Your 2025/26 holiday-let tax return after FHL abolition

In short: The Furnished Holiday Let regime was abolished by primary legislation in the Finance Act 2025 — 6 April 2025 for income tax and CGT, 1 April 2025 for corporation tax. The 2025/26 personal tax return is the first return prepared under the new rules; the online filing deadline is 31 January 2027. This piece covers the main changes for individual owners and Ltd companies, the transitional provisions that survive, and what to check before filing.

The Furnished Holiday Let (FHL) regime was abolished by primary legislation in the Finance Act 2025, with effect from 6 April 2025 for income tax and capital gains tax and 1 April 2025 for corporation tax. Abolition was announced at the Spring Budget 2024, with draft legislation published in July 2024. The first affected personal tax year ended on 5 April 2026 and the online filing deadline for the 2025/26 return is 31 January 2027 — early returns may be being filed now, but the bulk of filings will land between November 2026 and the January deadline.

What follows is a walkthrough of the main changes for individual owners and Ltd companies, with the transitional provisions that continue to matter.

What changed — and for whom

Impact varies materially by taxpayer type. Individual owners face the mortgage-interest restriction and the narrower income-side reliefs. Ltd companies are largely unaffected by the interest restriction (companies still deduct interest against profits) and dividend tax applies on extraction. A company's property disposal is considered under corporation tax on chargeable gains — the individual CGT and BADR discussion later in this piece is not simply mapped to a company disposal, and the company position should be worked through separately. Joint owners who are spouses or civil partners living together default to a 50:50 split for income tax under PIM4190 regardless of the actual beneficial ownership, unless a valid Form 17 declaration (with supporting evidence of unequal beneficial interests) is filed.

1. Loss of full mortgage interest relief — individuals only. For individual owners, mortgage interest on borrowing secured against the property is no longer fully deductible against rental profits. It is restricted to a basic-rate (20%) tax credit at the tax-calculation stage, in line with standard residential lettings. Ltd companies continue to deduct mortgage interest in full against corporation-tax profits — the restriction is a personal-tax rule and does not apply to companies. For a higher-rate individual taxpayer with substantial borrowing, this is the single most significant cash impact of the abolition.

2. Loss of the wide capital allowances position on new expenditure. New plant-and-machinery expenditure inside a dwelling is caught by s.35 CAA 2001 once the FHL qualifying activity has ended. Existing capital-allowance pools built up under FHL continue — writing-down allowances can still be claimed on the brought-forward pool balance at the applicable rate. Replacement of Domestic Items Relief (PIM3210) is the ongoing income-side relief for replacing existing domestic items. For individual landlords, losses brought forward from the last FHL year are generally ring-fenced against future property-business profits under the normal individual loss rules — check your accountant's carried-forward loss figure against your last FHL year. For companies, the property-loss relief rules are different (property losses can, subject to conditions, be set against total profits in the same period and the treatment on carry-forward follows the corporate loss rules) — do not assume the individual position applies.

3. Loss of eligibility for pension contribution relief on rental profits. Rental profits are no longer "relevant UK earnings" for pension purposes. Operators who had been using their STL income to fund pension contributions above their earned-income cap now have a materially smaller headroom.

4. CGT-side changes on disposal — individuals. For individual owners, Business Asset Disposal Relief no longer applies to STL disposals where the property is treated as a standard residential investment. BADR was never automatic even under the FHL regime — it depended on the business-disposal conditions being met. Standard residential-property CGT rates (18% basic, 24% higher) generally apply to disposals by individuals. BADR itself is not gone: its rate is 14% for qualifying disposals from 6 April 2025 and 18% from 6 April 2026, up to the £1m lifetime limit. Note the three-year post-cessation transitional rule at s.169I TCGA: where an FHL business genuinely ceased before 6 April 2025, BADR remains available on a qualifying disposal within three years of cessation. For operators still trading through the abolition date, that route is closed. Section 165 business-asset holdover on gifts to individuals is no longer available for the property; section 260 holdover on chargeable lifetime transfers into a discretionary trust is unaffected. Companies deal with disposal gains through corporation tax on chargeable gains rather than through the individual CGT regime — the individual BADR/rate analysis above does not apply directly; the company position needs to be worked out separately.

