The Tax Break That Quietly Disappeared
Somewhere between the July heatwave and the diary of Saturday changeovers, a lot of second-home owners across England and Wales are doing sums that didn't need doing eighteen months ago. If you own a cottage in Cornwall, a barn conversion in the Lake District, or a converted stable in the Cotswolds that you let out by the week, the tax return you're preparing for the 2025/26 year — due to HMRC by 31 January 2027 — looks noticeably different from the one you filed two years ago. The Furnished Holiday Lettings regime, which for decades let holiday-let owners behave like small business owners for tax purposes rather than like ordinary landlords, was withdrawn from 6 April 2025. Plenty of owners still haven't worked out exactly what that costs them.
What the Old Rules Actually Gave You
To qualify as an FHL under the old rules, a property had to be available to let for at least 210 days a year, actually let commercially for at least 105 of those days, and not occupied by any one tenant for more than 31 continuous days for more than 155 days a year. Clear the bar and HMRC treated your rental income almost like trading profit. Miss it — because your cottage sat empty through a wet April, say, or because you let your sister-in-law stay for six weeks over the summer — and you dropped straight back into the ordinary residential letting rules, with none of the reliefs below. That threshold always mattered more than most owners admitted, and plenty of accountants spent March scrambling to top up a client's letting days before the year closed.
Mortgage Interest: Back to the 20% Tax Credit
The single biggest change is how loan interest is treated. FHL owners used to deduct 100% of their mortgage interest from rental profit before working out tax, exactly like a trading business. Ordinary landlords lost that in April 2020 under Section 24 of the Finance Act, when full deductibility was replaced with a flat 20% tax credit — and from April 2025, holiday-let owners were pulled into the same system. Say you're paying £15,000 a year in mortgage interest on a holiday cottage. Under the old rules, a higher-rate taxpayer effectively saved £6,000 in tax on that interest. Under the new one, the same owner gets a tax credit worth £3,000 — the interest still reduces your bill, but nowhere near as much, and the gap widens the more geared the property is.
Buy a holiday let with a big mortgage and a modest occupancy rate, and this single change can turn a marginal property into a loss-making one on paper, even while cash is coming in every month.
Capital Allowances Gone, Replacement Relief In
FHL owners could previously claim capital allowances on furniture, appliances, and fitted kitchens — a hot tub, a new dishwasher, or a full re-fit of bedroom furniture all qualified, spread over several years. That's gone too. What replaces it is the same "replacement of domestic items relief" available to any residential landlord: you can deduct the cost of replacing an item that's worn out, but not the cost of furnishing a property from scratch, and definitely not the value of the item itself before depreciation. Anyone who timed a big refurbishment for spring 2025, hoping to catch the allowances before they closed, generally got there in time — but anyone furnishing a new holiday let from bare walls this year is doing it on considerably worse terms than they would have two years ago.
Capital Gains: No More Business Asset Disposal Relief
This is the one that tends to surprise owners most when they eventually come to sell. FHL owners could previously claim Business Asset Disposal Relief (the old Entrepreneurs' Relief) on a sale, taxing gains at 10% up to the lifetime limit rather than the standard residential rates. Rollover relief and gift hold-over relief were also available, letting owners defer gains when reinvesting in another qualifying property or passing one to a family member. All three disappeared for disposals from 6 April 2025 onward. A holiday cottage sold today is taxed like any other second property: 18% for gains within the basic-rate band, 24% above it, with no special holiday-let treatment at all. On a £150,000 gain, that's the difference between a £15,000 bill and one closer to £36,000, depending on the owner's other income that year.
Pension Contributions Take a Quiet Hit Too
One consequence that rarely comes up until an accountant flags it: FHL profits used to count as "relevant UK earnings" for pension purposes, meaning owners could pay into a SIPP or personal pension based on their letting income and get tax relief on it. Ordinary rental income has never qualified for that treatment. From the 2025/26 tax year, holiday-let profits fall into the same category, so anyone who was using their cottage income to justify pension contributions above their salary needs a different plan — and needs it before their accountant closes the books on this tax year, not after.
The Short-Term Let Register Nobody's Filled In Yet
Tax isn't the only front this has opened up. The government has committed to a mandatory national registration scheme for short-term lets in England, building on planning changes already in the Levelling-up and Regeneration Act 2023 that created a distinct use class for short-term lets separate from ordinary residential use. Some councils have moved faster than Westminster. In Greater London, letting an entire home short-term for more than 90 nights a year has required planning permission since 2015 — a rule plenty of Airbnb hosts still don't know exists until a neighbour reports them. Cornwall and parts of North Yorkshire have gone further, using Article 4 directions to strip away permitted development rights entirely, meaning switching a long-term rental into a holiday let now needs a planning application from scratch in those areas, not just a listing on a booking site.
Business Rates or Council Tax? The 140-Day Test
Get this one wrong and you can end up paying neither, which the Valuation Office Agency (VOA) will eventually notice.
Since April 2023, a self-catering property in England only qualifies for business rates — rather than council tax — if it was available to let for short periods for at least 140 days across the current and following 12 months, and was actually let for at least 70 of the past 12 months. The VOA asks for booking evidence now, not just a promise that the property is "available," which caught out a good number of owners who'd been coasting on business rates (and small business rates relief that can reduce the bill to nothing) without hitting the actual letting threshold. Fall short of 70 days let and you're reassessed for council tax instead, usually backdated, with a bill that can run to several thousand pounds depending on the band and local authority.
What This Actually Means for Your Summer
Not every owner is worse off, and it's worth saying that plainly rather than pretending the changes are uniformly bad. If your holiday cottage never came close to the old 105-day letting threshold in the first place, or if you own it outright with no mortgage to speak of, several of these changes simply don't touch you — you were never claiming full interest relief or Business Asset Disposal Relief anyway, so their withdrawal costs you nothing. The owners feeling this hardest are the heavily-mortgaged, actively-let properties that were built around the old regime's numbers.
Talk to an accountant who actually understands holiday lets before your January 2027 return, not after — the interest restriction, the loss of capital allowances, and the pension change all interact in ways that are easy to get wrong on a DIY return. And if you're weighing up whether to sell a holiday let this year or wait, run the capital gains numbers properly first: with Business Asset Disposal Relief gone, there's no tax reason left to rush a sale before some future deadline, because the old incentive to sell "while the relief still applies" no longer exists. Check your letting diary against the 140-day and 70-day thresholds now, in the middle of peak season, while there's still time to add extra midweek bookings before the 12-month window closes rather than finding out in October that you're short.