For four decades, a furnished holiday let was taxed more like a business than a rental property. That ended on 6 April 2025.
If you short-let a property in London, the change is not academic. It costs most owners a four-figure sum every year, and for some it costs five. This guide sets out what you lost, what replaced it, and what the annual bill actually looks like on a prime central London apartment.
What the FHL Regime Was, and What It Gave You
A property qualified as a furnished holiday let if it was furnished, available for letting at least 210 days a year, actually let for at least 105, and not let for extended periods of more than 31 continuous days beyond a set annual limit. Meet those tests and HMRC treated the letting as a trade for several purposes rather than as an investment.
Four advantages followed.
Full mortgage interest relief. You deducted every pound of mortgage interest from rental income before tax. Ordinary landlords lost that in stages between 2017 and 2020. Holiday let owners kept it.
Capital allowances on furnishings. Sofas, beds, white goods, the whole fit-out qualified for capital allowances. An ordinary landlord could claim nothing on an initial furnishing.
Capital gains tax reliefs. Business Asset Disposal Relief on sale, rollover relief when reinvesting, gift holdover relief when passing the property on, and relief for loans to traders. These were the reliefs that made an FHL a useful thing to hold and eventually pass down.
Pension contributions. FHL profits counted as relevant UK earnings, so they raised the ceiling on tax-relieved pension contributions. For an owner whose main income was property, this mattered a great deal.
A fifth advantage went almost unmentioned. Couples holding an FHL jointly could split the profit in whatever proportion they chose, rather than being fixed to their beneficial ownership shares.
What Changed in April 2025
The regime was abolished for income tax and capital gains tax from 6 April 2025, and for corporation tax from 1 April 2025. Full detail sits in the government's policy paper and the House of Commons Library briefing.
Your property did not change. Its tax treatment did. It now sits inside your ordinary UK property business, alongside any long lets you own.
| What you had | What you have now |
|---|---|
| Full deduction of mortgage interest | Finance cost restriction. Interest is not deductible. You get a tax reducer worth 20% of the interest instead |
| Capital allowances on the fit-out | Replacement of domestic items relief only. It covers replacing an item, never furnishing a property for the first time |
| BADR, rollover relief, gift holdover relief | Standard residential CGT. 18% or 24% depending on your band, with a £3,000 annual exempt amount |
| Profits counted as relevant UK earnings | They do not. Your pension contribution ceiling drops accordingly |
| Flexible profit split between spouses | Default 50/50 on jointly held property, varied only by beneficial ownership and a Form 17 election |
Three transitional points are worth knowing. Capital allowance pools you already had continue to attract writing down allowances, so you do not lose what you already claimed. Losses carried forward survive and can now be set against profits from your whole property business rather than the holiday let alone. And an anti-forestalling rule has applied since 6 March 2024 to stop unconditional contracts being used to lock in the old capital gains treatment.
What It Costs in Practice
Take a two-bedroom prime central London apartment producing £80,000 of gross rental income a year, with £28,000 of running costs and a £30,000 annual mortgage interest bill. The cash profit is £22,000 either way. Only the tax changes.
| Under FHL | Now | |
|---|---|---|
| Gross rental income | £80,000 | £80,000 |
| Running costs | (£28,000) | (£28,000) |
| Mortgage interest deducted | (£30,000) | nil |
| Taxable profit | £22,000 | £52,000 |
| Tax at 40% | £8,800 | £20,800 |
| Less 20% finance cost reducer | nil | (£6,000) |
| Tax payable | £8,800 | £14,800 |
| Profit after tax | £13,200 | £7,200 |
A higher rate taxpayer pays £6,000 more on the same property earning the same money. An additional rate taxpayer pays £7,500 more, because the gap between their marginal rate and the 20% reducer is wider.
The formula is simple enough to run on your own numbers. The annual cost is your mortgage interest multiplied by the difference between your marginal rate and 20%. At 40% that is a fifth of your interest bill. At 45% it is a quarter.
If you own the property outright, this particular change costs you nothing. A good many prime central London properties are held without a mortgage, and for those owners the abolition is a capital gains and pensions question rather than an annual one.
The fit-out is the second cost, and it catches people furnishing a property for the first time. A £60,000 furnishing budget on a prime apartment previously attracted capital allowances worth up to £24,000 of relief at a 40% marginal rate. Replacement of domestic items relief does not cover an initial furnishing at all, so that relief is now nil. You get relief when you replace the sofa in four years, not when you buy it.
Does Short-Let Still Beat Long-Let After Tax?
Usually yes. By less than the headline figures suggest, and not for everyone.
