The Furnished Holiday Lettings regime ended on 6 April 2025 (1 April 2025 for companies), and with it the package of reliefs that made short-term lets a tax-favoured way to own property. If you run an Airbnb, a holiday cottage or a portfolio of self-catering units, the practical question is no longer "how do I keep my FHL status" but "which of two regimes now taxes me, and what does that cost". This guide answers that, with the worked numbers, before Making Tax Digital and the April 2027 property rates change the arithmetic again.
The single distinction that drives almost everything below is whether your serviced accommodation is taxed as property income (the usual outcome) or as a genuine trade. Get that wrong and you either overpay or expose yourself to an enquiry, so we start there.
What changed when the FHL regime was abolished?
FHL was a separate qualifying activity sitting inside the income tax, corporation tax, capital allowances and chargeable-gains rules. A property that met the occupancy conditions (broadly available 210 days, let 105 days, and not tied up in long-stay use) was treated more like a business than an investment. That treatment delivered four things property landlords never had: full mortgage interest relief outside Section 24, capital allowances on the furniture and fit-out, Business Asset Disposal Relief and rollover relief on sale, and relevant earnings for pension contributions.
Finance Act 2025 Schedule 5 removed the regime in full from 6 April 2025. Former FHL property is now absorbed into the ordinary UK property business and taxed exactly like a standard buy-to-let. Two transitional points genuinely survive and are worth holding onto:
- Capital allowance pools carry on. Plant and machinery pools you built up while the property was an FHL keep receiving writing-down allowances inside the new residential property business. You do not lose the historic relief; you simply cannot start fresh capital allowances claims on new furniture.
- FHL losses carry forward. Unused losses from the former FHL business are preserved and can be set against future profits of the property business under the ordinary property-loss rules.
Everything else that made FHL attractive has gone. The table below is the fastest way to see the before and after.
| Tax feature | Under FHL (to 5 April 2025) | After abolition (from 6 April 2025) |
|---|---|---|
| Mortgage interest relief | Full deduction from profit | Section 24 applies: 20% tax reducer (property income) |
| Furniture and fit-out | Capital allowances | Replacement of domestic items relief only (existing pools continue) |
| CGT on sale | BADR (rates were 10%) and rollover relief | Residential CGT 18% / 24%, no BADR, no rollover |
| Pension contributions | Profits counted as relevant earnings | Rental profit is not relevant earnings |
| Loss relief | FHL-specific carry forward | Standard property-business losses (FHL losses preserved on transition) |
Property income or trading income: which test applies to you?
This is the live decision after abolition. Most serviced accommodation is property income. You move into trading income only where the services you provide go materially beyond letting a furnished space. The leading authorities are the inheritance tax cases Pawson v HMRC [2013] UKUT 050 (TCC) and Brander v HMRC [2010] UKUT 300 (TCC), and the principle reads across: passive letting, even short and intensive, is investment; a property becomes a trade where the owner is running a hospitality operation around it.
The practical line is about substance, not branding. Calling a flat "serviced" does not make it a trade. What HMRC looks at:
| Points towards a trade | Points towards property income |
|---|---|
| Daily housekeeping while guests are in residence | One clean between guests only |
| Cooked breakfast, room service or catering | Self-catering kitchen, guests cater for themselves |
| Staffed reception or genuine 24/7 concierge | Self check-in via keysafe or smart lock |
| Hotel-style standardised rooms and uniform service | Self-contained unit with its own entrance |
| Employees delivering the service | Owner or agent handling lettings only |
The honest position for the great majority of Airbnb hosts and holiday-cottage owners is that they are property landlords for tax. The same conclusion applies to Airbnb and short-term rental income generally. If you think you are trading, you need the evidence to support it, because the prize (escaping Section 24, keeping capital allowances, ordinary income tax rates) is exactly what HMRC scrutinises. For the inheritance tax angle on the same line, see our guide to serviced accommodation and Business Property Relief under the Pawson test.
How Section 24 hits former holiday lets
Once your serviced accommodation is property income, Section 24 applies in full. Finance costs (mortgage interest, arrangement fees, the interest element of finance leases) are no longer deducted from your profit. Instead you are taxed on the rent before interest, and then given a 20 percent tax reducer on the lowest of three figures: the finance cost, the property profit, or your income above the personal allowance.
This is the change that surprises former FHL owners most, because under the old regime interest came straight off the top.
Worked example: the Section 24 cost
Take a higher-rate landlord with one former FHL flat in 2026/27: gross rent £40,000, running costs £9,000, mortgage interest £15,000.
- Old FHL basis: profit was £40,000 minus £9,000 minus £15,000 = £16,000, taxed at 40% = £6,400.
- Section 24 basis now: taxable profit is £40,000 minus £9,000 = £31,000, taxed at 40% = £12,400, then a 20% reducer on the £15,000 interest = £3,000 credit, giving £9,400.
The same property, the same cash flows, but £3,000 more tax a year purely from the loss of FHL status. For a portfolio of three or four units the figure scales accordingly, which is why so many former FHL owners are revisiting structure. Our full list of allowable landlord tax deductions sets out what you can still claim to bring the gross figure down.
Capital gains tax when you sell
FHL property could once be sold with Business Asset Disposal Relief (charged at 10 percent when FHL still qualified) and rollover relief into a replacement business asset. Both stopped applying to FHL disposals after 5 April 2025. A standard serviced-accommodation disposal now sits in the residential property CGT regime:
- 18 percent on gains within your basic-rate band, 24 percent above it (the unified rates in force from 6 April 2024).
