Furnished Holiday Lettings 2026/27 — What Replaced FHL Tax Treatment

Furnished Holiday Lettings (FHL) enjoyed a privileged tax position for decades: full mortgage interest relief, capital allowances on furniture, Business Asset Disposal Relief (BADR) on sale, and profits that counted as relevant earnings for pensions. That regime was abolished for Income Tax and Capital Gains Tax from 6 April 2025 across the UK — so for the 2026/27 tax year there is no FHL status anywhere in the UK. Holiday lets are now taxed under the ordinary property-business rules, and the difference is expensive. Model your position with the FHL Calculator→ and read the Landlord Tax Changes guide→ for the wider picture.

This guide explains the qualifying tests that used to define an FHL, the tax advantages that have been lost, and exactly how holiday-let income, expenses and gains are taxed in 2026/27 — including the Section 24 restriction that now applies to every furnished holiday let.

What the Old FHL Tests Were

To understand today's treatment you need the old qualifying tests, because they still matter for past tax years and for any claims still being settled. A property qualified as an FHL if it was:

• Furnished — with enough furniture and equipment for normal occupation.
• Available for commercial letting for at least 210 days (30 weeks) in the tax year, actively marketed at market rates.
• Actually let commercially for at least 105 days (15 weeks) — the test most properties failed.
• Not over-used personally — personal or discounted family use could not exceed 155 days, or the availability test failed.

A period-of-grace election let a property that passed one year carry the status forward if it failed the 105-day test the next year. These rules only mattered up to 5 April 2025 for Income Tax and Capital Gains Tax; from 2026/27 every furnished letting, holiday or otherwise, is simply part of a UK property business.

How Holiday Lets Are Taxed in 2026/27

The biggest single change is Section 24. A higher-rate landlord with £8,000 of annual mortgage interest used to deduct the full £8,000; now they get a £1,600 credit against their tax bill instead. For a 40% taxpayer that is a £3,200 swing per year on that interest alone.

Worked Example: Sarah's Lake District Cottage

Sarah owns a holiday cottage worth £350,000 with a £200,000 mortgage. The cottage produces £30,000 of rent, her mortgage interest is £8,000, other allowable expenses are £6,000 and she used to spend £5,000 a year on new furniture. Assume separately that she has enough other taxable income for the property profit to fall in the 40% band. Without that assumption, the table cannot be used to calculate her total bill.

On these simplified assumptions, the property-related tax in the table is about £3,600 higher. It is an illustration of the treatment change, not Sarah's complete tax bill: her personal allowance, other income, Scottish rates if relevant, pension contributions, loss relief and the timing of payments could change the result. A disposal comparison also needs the actual gain, allowable costs, ownership, residence and tax band. The old BADR rate was not always 10%; rates changed over time, so a historical calculation must use the rate in force on the disposal date. The 2026/27 outcome cannot use the former FHL route simply because the property once met the old tests.

Scotland and the UK-wide repeal

The FHL tax regime was a UK tax regime and its Income Tax and Capital Gains Tax repeal took effect from 6 April 2025. Scotland can have different income-tax rates and devolved property rules, but that does not create a later Scottish FHL tax regime. For 2026/27, the same post-repeal property-income rules apply to UK FHL income and gains.

Basic-Rate Landlords Feel Less Pain

The Section 24 restriction bites hardest on higher-rate and additional-rate taxpayers. A basic-rate landlord paying 20% got the same £1,600 credit from £8,000 of interest that they would previously have saved as a deduction, so the headline tax bill barely changes. The real damage for basic-rate landlords is the loss of capital allowances and the push of taxable profit into higher bands: because interest is added back to income, a landlord whose profit crosses £50,270 suddenly pays 40% on the excess with only a 20% credit to soften it. Check your total income against the higher-rate threshold of £50,270 before assuming the change is neutral — a couple of strong letting years can tip you over.

What Still Works for Holiday-Let Landlords

Even without FHL status, the property business rules still allow genuine deductions: letting agent fees, repairs and maintenance, insurance, ground rent, utilities, council tax in void periods and accountancy fees are all deductible. Replacement of Domestic Items Relief lets you deduct the cost of a like-for-like replacement sofa, bed or washing machine, though the first purchase of an item is not deductible. If the let is furnished and actively marketed you may also argue the business is a trade for other purposes, but HMRC's starting point in 2026/27 is that all holiday lets are residential property businesses.

The deduction must belong to the property business and relate to earning the rent. A repair that restores an existing asset is different from an improvement that creates a better or larger asset. The cost of buying the cottage is capital, not a day-to-day rental expense, and mortgage principal repayments are not finance costs for the Section 24 calculation. Keep invoices and split mixed bills between private use and letting. Where the owner uses the property personally, private periods can affect the factual allocation of costs and the commercial character of the activity.

Replacement of Domestic Items Relief is narrower than the old capital-allowance treatment. The item must replace an existing domestic item provided for the tenant's use, and the replacement must be broadly like-for-like; an upgrade may be restricted to the cost of the equivalent replacement. The initial furnishing of an empty property is not a replacement. Record the old item's removal, the new invoice, the room or property supplied and any private use. This evidence matters when a property contains furniture bought in a previous tax year.

Could Your Let Still Be a Trade?

The FHL abolition removed the statutory shortcut, but it did not remove the possibility that a genuinely serviced operation is a trade. HMRC looks at the level of service: daily cleaning, breakfast or catering, on-site management, laundry and guest services point towards a trading business, while a self-catering cottage let weekly with no services is plainly a property business. The distinction matters because trading income can still support pension contributions, claim certain reliefs and use losses against general income. In practice very few holiday lets meet the trading test, and HMRC is alert to artificial service arrangements designed to recreate FHL benefits. If you think your operation might be a trade, document the services, staff and guest-facing activity before the year end rather than trying to argue it later.

Do not infer trade status from a high occupancy rate, a booking platform, a company name or the fact that the property is profitable. The question is what the operation actually does and the services supplied to guests. A property business can be run actively and commercially without becoming a trade. Conversely, a substantial hospitality operation may need analysis beyond the ordinary property rules, including payroll, VAT, business rates and the treatment of trading assets. Keep a service schedule showing what guests receive, who performs it, when it is performed and what is charged. If the position depends on a borderline distinction, obtain advice before relying on trading losses or pension relevant earnings.

Ownership and financing checks

The abolition applies to the tax regime, but ownership still affects the calculation. Joint owners need to allocate rent, expenses, finance costs and any gain under the ownership and beneficial-interest facts; married couples and civil partners may have special allocation rules that should not be assumed for every property. A company owner has a different Corporation Tax and extraction analysis from an individual owner, and transferring a property can create SDLT, CGT, refinancing and connected-party issues. Moving the mortgage or putting the property into a company does not by itself restore FHL benefits and can create costs elsewhere.

Before refinancing, compare the cash interest rate with the tax value of the basic-rate finance-cost credit, not with the old full deduction. A lower rate or smaller balance may improve cash flow, but fees, early-repayment charges, lender valuation and personal guarantees also matter. Keep the mortgage statement separate from capital repayments and document how interest is apportioned where a loan is partly private or funds more than one property.

What Landlords Should Do Now

Frequently Asked Questions

Model your 2026/27 position with the FHL Calculator→, then read the Landlord Tax Changes guide→ for Section 24 detail and the Property Income Allowance guide if you rent below the £1,000 threshold.

Official sources

• HMRC: Abolition of the furnished holiday lettings tax regime
• GOV.UK: Income Tax when you rent out a property — working out your rental income
• HMRC Property Income Manual: Furnished holiday lettings
• GOV.UK: Capital Gains Tax rates and allowances