Serviced Accommodation vs Buy-to-Let Tax: The 2026 Comparison

Furnished holiday lets were the obvious answer for years: full mortgage interest relief, generous capital allowances, business asset disposal relief on sale and pensionable earnings. That regime was abolished on 6 April 2025, and the question landlords actually ask now is sharper. With no FHL shortcut, does running a property as serviced accommodation still beat a straight buy-to-let on tax, and is that still true once the higher property income rates arrive in 2027?

This guide compares the two routes on the points that move the numbers: how the income is classified, Section 24, deductible expenses and capital allowances, business rates versus council tax, VAT, capital gains tax on sale, Making Tax Digital, and whether a limited company changes the answer. The headline is simple. After FHL abolition the two are taxed far more alike than they used to be, and the single thing that still separates them is whether your serviced let is property income or a genuine trade.

Serviced accommodation vs buy-to-let: the tax comparison at a glance

The table below sets the two routes side by side on the features that decide the tax bill. Read it as the property-business baseline (most serviced lets), with the trading and company variations covered underneath.

Feature	Buy-to-let (long residential let)	Serviced accommodation
Income classification	UK property business	Property business, or a trade if services are substantial
Income tax rates 2026/27	20% / 40% / 45%	20% / 40% / 45% (property), or trade rates if a trade
Income tax rates from 6 Apr 2027	22% / 42% / 47% property rates	22% / 42% / 47% if property; 20% / 40% / 45% if a genuine trade
Mortgage interest	Section 24 basic-rate reducer (20%, rising to 22% in 2027)	Section 24 reducer if property income; full deduction if a trade or in a company
Capital allowances on the let property	Very limited (replacement of domestic items relief only)	Wider where a trade or company; AIA on qualifying plant and machinery
Council tax vs business rates	Council tax	Business rates if the 140/70-day test is met (England)
VAT	Exempt (no registration, no input VAT recovery)	Standard-rated holiday accommodation; register once over the threshold
CGT on sale (2026/27)	18% / 24%, 3,000 pound annual exempt amount, 60-day reporting	Same, unless a trading structure changes the relief position
MTD for Income Tax	Caught at 50k (2026), 30k (2027), 20k (2028)	Same thresholds, far higher transaction volume to record

How HMRC classifies each: property income or a trade

This is the fork everything else hangs on. A standard buy-to-let is straightforward, it is a UK property business and is taxed on the property pages of your return. Serviced accommodation is less tidy. Most short-let operations, including the typical Airbnb flat, are still property business income, even when you provide clean linen, Wi-Fi and a welcome pack. The activity only becomes a trade where the services are substantial and ongoing enough to look like running a business in their own right: regular cleaning during a guest's stay, meals, concierge and similar hotel-style provision.

Why labour the point? Because the trading line is exactly where the post-FHL tax differences live. A trade is taxed at ordinary income tax rates rather than the new property rates from 2027, deducts finance costs in full instead of through the Section 24 reducer, and opens up capital allowances and (potentially) different reliefs on sale. Claim trading treatment without the substance behind it and HMRC can reclassify you, unwinding those advantages with interest. Confirm the classification before you build a plan on it. If you are weighing routes, our explainer on the FHL abolition and what replaced it sets out how the old category mapped onto the current rules.

Section 24 and mortgage interest: the same drag on both, with one exit

Where a property is held personally and taxed as a property business, Section 24 applies to both buy-to-let and serviced accommodation in the same way. Finance costs are not deducted from rental profit. Instead you get a tax reducer worth 20% of the interest, regardless of your marginal rate.

The bite is on higher-rate landlords. Take 20,000 pounds of annual mortgage interest. The reducer is worth 20% of that, so 4,000 pounds, where a full deduction at 40% would have been worth 8,000 pounds. The shortfall is 4,000 pounds of extra tax a year, and it lands identically whether the property is let long-term or run as serviced accommodation, because both are property income.

Two routes escape Section 24. First, a genuine trade deducts its finance costs in full, which is another reason the classification question matters for an intensively serviced operation. Second, a limited company deducts interest as a normal business expense, which is the main driver behind landlord incorporation. The reducer rate itself stays at 20% in 2026/27 and rises to 22% from 6 April 2027 in step with the new basic property rate, so the increase does not open a new wedge for basic-rate landlords, it simply keeps the relief aligned to the rate.

