The furnished holiday let abolition came into force on 6 April 2025, and roughly 127,000 property owners across the UK woke up to a different tax regime overnight. If you owned an FHL before that date, the rules you built your investment around no longer exist. Capital allowances, the 10% business asset disposal relief, full mortgage interest deductions, the lot, all gone. What sits in their place looks far less generous, and the transitional rules HMRC published catch out owners who assumed the changes would phase in gradually.
This guide walks through what changed, what replaced it, and the planning moves still available to you in 2026.
What the FHL Regime Used to Offer
Before April 2025, a qualifying furnished holiday let occupied a strange middle ground in UK tax law. HMRC treated it almost like a trade rather than a rental investment, which unlocked four significant advantages.
Owners claimed capital allowances on furniture, fixtures, and equipment. Profits counted as relevant UK earnings for pension contribution purposes. Mortgage interest qualified for full deduction against rental income, sidestepping the Section 24 mortgage interest restriction that crushed margins for standard buy-to-let landlords. On disposal, business asset disposal relief brought capital gains tax down to 10%, and rollover relief plus gift holdover relief gave owners genuine flexibility on succession planning.
The qualifying conditions were strict. Properties needed to be available for letting at least 210 days a year, actually let on a commercial basis for 105 days, and avoid long-term occupation patterns. Owners who hit those thresholds enjoyed a tax position that buy-to-let landlords could only envy.
That ended on 6 April 2025 for income tax and capital gains tax purposes, and 1 April 2025 for properties held in companies.
What Replaced the FHL Regime in April 2025
Properties formerly classified as FHLs now sit inside the standard UK property business tax framework. The shift sounds administrative on paper. The financial impact is anything but.
Mortgage interest restriction now applies
You can no longer deduct mortgage interest as an expense. Instead, you receive a basic-rate (20%) tax credit, regardless of whether you pay tax at higher or additional rates. Higher-rate owners typically see their effective tax rate on rental profits jump by 15 to 20 percentage points.
Capital allowances stop accruing
You cannot claim writing-down allowances on the existing pool, and any new furniture, white goods, or equipment falls under replacement of domestic items relief instead. That relief covers like-for-like replacements only. The first purchase of a sofa, fridge, or bed frame in a newly let property attracts no relief at all.
Capital gains tax treatment hardens
Business asset disposal relief no longer applies to former FHL disposals, which lifts the CGT rate on property from 10% to 18% or 24% depending on your income band. Rollover relief and gift holdover relief also disappear, which complicates succession and restructuring plans that depended on them.
Pension contribution capacity shrinks
FHL profits previously counted as relevant earnings, letting owners make tax-relieved pension contributions far above the £3,600 gross floor. Standard property income does not count, so contribution capacity drops to whatever other earned income you have.
Transitional Rules HMRC Confirmed
The transitional position carries more nuance than the headlines suggested, and three points deserve attention.
Capital allowance pools at cessation
HMRC treats the deemed cessation of the FHL business at the end of the 2024 to 2025 tax year. Pool balances do not give rise to a balancing allowance or balancing charge purely because of the regime change. The pool transfers into the ongoing property business, and writing-down allowances continue on plant and machinery already in the pool. New expenditure after April 2025 does not enter the pool.
Brought-forward FHL losses
Losses generated under the old regime do not simply vanish. You can carry them forward and set them against future profits of the same property business. UK FHL losses combine with the wider UK property business; overseas FHL losses combine with the overseas property business. The two streams remain separate, which matters if you owned holiday lets in both jurisdictions.
Anti-forestalling on disposals
HMRC introduced anti-forestalling rules to block owners who tried to lock in business asset disposal relief by entering unconditional contracts before April 2025 with completion afterwards. If the contract was entered into for a tax advantage rather than commercial reasons, BADR gets denied. Document the commercial rationale for any disposal that straddled the cessation date and keep the evidence on file.
Tax Planning Options for Former FHL Owners in 2026
The regime change does not leave you without options. Four scenarios cover most of the conversations we have with clients at IBISS & CO.
