HMRC Furnished Holiday Lets: 2026 Rules After FHL Abolition

The Furnished Holiday Let (FHL) tax regime ended on 6 April 2025 for individuals (1 April 2025 for companies). The headline change is straightforward: the tax advantages that made FHLs attractive — full mortgage interest deduction, capital allowances on furniture, CGT trading-business reliefs, pension-contribution eligibility on income — have gone.

The less straightforward part is what HMRC now treats former FHL income as, where the line between property income and trading income sits in 2026, and what decisions former FHL hosts need to make this tax year to manage the change.

This is a decision-support guide for hosts who held FHL status before April 2025 and need to understand what to do next.

This is general guidance, not tax advice. Tax positions depend on personal facts. Always confirm with a qualified accountant before relying on any treatment.

What Actually Changed on 6 April 2025

HMRC's policy paper on the abolition sets out four changes. They map to the four reasons hosts elected FHL status in the first place:

1. Finance costs. Until 5 April 2025, FHL hosts deducted full mortgage interest from rental income. From 6 April 2025, the same restriction that applies to residential landlords applies: relief is given as a 20% basic-rate tax credit, not a deduction. For a host on the higher-rate band with significant mortgage interest, this is the biggest single change — taxable income rises and the marginal cost of debt approximately doubles.
2. Capital allowances. FHLs claimed Annual Investment Allowance on furniture, fixtures, equipment, white goods, decoration. From 6 April 2025, no new capital allowances are available; instead Replacement of Domestic Items Relief applies — like-for-like replacement of furniture, appliances, kitchenware claimed against income in the year of replacement. (Initial purchase of brand-new equipment for a property doesn't qualify.)
3. Capital gains. Business Asset Disposal Relief (10% CGT on qualifying disposals up to £1m lifetime limit), Rollover Relief, and Holdover Relief were all withdrawn from 6 April 2025. Disposals from that date are taxed at the standard residential property CGT rates (24% higher rate, 18% basic rate).
4. Pensions. FHL income no longer counts as relevant UK earnings when calculating the maximum tax-relieved pension contribution. For hosts who structured their pension contributions around FHL income, this is a planning point — it may push the contribution ceiling down to whatever other earned income they have.

For the operational and business-rates implications, see our furnished holiday let tax changes 2025 guide.

Is It Property Income or Trading Income? The Question HMRC Cares About

The abolition doesn't move FHL income into "trading" income. HMRC's default position is that former FHLs now form part of a person's UK property business — taxed as property income, not trading income. The advantages and disadvantages of property-income treatment:

• Disadvantage: No more business-asset CGT reliefs; finance cost restriction applies; no relevant UK earnings for pensions; capital allowances unavailable for new expenditure.
• Advantage: Property income is generally simpler — no Class 2/4 NICs, no requirement to register as self-employed, no payments on account complexity from trading status.

But the line between property income and trading income is not purely about the type of asset — it's about the level of services provided. HMRC's Business Income Manual (BIM) sets out the test at BIM22001 onwards: a trade arises where the activity goes beyond letting and into providing services to occupants.

The key indicators HMRC look at (drawn from BIM22001 and case law including Griffiths v Jackson [1983] STC 184):

Activity	Pushes toward trading	Stays as property
Cleaning, linen, key handover	Substantial personal service by host	Subcontracted to third party with arm's-length charge
Meals provided	Breakfast, dinner included = strongly trading (B&B / serviced)	None provided = property
Concierge, tours, transfers, in-stay support	Active host-provided services = trading	None = property
Length of stay	Short stays + high turnover + service = trading	Long stays, no service = property
Number of properties	Multiple properties with operational hub = trading more likely	Single property, passive = property

The practical question for a former FHL host: does my activity have enough "service" content to be trading, and would I be better off being treated as such? For most self-catering hosts the answer is no — the property-income default suits them.

But for hosts running multiple properties with significant operational involvement (cleaning teams, on-site management, packaged services), HMRC has historically been willing to accept a trading classification, with the corresponding (and now-restored) advantages: capital allowances on new equipment, BADR potentially available on disposal of a trading business, full mortgage interest as a trading expense, and Class 2/4 NIC instead of higher-rate income tax.

The Class 1 NICs Risk Hosts Should Watch

A subtler issue HMRC has flagged is the Class 1 National Insurance contributions risk where a host effectively employs themselves (through their own company) to provide cleaning, key-handover, or in-stay services.

Where a host trades through a personal limited company that owns the property and the host personally provides services to guests, HMRC may argue:

• The host is an employee or director of the company providing services
• Services are remunerated through dividends or salary
• The salary element is subject to Class 1 NICs and PAYE
• The arrangement is potentially within IR35-equivalent rules if structured as a single-purpose service company

For most single-property family-run holiday lets this is theoretical risk. For incorporated multi-property structures, it's worth a planning review — the marginal cost of getting NICs wrong on a corporate structure can run to 13.8% employer NICs plus 8% employee NICs on the salary element across several years.

