The Furnished Holiday Let Regime, One Full Tax Year On: What Your Return Actually Looks Like Now

In short: The abolition of the Furnished Holiday Let regime is not a theoretical change any more. Operators have now filed a full tax year under the new rules. The biggest cash-flow shocks landed on higher-rate mortgage borrowers and on operators considering exit. This piece sets out where the numbers actually landed and what to change before the second year.

The Furnished Holiday Let (FHL) regime was abolished with effect from 6 April 2025 for income tax and capital gains tax, and from 1 April 2025 for corporation tax. The consultation had been running for eighteen months before that. The regulations, however, only bite when the first return is prepared. The first tax year under the new rules ran to 5 April 2026, and by September 2026 the majority of affected operators had submitted their self-assessment for the year.

We have been through this process with our clients across the summer. What follows is a plain-terms summary of what the numbers looked like in practice.

The four losses, in cash terms

The abolition removed four distinct tax advantages simultaneously. For most operators, the biggest is number one.

1. Loss of full mortgage interest relief. Interest on borrowing secured against the property is no longer fully deductible against rental profits. Instead, it is restricted to a basic-rate (20%) tax credit, in line with standard residential lettings. For a higher-rate taxpayer with a substantial mortgage, this is the single most significant cash impact. A property that produced a small profit in 2024/25 under the FHL rules commonly produced a materially larger tax bill in 2025/26 despite the same underlying trading position, because the mortgage interest is no longer a deduction against income but a partial credit against the tax bill.

2. Loss of full capital allowances on furniture and equipment. The FHL regime allowed capital allowances on fixtures, fittings, and furniture. Under the new rules, only replacement of domestic items is available as a deduction. This is a much narrower relief.

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. Loss of CGT reliefs on disposal. Business Asset Disposal Relief (10% CGT) and rollover relief are no longer available on disposals from 6 April 2025 onwards. An operator considering exit now faces 24% CGT on the gain (higher rate) rather than 10% under BADR. On a typical portfolio-scale disposal this is a very large number.

What we saw in practice

Three patterns played out across our client base through the summer:

Cash-flow shock at payment on account time. Many operators had not fully modelled the mortgage-interest change in their in-year cash planning. The January 2026 balancing payment (for 2024/25, the last FHL year) was manageable; the July 2026 payment on account (based on 2024/25 profits) was manageable; but the underlying accrued liability for 2025/26 - the first full non-FHL year - is materially larger. Operators who did not put the additional accrual aside through the year are looking at a bigger-than-expected January 2027 payment.

Silent overpayment through unhelpful expense claiming. A number of the returns we picked up from other accountants had continued to claim capital allowances on furniture and equipment that no longer qualified. Where those claims are corrected retrospectively, HMRC assesses interest. Where they are not corrected, they may be picked up on any subsequent enquiry.

Business structuring reviews. The change has narrowed the tax gap between running an STL as a sole trader/partnership and running it through a limited company. For portfolios of any real size, the arithmetic has shifted materially. We are now recommending a structural review for any operator with three or more units, or with borrowing costs above around 40% of turnover.

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 are running the STL as a sole trader with multiple units or meaningful borrowing. For portfolios of this shape, the Ltd route now saves more tax than it did under the old regime.
4. Do not proceed with a disposal without a CGT projection. The move from 10% BADR to 24% higher-rate CGT is arithmetic that needs to be modelled before the property is listed, not after.

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.