Deductible expenses and capital allowances

Both routes deduct the running costs of letting, but the lists differ in shape, and serviced accommodation is where capital allowances actually become interesting again after FHL abolition.

Buy-to-let deductions

A long residential let runs on a familiar set of allowable expenses:

• Letting and management agent fees
• Repairs and maintenance (not improvements)
• Buildings and landlord insurance
• Gas, electrical and other safety certificates
• Ground rent and service charges
• Accountancy and other professional fees
• Advertising for tenants
• Replacement of domestic items relief (the modern stand-in for the old wear and tear allowance)

Capital allowances on the dwelling itself are largely off the table for a residential let. The replacement of domestic items relief covers like-for-like replacements of furniture, white goods and similar, but there is no plant and machinery allowance on fixtures within a dwelling let on an assured shorthold tenancy.

Serviced accommodation deductions

The serviced model carries extra running costs, all deductible against the income they relate to:

• Cleaning and changeover between guests
• Utilities you bundle into the nightly rate
• Consumables and welcome packs
• Platform commission (booking sites and channel managers)
• Listing photography and marketing
• Guest communication and support tools
• Higher insurance reflecting short-stay use
• More frequent furniture and soft-furnishing replacement

Capital allowances are the genuine divergence. Where serviced accommodation is run as a trade, or held in a company, qualifying plant and machinery (furniture, integral features, equipment) can attract the Annual Investment Allowance, which gives 100% relief on qualifying spend up to the AIA limit. That is the kind of relief FHLs used to deliver, now available only through the trading or corporate route, not for an ordinary property-business serviced let or a buy-to-let.

Council tax, business rates and VAT

This is where serviced accommodation diverges most from buy-to-let on day-to-day cost, and where investors most often get caught out.

Business rates versus council tax

A long residential let sits in council tax, usually paid by the tenant. Serviced accommodation in England moves into business rates where the property is available to let for short periods totalling at least 140 days in the previous and current year and was actually let for at least 70 days in the previous 12 months. Below those thresholds it stays in council tax. Where business rates apply, Small Business Rate Relief can cut or remove the bill on low rateable values, so the move is not always a cost increase. Wales runs stricter tests (252 days available, 182 days actually let) before a property leaves council tax, and Scotland operates its own self-catering rating rules, so check the position for the property's nation rather than assuming the English test.

VAT

Long residential letting is exempt from VAT: no VAT on the rent, no input VAT recovery, no registration. Serviced and holiday accommodation is a standard-rated supply, so once taxable turnover exceeds the VAT registration threshold (90,000 pounds from 1 April 2024) registration becomes compulsory and 20% VAT applies to guest charges. On a busy portfolio that is a material cost and a real planning constraint, and it is a cost a buy-to-let landlord essentially never meets. Operators commonly manage it by capping unit numbers, watching the rolling 12-month turnover or structuring ownership so no single entity breaches the threshold, all of which need advice to keep on the right side of HMRC's anti-disaggregation rules.

Capital gains tax on disposal

When you sell, both routes face the same residential capital gains tax treatment where the property is held personally as a property business: 18% within your remaining basic-rate band and 24% above it for 2026/27, after the 3,000 pound annual exempt amount. A UK residential property disposal must be reported and the CGT paid within 60 days of completion, a deadline that catches out sellers expecting to settle through their normal return.

The only meaningful CGT difference appears where serviced accommodation is a genuine trade run through a structure, which can alter the relief picture on sale. Note that since FHL abolition there is no longer automatic business asset disposal relief simply because a property was let as a holiday let, a relief many investors are surprised to find gone. If part of the property has ever been your home, principal private residence relief interacts with both routes, and intensive commercial use can complicate the relief on the let portion.