What to Do This Tax Year

Three decisions every former FHL host should have closed by now:

1. Update your accounting for finance cost restriction.

If your accountant still has FHL-pattern templates with mortgage interest as a direct deduction, the 2025-26 return will be wrong. Mortgage interest is now reported separately and the 20% basic-rate tax credit applied at the income-tax computation stage. For higher-rate taxpayers with significant FHL debt, this typically means a 30-50% increase in declared taxable income and a corresponding tax cost.

2. Decide whether to pre-empt with replacement-of-domestic-items planning.

Replacement of Domestic Items Relief works on a like-for-like basis. If you were planning to refurnish (new sofas, beds, kitchenware), the timing decision matters: replacements of existing items qualify; an initial fit-out for a newly-acquired property does not. If you have items genuinely needing replacement, claim them in the tax year you incur the cost rather than deferring.

3. Review pension contributions against your new relevant earnings position.

If your FHL income was the bulk of your relevant UK earnings, the maximum tax-relieved pension contribution may have dropped sharply. Confirm with your pension provider or financial adviser what your current annual allowance is — the £60,000 ceiling is meaningless if your relevant earnings are below it.

Joint Ownership: The 50:50 Default

For married couples or civil partners who jointly owned an FHL, the default profit-allocation rule under the property-income regime is 50:50, regardless of actual ownership percentages — unless a Form 17 declaration is filed with HMRC specifying the actual beneficial split.

Under the FHL regime, profits could be split in any proportion the parties agreed (typically the higher-earning partner taking less to reduce the household tax bill). From 6 April 2025, that flexibility ended.

If your FHL was set up specifically to allow flexible split, file Form 17 against the actual ownership percentages — but be aware that the split has to match actual beneficial ownership of the property. You can't just elect to a tax-optimal split without underlying ownership change.

When to Move to a Trading Classification (and When Not To)

A former FHL host might consider arguing for trading classification (under BIM principles) where:

• The property is part of a multi-property operation with shared staff
• Hosting services are genuinely provided (cleaning by your team, key-handover, in-stay assistance, packaged tour or transfer services)
• The host is personally involved in operations beyond minimal management
• Capital allowances on new equipment would meaningfully offset profits
• A future disposal is in scope where BADR would apply

The host should NOT push for trading classification where:

• The property is run essentially passively, with all operational tasks subcontracted at arm's length
• Personal involvement is limited to occasional review and finance
• The host already qualifies for the £1,000 property allowance and prefers simplicity
• Cash flow for Class 2/4 NICs and payments on account would be challenging

The decision matters because HMRC will not let you toggle between property and trading classifications year-to-year — once you've signalled trading by claiming AIA or by registering self-employment, you've made an election that's difficult to unwind.

What HMRC Has Said Won't Change

A few things hosts sometimes assume changed but didn't:

• VAT — the threshold and registration rules are unchanged. If your taxable turnover exceeds £90,000 (the threshold from 1 April 2024), you must register, regardless of FHL status.
• Business rates vs council tax — the days-let thresholds for business rates are unchanged. See our holiday let business rates guide and council tax for holiday lets guide.
• Rent-a-room scheme — separate from FHL. If you let a furnished room in your main home, the £7,500 rent-a-room allowance still applies.
• Inheritance tax — FHL property did not qualify for Business Property Relief (BPR) under the FHL regime, and that remains the same after abolition.

The Practical Bottom Line

For most single-property former FHL hosts: file as property income under the post-abolition regime, claim Replacement of Domestic Items Relief where applicable, accept the finance cost restriction, and move on. The tax cost has gone up, but the compliance pattern is straightforward.

For multi-property hosts with operational involvement: this is the right tax year to take advice on whether a genuine trading classification is supportable. The BADR/AIA upside can be material on multi-property structures, but only if the trading characteristics are genuinely there.

For the full picture across all four taxes — income tax, CGT, SDLT, and VAT — see our holiday let tax guide.

For the acquisition taxes that apply when buying a holiday let — SDLT additional dwelling rates, the October 2024 surcharge increase, and Scotland/Wales equivalents — see our holiday let stamp duty guide.

Sources

• GOV.UK — Abolition of the Furnished Holiday Lettings Tax Regime (policy paper)
• GOV.UK — Clarification on abolition of the Furnished Holiday Lettings tax regime
• HMRC Business Income Manual (BIM)
• HMRC Property Income Manual PIM3210 — Replacement of Domestic Items Relief