expenses, taxed at your band rates, then reduced by 20% of your interest under Section 24, with no National Insurance unless you genuinely trade, and 18%/24% capital gains tax on any sale after the £3,000 exemption. The hard part is the judgement around it, trading status, joint ownership splits, MTD timing and whether to incorporate, where the figures for two similar cottages can diverge sharply. Those are the questions worth getting a specialist property accountant to run the numbers on before the next tax year locks them in.