The abolition of the Furnished Holiday Lettings (FHL) regime in April 2025 fundamentally changed how serviced accommodation tax works for UK landlords. Properties that previously qualified for FHL tax benefits—including capital gains relief and enhanced expense deductions—now fall under standard property income rules or potentially trading income treatment.

This shift affects thousands of landlords operating Airbnb properties, holiday cottages, and other short-term lets. Understanding the new serviced accommodation tax framework is crucial for compliance and tax planning in the post-FHL landscape.

What Was the FHL Regime and Why Was It Abolished?

The Furnished Holiday Lettings regime provided preferential tax treatment for qualifying short-term rental properties. To qualify, properties needed to be:

  • Available for commercial letting for at least 210 days per year
  • Actually let for at least 105 days per year
  • Not occupied by the same tenant for more than 31 consecutive days for more than 155 days total
  • Located in the UK or European Economic Area

FHL properties enjoyed significant tax advantages including capital gains rollover relief, capital allowances on furniture and equipment, and treatment as a business for inheritance tax purposes. The government abolished the regime citing complexity and unfair advantages over long-term residential lettings.

How Is Serviced Accommodation Taxed After FHL Abolition?

Post-April 2025, serviced accommodation income typically falls into one of two categories: property income or trading income. The distinction significantly affects your tax obligations and available reliefs.

Property Income Treatment (Most Common)

Most serviced accommodation operations are treated as property income, subject to standard rental income rules:

  • Section 24 restrictions apply: Mortgage interest relief limited to 20% tax credit rather than full deduction
  • Income tax rates: From April 2027, property income faces separate rates of 22% basic, 42% higher, 47% additional
  • Capital gains: 18% basic rate, 24% higher rate on disposals
  • Allowable expenses: Standard property deductions including repairs, maintenance, letting agent fees, and council tax

A landlord with three Airbnb properties generating £60,000 annual income would face the higher rate property tax from April 2027, paying 42% on income above the basic rate threshold.

Trading Income Treatment (High Service Provision)

Properties providing substantial additional services may qualify as trading income rather than property investment. This typically applies when you provide:

  • Daily housekeeping and cleaning
  • 24/7 concierge services
  • Meal provision or room service
  • Laundry and personal services
  • Entertainment or recreational facilities

Trading income offers different tax treatment:

  • Section 24 doesn't apply: Full mortgage interest deduction available
  • Income tax: Standard income tax rates apply (not the separate property rates from 2027)
  • Capital allowances: Available on furniture, equipment, and fixtures
  • Business reliefs: Access to entrepreneurs' relief and other business CGT reliefs

Key Tax Changes Affecting Serviced Accommodation

Section 24 Now Applies

Former FHL properties treated as property income now face Section 24 restrictions. This means mortgage interest costs are no longer fully deductible against rental income. Instead, you receive a 20% tax credit.

For a landlord with £40,000 serviced accommodation income and £15,000 mortgage interest, the old FHL treatment allowed full deduction. Now under Section 24, they pay income tax on the full £40,000 but receive a £3,000 tax credit (20% of £15,000).

Capital Gains Tax Changes

FHL properties previously qualified for business asset disposal relief (formerly entrepreneurs' relief) and rollover relief. These benefits are no longer available for standard serviced accommodation.

Properties now face residential CGT rates of 18% for basic rate taxpayers and 24% for higher rate taxpayers, with the annual exempt amount of £3,000 for 2025/26.

Loss of Capital Allowances

FHL properties could claim capital allowances on furniture and equipment. Standard property investments cannot claim these allowances—furniture costs are typically claimed through the replacement domestic items relief instead.

However, properties qualifying as trading income can still claim capital allowances, making the property vs trading distinction crucial for tax planning.