Continue letting the property
If the location supports short-term lets and the yield still works after the tax shift, carrying on as a standard furnished let remains viable. Run the numbers honestly. A property that produced a healthy net return under FHL rules can slip into a loss-making position once Section 24 and the loss of capital allowances bite. Build a fresh cash flow projection before assuming the status quo holds.
Transfer ownership between spouses or civil partners
If one partner sits in the basic-rate band and the other in the higher-rate band, transferring the property or a beneficial share through a Form 17 election can reduce the household tax bill on rental income. The transfer itself attracts no CGT between spouses living together, though the receiving spouse takes on the original base cost. SDLT treatment depends on whether mortgage debt transfers with the property. Our tax planning advisors can model the position before you commit.
Incorporate the property into a limited company
Companies pay corporation tax at 19% to 25% on rental profits and deduct mortgage interest in full. The structure looks attractive on paper. The transfer triggers CGT at the personal level (no holdover relief now that the FHL status has gone), SDLT on the market value transfer to the company, and potentially refinancing costs as personal mortgages rarely transfer to corporate borrowers. Property incorporation works well for portfolios above a certain size and poorly for single properties with significant embedded gains. Get the modelling done before committing.
Sell the property
With BADR no longer available, the CGT exit position is materially worse than it was 18 months ago. That said, holding a loss-making property to avoid a tax charge rarely makes sense. Calculate the true post-tax position of selling now versus continuing to let, and let the numbers decide.
Practical Steps to Take Before Your Next Tax Return
Five actions belong on your list before the 2025 to 2026 self-assessment deadline.
- Reconcile the capital allowance pool balance at 5 April 2025 and confirm the writing-down allowance available for 2025 to 2026.
- Gather records of any FHL losses brought forward and confirm whether they sit in the UK or overseas property business.
- Document the commercial rationale for any property disposal completed in late 2024 or early 2025.
- Review your mortgage statements and recalculate post-Section 24 net rental income for cash flow purposes.
- Reassess your pension contribution capacity now that property profits no longer count as relevant earnings.
If you’d rather hand the reconciliation work to a specialist, our self-assessment tax return service covers former FHL property owners across the UK.
If the property sits in Scotland or Wales, the devolved property taxes (Land and Buildings Transaction Tax in Scotland, Land Transaction Tax in Wales) apply different rates and reliefs from English SDLT. Check the position with Revenue Scotland or the Welsh Revenue Authority before any transfer or incorporation move.
How IBISS & CO Helps Former FHL Owners
We work with property owners across our London offices in Tooting and Barking, and remotely with clients throughout the UK. The transitional position rewards careful planning, and the wrong assumption about loss treatment, capital allowances, or anti-forestalling rules can cost thousands at the next tax return.
Our property tax accountants review your former FHL position, model the planning options against your wider tax picture, and handle the implementation work end to end.
Frequently Asked Questions
Can I still claim capital allowances on furniture bought before April 2025?
Yes, on items already in the capital allowance pool at the cessation date. Writing-down allowances continue on the existing pool. Any new furniture or equipment purchased after 6 April 2025 falls under replacement of domestic items relief, which only covers like-for-like replacements rather than initial purchases.
What happens to my FHL losses brought forward?
Brought-forward FHL losses transfer into your wider property business. UK FHL losses combine with UK property business profits; overseas FHL losses combine with overseas property business profits. The two streams stay separate and you cannot offset one against the other.
Does abolition affect my pension contributions?
Yes. FHL profits previously counted as relevant UK earnings for tax-relieved pension contributions. Standard property income does not. If your contribution strategy depended on FHL profits, you need to reassess capacity based on your other earned income and the £3,600 gross floor available without earnings.
Is it worth incorporating my former FHL property?
Sometimes, rarely for single properties with large embedded gains. Incorporation triggers personal CGT (no holdover relief now), SDLT on the market value transfer, and potential refinancing costs. The corporation tax saving compounds over time but the upfront cost can take years to recover. Run the modelling before deciding.
Do the rules apply differently in Scotland or Wales?
The income tax and capital gains tax changes apply UK-wide and are identical in all four nations. Devolved property taxes (LBTT in Scotland, LTT in Wales) differ from SDLT in England and Northern Ireland, which matters for any transfer, incorporation, or restructuring move. Check the rates that apply to your jurisdiction before completing a transaction.
