From income tax to capital gains and furnished holiday let rules, here is your complete guide to understanding the tax position of your UK holiday home in 2025.
Tax is one of the most complex and frequently misunderstood aspects of owning a holiday let in the UK. The good news is that — historically — holiday lets have enjoyed some of the most generous tax treatment of any type of property investment. The less welcome news is that the rules have changed significantly, and 2025 marks an important transition point for many owners.
This guide covers the full tax picture for UK holiday home owners: the Furnished Holiday Let (FHL) regime, income tax, capital gains tax, inheritance tax, council tax, and what the abolition of the FHL regime means in practice.
Disclaimer: This article is for informational purposes only and does not constitute professional financial, legal, or tax advice. Consult a qualified professional for your specific circumstances.
For decades, HMRC provided a special tax classification for short-term holiday lets that met certain qualifying criteria — known as the Furnished Holiday Let (FHL) regime. Properties qualifying as FHLs were treated more like a business and less like a passive investment, which unlocked a range of tax advantages not available to buy-to-let landlords.
To qualify as an FHL, a UK property had to meet all three of the following availability and occupancy tests during the tax year (6 April to 5 April):
Meeting these conditions unlocked access to business property relief, capital gains tax reliefs, pension contribution allowances based on FHL profits, and the ability to claim capital allowances.
This is the major headline for 2025. The UK government announced in the 2024 Spring Budget that the Furnished Holiday Let tax regime would be abolished, with effect from 6 April 2025.
This means that from the 2025/26 tax year onwards, holiday lets are no longer treated as a distinct category for tax purposes. They are taxed like any other property letting business.
The abolition has several significant consequences:
1. Loss of capital allowances Previously, FHL owners could claim capital allowances on furniture, fixtures, and equipment — reducing their taxable income. From April 2025, this option is no longer available for holiday lets. A replacement furniture relief (allowing deduction of the cost of replacing furnishings) applies instead, as it does for residential landlords.
2. Loss of pension contribution relief FHL profits previously counted as "relevant UK earnings" for pension contribution purposes, meaning owners could contribute up to 100% of their FHL profits to a pension and receive tax relief. This is no longer the case from April 2025. Holiday let income is now unearned income for pension purposes.
3. Mortgage interest restriction Like residential landlords, holiday let owners are now subject to the Section 24 mortgage interest restriction. Rather than deducting mortgage interest as an expense, they receive a 20% tax credit. For higher and additional rate taxpayers, this materially increases the effective tax rate on their letting income.
4. Loss of business property reliefs for CGT FHL owners previously had access to Entrepreneurs' Relief (now Business Asset Disposal Relief), Holdover Relief, and Rollover Relief — all business property CGT reliefs that are not available to residential landlords. These are no longer available after April 2025.
5. Loss of IHT business property relief FHLs previously had a reasonable (though not guaranteed) case for business property relief from inheritance tax. That argument is now substantially weaker.
From 2025/26, holiday let income is taxed as property income, in the same way as buy-to-let rental income.
You can still deduct a wide range of legitimate expenses from your gross rental income before calculating tax:
Holiday let income is added to your other income and taxed at your marginal rate:
The personal allowance (£12,570 in 2025/26) applies before any tax is payable, but note that high earners see their personal allowance tapered — it is reduced by £1 for every £2 of income over £100,000.
If your gross holiday let income exceeds £1,000 per year (the property allowance), you must register for Self Assessment with HMRC and file an annual tax return. Keep records of all income and expenses carefully throughout the year.
When you sell a holiday let property, the gain (the difference between the sale price and the original purchase price, adjusted for costs and improvements) is subject to Capital Gains Tax (CGT).
Following the October 2024 Autumn Budget, CGT rates on residential property were changed:
Holiday lets are now classified as residential property for CGT purposes following the FHL abolition, so these rates apply.
Every individual has an Annual Exempt Amount — the amount of gain that can be made each year before CGT applies. For 2025/26, this is £3,000 (it was reduced substantially from £12,300 in recent years).
For properties held personally, holiday let assets now form part of the owner's estate for inheritance tax purposes. IHT is charged at 40% on the value of the estate above the nil-rate band (£325,000 per individual, with potential for an additional £175,000 residence nil-rate band on a main home passed to direct descendants).
With the abolition of the FHL regime and the weakening of the business property relief argument, professional estate planning advice is now more important than ever for holiday let owners who wish to pass properties to the next generation.
This is an area where English holiday let owners saw a significant change in 2023 that continues to apply in 2025.
Before April 2023, holiday lets that met certain availability and letting thresholds were eligible to be rated for business rates rather than council tax. Because small business rate relief often reduced the business rates bill to zero, this was a material financial advantage.
From April 2023, HMRC tightened the qualifying thresholds:
Different rules apply in Scotland and Wales, where even stricter thresholds now apply following local government reforms.
If your property is liable for council tax, check whether a council tax reduction applies for furnished second homes — many councils charge a premium (up to 100% or more) on second homes.
Accurate records are the foundation of good tax compliance. LetPilot automatically tracks bookings, income, owner payouts, and property expenses — giving you a clean audit trail at year-end and making it much easier to work with your accountant. Try LetPilot free at letpilot.co — no credit card required.