Individual worked example

Assumptions: Sarah owns a self-catering cottage in the Lake District as sole owner. Higher-rate taxpayer with no basic-rate band spare on other income. £150,000 mortgage at 5.5% interest = £8,250 annual interest. Rental income £24,000; other allowable expenses £6,500.

• 2024/25 (FHL basis): profit £9,250 (£24,000 – £6,500 – £8,250) × 40% = £3,700 income tax
• 2025/26 (post-FHL basis): "profit" for income-tax purposes is £17,500 (£24,000 – £6,500) because interest is no longer a deduction; £17,500 × 40% = £7,000 income tax gross, less basic-rate credit on interest of £8,250 × 20% = £1,650 = £5,350 net income tax

The £1,650 cash increase (from £3,700 to £5,350) is the mortgage-interest restriction in cash terms. The same numbers held in a Ltd company would attract corporation tax on £9,250 at 19% = £1,758 (no restriction), before any extraction tax. The choice between structures for this specific owner is not settled by that comparison — extraction taxes, transition costs, and other income all matter — but the direction of travel for a higher-rate individual with meaningful borrowing is clear.

Where returns commonly go wrong

Three specific points that come up on a hypothetical individual higher-rate STL owner filing 2025/26:

Cash-flow shock at payment-on-account time. The January 2026 balancing payment (for 2024/25, the last FHL year) and the July 2026 payment on account (based on 2024/25 profits) may have been manageable, but the underlying accrued liability for 2025/26 is likely larger — the mortgage-interest restriction is the biggest driver. Operators who did not put an additional accrual aside through the year should model the January 2027 payment early.

Over-claiming exposure on capital allowances that no longer qualify. Continuing to claim plant-and-machinery capital allowances on furniture and equipment inside the dwelling in 2025/26 does not work — s.35 CAA 2001 catches new spending inside the dwelling once the FHL qualifying activity has ended. See our capital allowances piece. Left uncorrected, that is under-declared tax exposed to interest and potentially penalties on enquiry.

Ownership-structure review. For individual owners, the mortgage-interest restriction can substantially change the after-tax return. Where the same portfolio is held through a company, mortgage interest is a full deduction against corporation-tax profits but extraction (dividends or salary) carries its own tax cost. Whether the company route is better depends on borrowing levels, other income, retention vs extraction intent, and exit horizon. Model the specific position rather than applying a rule of thumb.

What operators should do now

1. Reforecast 2025/26 and 2026/27 tax bills against the new rules. If your accountant did not walk you through this at the time of filing, ask for a follow-up review.
2. Set aside additional cash for the January 2027 payment. The step-up from the last FHL year to the first non-FHL year is real, and it is coming.
3. Get a structural review if you have multiple units or meaningful borrowing. For personal ownership with those features, the company route may save tax — but the answer depends on borrowing, extraction plans, other income and transfer costs. It is not universal; it needs modelling on the specific facts.
4. Do not proceed with a disposal without a CGT projection. The move from the old 10% BADR rate on qualifying FHL disposals to the standard residential-property CGT rates (18% or 24% for individuals) that generally apply to post-abolition STL disposals is arithmetic that needs modelling before the property is listed, not after.
5. Plan for the 2027-28 property income tax rise. The Autumn Budget 2025 confirmed that property income tax rates will rise by 2 percentage points from 6 April 2027 — to 22% (basic), 42% (higher) and 47% (additional). Finance-cost credits will move to 22%. Scotland's non-savings, non-dividend income rates are devolved and set separately by the Scottish Government at each Scottish Budget — the UK Budget change does not automatically flow through to Scottish taxpayers, and the 2026-27 Scottish rates should be checked with your accountant. For rest-of-UK taxpayers, the 2027-28 rise widens the Ltd-vs-sole-trader gap further.

The FHL abolition was, in policy terms, a substantial tax rise on a small and identifiable group of operators. That group is our entire client base. The change is now bedded in — and the operators who have adjusted to it early are in materially better shape than those still filing as though nothing had changed.

Book a free 15-minute consultation to talk through your position.

Sources: Finance Act 2025 (primary legislation); HMRC — Clarification on abolition of the FHL regime; HMRC — Property income manual (PIM4100 series); Autumn Budget 2025; ICAEW — Furnished holiday lets in the 2025/26 tax return.