- £3,000 annual exempt amount for 2025/26 and 2026/27.
- 60-day reporting and payment through an HMRC CGT on UK property account after completion.
The loss of BADR is material: a £200,000 gain that might once have attracted 10 percent now attracts up to 24 percent. Spousal ownership splitting and timing a disposal across two tax years to use two annual exemptions are the realistic levers left. The mechanics, including band-stacking, are covered in our current CGT rates guide and the wider capital gains tax on property guide.
Should you incorporate? Section 24 versus a limited company
For higher and additional-rate landlords the obvious response to losing FHL status is to ask whether a company is better. A company is outside Section 24 entirely, so it deducts mortgage interest in full, and it pays corporation tax (19 percent on profits up to £50,000, 25 percent above £250,000, with marginal relief between) rather than the personal property rates. The catch is that you only spend money personally once you extract it, and dividends are taxed again in your hands.
| Factor | Hold personally (property income) | Hold through a company |
|---|---|---|
| Mortgage interest | Section 24: 20% reducer only | Fully deductible |
| Tax on profit | Personal property rates (22/42/47 from 2027/28) | Corporation tax 19% to 25% |
| Extracting cash | Already yours | Dividend or salary, taxed again |
| Cost to set up | None | SDLT and a CGT disposal at market value (unless a relief applies) |
| Compliance | Self assessment | Company accounts, CT600, payroll if salaried |
Incorporation tends to win where profits are retained and reinvested, and where the borrowing is significant. It tends to lose where you need the income to live on, because the second layer of tax on extraction often cancels the corporation-tax saving. The entry costs (SDLT on the transfer and a CGT charge at market value unless incorporation relief or a partnership route applies) also have to be earned back. Run the numbers before moving, not after. Our buy-to-let limited company guide works through the extraction and dividend-tax detail.
What the April 2027 property tax rates mean for holiday lets
From 6 April 2027, property income is taxed at separate rates of 22 percent basic, 42 percent higher and 47 percent additional, two percentage points above the corresponding main income tax rates. This is enacted in Finance Act 2026, not a proposal, and it applies to England, Wales and Northern Ireland. Scotland is the only part of the UK carved out for 2027/28.
Two points commonly get reported wrongly, so to be clear:
- The Section 24 finance-cost reducer rises to 22 percent in step with the new basic rate. A basic-rate landlord therefore sees no new wedge open between the rate on income and the rate of interest relief.
- Wales does not set its own property income rates for 2027/28. The Welsh self-setting power exists in Finance Act 2026 but is a future power, not in force for 2027/28, so Welsh landlords are on the 22/42/47 rates alongside England and Northern Ireland.
Where this bites is the differential between property and trading treatment. A genuine trade stays on the ordinary income tax rates, so the 2-point property premium is one more reason to be certain which side of the line you sit on. The full picture is in our guide to the 2027 property income tax rates for landlords.
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Making Tax Digital: serviced accommodation is in scope
Serviced accommodation income counts towards Making Tax Digital for Income Tax on exactly the same timetable as any landlord. What catches holiday-let owners is that the threshold is measured on qualifying income, meaning gross rents (plus any sole-trade turnover) before expenses, not net profit.
| Mandation date | Qualifying income above |
|---|---|
| 6 April 2026 | £50,000 |
| 6 April 2027 | £30,000 |
| 6 April 2028 | £20,000 |
A serviced-accommodation business often runs high turnover on thin margins, so a unit producing £55,000 of gross bookings is in MTD from April 2026 even if the profit after platform fees, cleaning and finance costs is modest. In scope means quarterly digital updates plus a final declaration, using MTD-compatible software. Our Making Tax Digital for landlords guide sets out the deadlines and what compatible software has to do.
Business rates, licensing and council tax
Beyond income tax, short-let operators face a separate set of property charges that FHL abolition does not touch. In England, a self-catering property is rated for business rates rather than council tax only if it was both available to let for at least 140 days and actually let for at least 70 days in the relevant period; below that, it stays in council tax. Small business rates relief can reduce or remove the bill where it applies. Scotland and Wales run their own short-term-let licensing and control schemes, and a number of local authorities operate planning controls on new short-let use. None of this is income tax, but it affects which expenses are deductible and whether the operation is viable, so it belongs in the same review.
A practical sequence after FHL abolition
The decisions interlock, so the order matters. Work through them like this:
- Confirm your status. Property income or trade. Be honest about the services you actually provide and keep the evidence if you claim trading.
- Model Section 24. If you are property income with borrowing, calculate the real after-tax position on current rates and again on the 2027/28 rates.
- Decide on structure. Only then consider incorporation, comparing the corporation-tax saving against the entry costs and the dividend tax on extraction.
- Get MTD-ready. Check your gross qualifying income against the threshold and put digital records in place before the relevant April.
- Plan disposals. If a sale is on the horizon, use spousal ownership and two-tax-year timing to make the most of the £3,000 annual exempt amount, and budget for 60-day reporting.
Where specialist advice pays for itself
The cases where it is worth getting this looked at properly are the ones where the numbers are large or the status is genuinely arguable: multiple units, significant borrowing, a real services operation that might be a trade, a planned sale, or a portfolio you are thinking of incorporating. The trading-versus-property line in particular is fact-sensitive and HMRC tests it, so a documented position is worth far more than an optimistic one.
A specialist property accountant can confirm your status, model the Section 24 and 2027 impact on your actual figures, and tell you whether restructuring earns its cost. The reliefs FHL gave have gone, but the planning that is left (status, structure, timing and clean MTD compliance) still makes a real difference to what you keep.