Understanding how much tax you pay on a holiday let property has become more complex since the abolition of Furnished Holiday Lettings (FHL) relief from April 2025. Holiday let income is now treated as standard rental income, subject to the same tax rules as buy-to-let properties.
This means holiday let income tax rates depend on your total income level and how you structure your property investment. With new property income tax rates coming in April 2027, timing and structure matter more than ever.
Holiday Let Income Tax Rates 2026/27
From April 2025, holiday lets are taxed as rental income using standard income tax rates. For 2026/27, these are:
- Basic rate (20%): Total income £12,571-£50,270
- Higher rate (40%): Total income £50,271-£125,140
- Additional rate (45%): Total income above £125,140
However, a major change arrives in April 2027. Property income will be taxed at separate rates: 22% basic rate, 42% higher rate, and 47% additional rate. This means a holiday let generating £30,000 annual profit will cost an additional rate taxpayer £14,100 in tax from April 2027 (47% rate) compared to £13,500 under current rules (45% rate).
If you're subject to Section 24 restrictions, mortgage interest on holiday lets is limited to basic rate tax relief (20% tax credit), not full deduction against income.
What Counts as Holiday Let Income?
All income from short-term holiday rentals is taxable, including:
- Rental payments from guests
- Booking fees charged to guests
- Cleaning fees and damage deposits (if retained)
- Income from additional services (WiFi charges, late check-in fees)
Income is taxed in the tax year it's received, not necessarily when the booking was made. For example, rent received in March 2026 for a July 2026 stay counts as 2025/26 income.
Allowable Holiday Let Expenses and Deductions
You can deduct legitimate business expenses from holiday let income before calculating tax. Common deductions include:
Property Running Costs
- Cleaning and housekeeping between guests
- Utilities (gas, electricity, water)
- Council tax and business rates
- Property insurance
- Regular maintenance and repairs
Furnishing and Equipment
- Furniture, beds, sofas (replacement basis)
- Kitchen equipment and appliances
- Linens, towels, and soft furnishings
- Garden furniture and equipment
Marketing and Management
- Advertising and booking platform fees (Airbnb, Booking.com commissions)
- Website development and maintenance
- Professional photography
- Property management fees
- Accountancy and legal costs
Unlike traditional buy-to-let properties, holiday lets often have higher running costs due to frequent guest turnover, higher cleaning requirements, and the need for quality furnishings.
Mortgage Interest Relief on Holiday Lets
Holiday let mortgages are subject to Section 24 restrictions like other rental properties. This means:
- Mortgage interest cannot be deducted in full from rental income
- Instead, you receive a tax credit worth 20% of mortgage interest payments
- This often increases your overall tax bill, especially for higher rate taxpayers
For example, a higher rate taxpayer with £2,000 annual mortgage interest previously saved £800 in tax (40% of £2,000). Under Section 24, they receive only £400 tax credit (20% of £2,000), effectively paying £400 more in tax.
Business Rates vs Council Tax on Holiday Lets
The tax treatment depends partly on whether your holiday let pays business rates or council tax:
Business Rates
Properties available for short-term letting for 140+ days annually typically pay business rates. Small holiday lets may qualify for Small Business Rate Relief, potentially reducing the bill to zero.
Council Tax
Properties used primarily as second homes or let for longer periods may pay council tax instead. Many councils apply a premium (often 100%) on second homes.
Both business rates and council tax are deductible against holiday let income for tax purposes.
Capital Gains Tax on Holiday Let Sales
When you sell a holiday let property, tax on holiday rental extends to capital gains. CGT rates for 2026/27 are:
- Basic rate taxpayers: 18% on property gains
- Higher/additional rate taxpayers: 24% on property gains
The annual exempt amount is £3,000 for 2026/27. Unlike your main residence, holiday lets don't qualify for Principal Private Residence Relief, so the full gain is potentially taxable.
For detailed guidance on calculating and reducing CGT liabilities, see our complete guide to CGT on property.
Holiday Lets in Limited Companies
Some investors hold holiday lets through limited companies to potentially reduce tax bills. Corporation tax rates for 2026/27 are:
- Small profits rate (19%): Company profits up to £250,000
- Main rate (25%): Company profits above £250,000
Companies aren't subject to Section 24 restrictions, so mortgage interest remains fully deductible. However, you'll pay additional tax when extracting profits as dividends or salary.
The decision between personal ownership and incorporation depends on your circumstances, including total income, mortgage levels, and long-term plans.
VAT on Holiday Let Income
Holiday accommodation can be subject to VAT if your annual turnover exceeds £90,000. This includes all rental income from the property, not just profit.
VAT registration means:
- Adding 20% VAT to guest charges (if not already included)
- Submitting quarterly VAT returns
- Potentially reclaiming VAT on property expenses and improvements
Many holiday let operators find VAT registration reduces competitiveness, as guests effectively pay 20% more unless you absorb the cost.
Record Keeping for Holiday Let Tax
HMRC requires detailed records of holiday let income and expenses. From April 2026, Making Tax Digital rules apply to landlords with gross rental income over £10,000, requiring digital record keeping and quarterly submissions.
Essential records include:
- Booking confirmations and payment receipts
- Platform statements (Airbnb, Booking.com)
- All expense receipts and invoices
- Bank statements showing rental income
- Occupancy calendars and availability records
Tax Planning Strategies for Holiday Lets
Several strategies can help minimize holiday let income tax:
Timing Income and Expenses
Consider timing major expenses (furniture replacement, repairs) to offset high-income years. Similarly, if expecting lower income next year, you might delay December bookings until January.
Spouse/Civil Partner Transfers
If one partner pays tax at a lower rate, transferring property ownership (or shares in a company) might reduce overall tax bills.
Pension Contributions
Holiday let profits count as relevant UK earnings for pension contribution purposes, potentially allowing higher contributions to reduce current year tax bills.
Incorporation Timing
With property income tax rates increasing to 22%/42%/47% from April 2027, incorporation may become more attractive for profitable holiday let businesses.
Common Tax Mistakes with Holiday Lets
Avoid these costly errors:
- Not registering for tax: All rental income must be declared, even from occasional lettings
- Mixing personal and business use: Periods of personal use affect allowable expense claims
- Incorrect expense claims: Capital improvements aren't deductible against income (but may reduce CGT)
- Ignoring platform reporting: Some booking platforms report payments to HMRC
- Poor record keeping: Without proper records, you can't claim legitimate expenses
Getting Professional Help
Holiday let taxation involves multiple complexities: income tax, VAT, business rates, capital gains, and potential incorporation benefits. A specialist property accountant can help optimize your tax position and ensure compliance.
Professional advice is particularly valuable when:
- Deciding between personal ownership and incorporation
- Planning for the 2027 property income tax rate changes
- Implementing MTD compliance systems
- Structuring complex portfolios involving multiple property types
The cost of professional advice is typically far outweighed by tax savings and reduced compliance risks, especially given the increasing complexity of UK property taxation.