Start with the gross gap. Beauchamp Estates' Millionaires Letting in London Survey 2026 recorded prime London short-let apartments achieving £2,142 a week in 2025 against £1,770 for a long let, and houses at £4,974 against £2,499. That is about a fifth more for apartments and close to double for houses.
Now take the gross gap apart. Short letting carries costs a long let does not: cleaning and linen on every changeover, platform commission on every booking, higher insurance, furnishing and consumables, and management if you are not doing it yourself. Occupancy is seasonal rather than continuous. And the 90-night planning cap limits how much of the year you can run short-let at all.
Then apply the tax. Here is the important part: the finance cost restriction now hits both routes identically. An ordinary long let has been inside those rules since 2020. The abolition did not make short letting worse than long letting. It removed short letting's advantage and put the two on the same footing.
So the comparison comes back to the operating numbers rather than the tax code. On a prime house, where the gross premium is close to double, short and mid-term letting still wins comfortably. On an apartment, where the premium is around a fifth, it depends on your costs, your occupancy and how much of the calendar the 90-night cap leaves you.
What the abolition genuinely changed is the case for buying a property specifically to run as a holiday let, and the case for holding one to pass on. Both were built substantially on reliefs that no longer exist.
What to Do Now
Work out your own number. Take your annual mortgage interest and multiply it by 20% if you are a higher rate taxpayer, or 25% if you are an additional rate taxpayer. That is what the change costs you every year. It is worth knowing precisely rather than approximately.
Check whether you still have capital allowance pools running. If you claimed allowances before April 2025, those pools continue. Your accountant should still be claiming writing down allowances on them.
Look again at ownership structure, but slowly. Some owners are asking about holding property through a company, where interest remains fully deductible. It can work. It also brings corporation tax, potential double taxation on extraction, stamp duty on any transfer, and possible capital gains on incorporation. It is rarely the right answer for a single property and it is never a decision to make from an article.
If you are furnishing a property, expect no relief on the initial spend. Budget accordingly, and keep clean records of every item, because you will want them when replacement relief becomes available later.
Talk to your accountant before you act on any of this. Your marginal rate, your other property income, your joint ownership position and your plans for the asset all change the answer. We model what a property earns. We do not do your tax return, and any short-let manager who tells you they can is telling you something else that is not true either.
Your Questions Answered
When exactly was the Furnished Holiday Lettings regime abolished?
For income tax and capital gains tax it ended on 6 April 2025. For corporation tax it ended on 1 April 2025. From those dates a furnished holiday let is treated as part of your ordinary UK property business, with no separate rules of its own.
How much does the FHL abolition cost me each year?
Your annual mortgage interest multiplied by the gap between your marginal rate and 20%. A higher rate taxpayer with £30,000 of interest pays about £6,000 more a year. An additional rate taxpayer pays about £7,500. If the property has no mortgage, the annual cost is nil.
Can I still claim capital allowances on my holiday let furniture?
Not on new furnishings. Pools you established before April 2025 continue to attract writing down allowances. New expenditure falls under replacement of domestic items relief, which gives relief when you replace an item but nothing when you furnish a property for the first time.
Is short-letting still worth it after the tax changes?
For most prime central London properties, yes. The finance cost restriction applies equally to long lets, so the abolition removed short letting's tax advantage rather than creating a disadvantage. The comparison now turns on rates, occupancy and running costs rather than on the tax treatment.
Should I move my property into a limited company?
Sometimes, rarely for a single property. Companies still deduct interest in full, but you take on corporation tax, tax on extracting profits, stamp duty on the transfer and possibly capital gains on incorporation. It is a decision for your accountant with your full position in front of them.
What happened to Business Asset Disposal Relief on holiday lets?
It no longer applies. A disposal is now taxed at standard residential capital gains rates of 18% or 24% depending on your band, against a £3,000 annual exempt amount. Rollover relief and gift holdover relief have gone the same way.
Does the abolition affect my pension contributions?
It can. FHL profits used to count as relevant UK earnings, which set the ceiling on tax-relieved pension contributions. They no longer do. If property was your main source of earnings, your contribution limit may have dropped substantially without you noticing.
What We Would Do Next
Run your own interest number first. It takes a minute and it tells you whether this is a five-figure problem or nothing at all.
Then look at the property rather than the tax. If the annual figure has moved against you, the question is whether the letting strategy is right, not whether the tax rules are fair. We will model what your specific building and bedroom count achieves on short, mid-term and long lets, against achieved data rather than asking prices, with the lease and 90-night position checked. It is free and it takes twenty-four hours.
This guide is general information about the tax position in England as at September 2026. It is not tax advice and no one should act on it without speaking to a qualified accountant about their own circumstances. Tax treatment depends on individual facts and rules change.