Owners urged to review holiday lets as tax changes bite

At a glance

• The special tax treatment of eligible furnished holiday lets (FHLs) was abolished in April 2025. It means all income and gains from FHLs are now taxed in the same way as other rental properties.
• The income from FHLs can no longer be included as relevant UK earnings for pension tax relief.
• FHL owners must plan for higher income tax on property income and potentially filing tax records with HMRC every quarter.
   

Furnished holiday let owners have seen their tax bills jump after the preferential tax regime for this type of business was scrapped last year.

In a double whammy, a 2% increase to income tax rates on property income is coming down the track (April 2027), while income tax thresholds have been frozen until 2031 (for England, Northern Ireland and Wales).

As the 2025/26 tax year-end approaches, investors are being encouraged to review their property tax arrangements to ensure their financial plans are still on track.

Changes to the tax regime for FHLs

The income tax and capital gains tax (CGT) reliefs applicable to eligible FHLs were scrapped on 6 April 2025. These changes, which were first announced in the government’s Spring Budget in 2024, were introduced to streamline the tax regime for rental properties and create a fairer system for all landlords.

The main changes apply to:

• Mortgage interest. Removing the income tax relief on mortgage interest (which FHLs could deduct from rental income). This tax relief is now capped at the basic rate for all FHLs in line with other types of rental property.
• Scrapping of capital allowances. Previously FHL owners could claim tax relief against the purchase of assets for their business, such as furniture, fixtures and fittings. Now owners can only claim deductions against rental income for the cost of replacing items.
• Capital gains tax. Prior to April 2025, FHL owners had capital gains tax (CGT) relief when selling under the business assets disposal relief (BADR) scheme. This was advantageous compared to the standard CGT rates for other types of rental and buy-to-let property. FHL owners had the first £1 million of lifetime gains taxed at 10%. In contrast, under the new tax regime, the CGT rate will apply at up to 24%, depending on your rate of income tax.
• Pension contributions. Income from a FHL can no longer be treated as ‘relevant UK earnings’ for claiming tax relief on pension contributions made personally, as had been the case prior to April 2025.

Previously, to be an eligible FHL, a property had to meet specific criteria set out by HMRC. The property had to be available as a furnished holiday let for at least 210 days in a year. It had to be actually let out commercially for at least 105 days in a year (not including any time when it may be let to friends and family at reduced or zero cost).

Since April 2025 all FHLs are now treated in the same way as any other rental property for tax purposes. In other words, the special treatment of FHLs has ended.

This means the rental income and capital gains from a furnished holiday let are treated the same for tax purposes as any other buy-to-let or rental property. The tax owed must be reported to HMRC in the same way as for other types of rental property.

Preparing for tax-year end

As well as preparing documentation for the self-assessment tax process, the tax-year end could be a good prompt for a review of your rental property holdings and investments.

Iain Mcleod, head of private clients at St. James's Place, says: ‘Over recent years, many furnished holiday let investors have benefited from strong capital growth, particularly in high demand coastal and tourist destinations. However, the abolition of the FHL tax regime now represents a significant headwind. The structure is no longer as efficient as an income generating vehicle, and disposals have become less favourable from a capital gains tax perspective.

‘As tax year end approaches, it is important for FHL owners to ensure record keeping is robust. Accurate documentation enables investors to claim all allowable costs. They should also be engaging early with advisers to understand how the abolition of the FHL regime may affect their pension contribution strategies, especially given the previous alignment of FHL profits with relevant earnings.’

Looking further ahead investors will need to factor in the property-specific income tax rise which will take effect from April 2027. This will increase from 20% to 22% for a basic rate taxpayer. Higher rate taxpayers will see the tax rate rise from 40% to 42%., Meanwhile for additional rate taxpayers, the rate will increase from 45% to 47%. These rates will apply to all property income.

Mcleod adds: ‘Tax year end should serve as an opportunity for reflection. Investors should be asking: ‘What is my long term strategy? How does this asset fit into my objectives for tax efficient income, wealth transfer, or retirement? In an environment of evolving regulation, strategic assessment of long-term options at tax year end is more important than ever.’

Making Tax Digital

From April, any landlords and investment property owners, including holiday let businesses, will need to comply with new rules for record-keeping and filing tax. This is  under HMRC’s new ‘Making Tax Digital’ (MTD) initiative.

Under MTD property owners with annual rental income of £50,000 or more (£30,000 from April 2027, falling to £20,000 from April 2028) must submit quarterly tax updates to HMRC using specific software, which will record their rental income and expenses for the quarter. A final declaration and payment of tax owed will still occur annually after the tax year end.

While there will be no penalties or fines for late filing in the 2026/27 tax year, penalties will apply for late quarterly filing after April 2027. Taxpayers will receive a penalty point for each quarter they are late filing their records. Those who reach four penalty points will receive a £200 fine.  However, penalty points are wiped if the taxpayer doesn’t reach four points within a 24-month period.

Mcleod says: ‘When the tax changes for FHLs are combined with the growing administrative burden of compliance, especially with ‘Making Tax Digital’ on the horizon, it is unsurprising we are seeing a growing number of investors choosing to unwind or restructure their FHL portfolios.’

For joint owners of rental properties who need to submit records through the ‘Making Tax Digital’ system, HMRC says individuals will only need to create one digital record for their share of income for each quarter, and just one digital record for their share of expenses for each category per year. The aim is that this should mean less overall admin for joint owners.

Council tax or business rates

Both business tax rates and council tax have risen in recent years, adding extra cost pressure to holiday let businesses. It may be cost-effective for holiday let owners to pay business rates rather than council tax, but there are strict eligibility criteria.

Eligibility for business rates will depend on where your holiday let is located in the country, and its availability for commercial rent. For example, eligibility in England requires your property to be available for commercial short-term let for 140 nights in a 12-month period, plus it must actually be let for at least 70 nights. In Wales a property must be available for commercial let for at least 252 nights in a year and actually let for at least 182 nights.

Owners of single holiday lets in England with a ratable value (estimated annual rent) of £15,000 per year or less may be eligible for small business rate relief, a discount on the business rate.

Buying a holiday home

For investors considering buying a holiday let, or other second property such as a buy-to-let investment or a holiday home for personal use, there is a 5% stamp duty surcharge on the purchase (where you already own a residential property). This needs to be factored into your overall purchase costs.

It means the stamp duty rate on the purchase of a second home with a sale price of between £250,001 and £925,000 would be 10% (an additional 5% on top of the standard residential stamp duty rate of 5%). On a sale price of between £925,001 and £1.5 million the stamp duty rate is 15%.

Your home or other property may be repossessed if you do not keep up repayments on your mortgage. 

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is dependent on individual circumstances.

Some buy-to-let mortgages are not regulated by the Financial Conduct Authority.