Determining Property vs Trading Income Status

HMRC applies several factors to determine whether serviced accommodation constitutes property investment or trading activity:

Factors Indicating Trading Income

  • Extensive services: Daily cleaning, meal provision, 24/7 reception
  • Short occupancy periods: Stays typically under 7 days
  • Hotel-like operation: Standardised rooms, uniform service standards
  • Staff employment: Full-time employees providing services
  • Continuous availability: Property marketed and available year-round

Factors Indicating Property Income

  • Self-contained accommodation: Kitchen facilities, separate entrance
  • Longer stays: Weekly or monthly bookings common
  • Minimal services: Basic cleaning between lets, no daily service
  • Tenant responsibility: Guests handle own meals, entertainment, daily needs
  • Passive management: Limited landlord involvement in day-to-day operations

Most Airbnb and holiday cottage operations fall into the property income category unless significant additional services are provided.

Tax Planning Strategies After FHL Abolition

Consider Incorporation

Operating serviced accommodation through a limited company structure may offer tax advantages, particularly for higher rate taxpayers facing the new property income tax rates from April 2027.

Companies pay 19% corporation tax on profits up to £250,000, potentially lower than the 42% property income rate for higher rate taxpayers. However, extraction costs and additional compliance requirements must be considered.

Maximise Allowable Deductions

With FHL benefits lost, maximising legitimate expense deductions becomes more important. Allowable deductions for serviced accommodation include:

  • Property management and booking platform fees
  • Cleaning and maintenance costs
  • Utilities and council tax when not recovered from guests
  • Insurance premiums
  • Furnishing replacement costs (replacement domestic items relief)
  • Professional fees including accountancy costs

Review Property Portfolio Structure

The loss of FHL benefits may prompt a review of your overall property strategy. Some landlords are switching from short-term to long-term lets to avoid Section 24 implications and compliance complexity.

Others are enhancing service provision to potentially qualify for trading income treatment, though this requires genuine business substance and carries additional operational complexity.

Compliance Obligations for Serviced Accommodation

Making Tax Digital Requirements

Landlords with gross property income exceeding £10,000 must comply with Making Tax Digital for Income Tax from April 2026. This includes quarterly digital record-keeping and reporting for serviced accommodation income.

Record-Keeping Requirements

Maintain detailed records including:

  • Booking records and occupancy rates
  • Income from each property and booking platform
  • All property-related expenses with receipts
  • Services provided to guests (relevant for trading vs property distinction)
  • Capital expenditure on improvements and equipment

Local Authority Compliance

Many councils now require serviced accommodation registration or licensing. While not directly tax-related, non-compliance can affect the legitimacy of expense deductions and potentially trigger business rates liability.

Planning for the 2027 Property Tax Rate Changes

The introduction of separate property income tax rates from April 2027 significantly impacts serviced accommodation taxation. Property income will face rates of 22% basic, 42% higher, and 47% additional—higher than general income tax rates.

This change makes the trading vs property income distinction even more important. Operations qualifying as trading income will continue facing standard income tax rates, potentially offering substantial savings for higher rate taxpayers.

Example: Tax Impact Comparison

A higher rate taxpayer with £30,000 serviced accommodation profit in 2027/28:

  • Property income treatment: £30,000 × 42% = £12,600 tax
  • Trading income treatment: £30,000 × 40% = £12,000 tax
  • Annual saving: £600

For larger operations, these differences become more significant, making professional advice essential for tax planning.

Getting Professional Advice

The abolition of FHL and upcoming property tax rate changes create complexity requiring specialist guidance. Consider professional advice if you:

  • Operate multiple serviced accommodation properties
  • Provide substantial additional services to guests
  • Are considering incorporation or portfolio restructuring
  • Face higher rate tax implications from the 2027 changes
  • Need help determining property vs trading income status

A specialist property accountant can help navigate the new landscape and optimise your tax position within the revised framework.

The serviced accommodation tax environment has fundamentally changed since FHL abolition. While the preferential treatment is gone, understanding the new rules and available planning opportunities remains essential for protecting your returns in this evolving sector.