Making Tax Digital: both caught, one far heavier

Making Tax Digital for Income Tax is now live and catches both strategies. The thresholds phase in by qualifying gross income: over 50,000 pounds from 6 April 2026, over 30,000 pounds from 6 April 2027, and over 20,000 pounds from 6 April 2028. Gross income, not profit, is what counts, so a serviced operation with high turnover and a thin margin can be pulled in earlier than its profit alone would suggest.

Buy-to-let is the lighter compliance load: monthly rent, a handful of recurring costs, predictable timing. Serviced accommodation generates daily bookings, platform payouts that net off commission, frequent small expenses and pronounced seasonality, all of which have to be captured digitally and reported each quarter. In practice that means proper short-let accounting software and tighter bookkeeping discipline rather than a spreadsheet updated once a year.

Does a limited company change the answer?

For higher-rate landlords, increasingly yes, and the 2027 property rates push the maths further that way. A limited company pays corporation tax at 19% on profits up to 50,000 pounds and 25% above 250,000 pounds, with marginal relief tapering in between, and it deducts mortgage interest in full rather than through the Section 24 reducer. Against personal property rates rising to 42% and 47% from April 2027, that gap is what drives most incorporation decisions.

Serviced accommodation tends to make the corporate case more readily: higher gross profits to carry the running cost of a company, the capital allowances point above, and lenders who expect commercial borrowers to be companies. But incorporating an existing personally held portfolio is a disposal for CGT and a purchase for SDLT, so it carries an entry cost that has to be modelled before any move. Holding property in a company also changes how you take money out, through salary, dividends or director's loan repayments, each with its own tax profile.

Worked comparison: a basic-rate taxpayer's first property

Sarah earns 35,000 pounds from employment and is choosing how to let a property she has bought for 300,000 pounds with a mortgage. Both scenarios are property income held personally, so Section 24 applies to each.

As a long buy-to-let

• Rental income: 18,000 pounds
• Allowable expenses (excluding interest): 3,000 pounds
• Mortgage interest: 12,000 pounds
• Taxable rental profit: 18,000 minus 3,000 = 15,000 pounds
• Tax before reducer (basic rate 20%): 3,000 pounds
• Section 24 reducer: 20% of 12,000 = 2,400 pounds
• Tax on the rental profit: 600 pounds

As serviced accommodation

• Gross income: 28,000 pounds
• Platform commission: 4,200 pounds
• Cleaning and utilities: 6,000 pounds
• Other running costs: 5,000 pounds
• Mortgage interest: 12,000 pounds
• Taxable profit: 28,000 minus 15,200 = 12,800 pounds
• Tax before reducer (basic rate 20%): 2,560 pounds
• Section 24 reducer: 20% of 12,000 = 2,400 pounds
• Tax on the operating profit: 160 pounds

The serviced route shows a higher gross and, here, a lower tax figure, but the comparison is incomplete until you weigh the extra time, voids, VAT risk if turnover climbs, possible business rates and far heavier MTD record-keeping against that. The figures are illustrative, rounded and ignore the personal allowance interaction and other income, so they show the mechanics, not your answer. For a higher-rate version of Sarah from April 2027, the property profit would be taxed at the new 42% rate, sharply increasing the bill on both routes and strengthening the case for a company or, if the activity genuinely qualifies, trading treatment.

Which route fits which landlord

The tax does not pick the strategy on its own, but it points clearly in each direction.

Serviced accommodation tends to win where you can sustain materially higher yields, have the time or a managing agent for an intensive operation, sit in a location with year-round short-stay demand, and either run it through a company or have a genuine trading case for the capital allowances and rate advantages. It is the more demanding route on compliance, cost and management.

Buy-to-let tends to win where you want lower-touch income, local long-let yields are competitive, you value the certainty of a longer tenancy, and you would rather keep VAT, business rates and quarterly MTD complexity off the table. After FHL abolition it is also, simply, the more predictable of the two on tax.

The honest summary is that abolishing FHLs narrowed the gap. What remains is the trading-versus-property-income line and the company-versus-personal question, and both turn on facts specific to you: your other income, your borrowing, the property's location and how you intend to run it. If you are deciding between the two, or thinking of switching an existing let, it is worth having a specialist property accountant model both routes on your real numbers, including the 2027 rate change and any incorporation cost, before you commit.