FHL Abolition Impact Calculator 2025/26

What Was the FHL Regime?

The Furnished Holiday Lettings (FHL) regime was a set of special tax rules that applied to short-term holiday lets in the UK and the European Economic Area that met certain qualifying conditions. To qualify, a property had to be available for letting for at least 210 days per year, actually let for at least 105 days, and not normally occupied for continuous periods exceeding 31 days (the long-term occupation condition).

Properties meeting these conditions were treated as trading income rather than investment income for most tax purposes. This gave FHL landlords access to reliefs normally reserved for trading businesses: full mortgage interest deductibility (not subject to Section 24), capital allowances on furnishings and equipment (including 100% Annual Investment Allowance), Business Asset Disposal Relief for CGT at the 10% rate, the ability to roll over gains, and treatment of profits as relevant UK earnings for pension contribution purposes.

The government announced the abolition of the FHL regime in Spring Budget 2024, to take effect from 6 April 2025, as enacted in Finance Act 2025.

Section 24 Mortgage Interest Restriction

The most financially significant change for many FHL landlords is the loss of full mortgage interest deductibility. Under the old FHL regime, mortgage interest was deductible from rental income in full, reducing taxable profits. Under the normal residential letting rules (Section 24, as applied from 2020/21 for standard buy-to-let landlords), mortgage interest is not deductible from rental profits. Instead, a 20% basic rate tax credit is available on the finance costs.

For basic rate taxpayers, the practical difference is modest because the 20% credit effectively mirrors a 20% deduction. But for higher rate (40%) and additional rate (45%) taxpayers, the change is significant. A higher rate taxpayer paying £8,000 per year in mortgage interest would previously save £3,200 in tax (40% of £8,000). Under Section 24, they only receive a £1,600 credit (20% of £8,000) — an annual extra tax cost of £1,600 from this element alone, even if the property profit is unchanged.

Critically, Section 24 can cause some landlords to appear to make a profit on paper (before the credit) even if their cash position is break-even or negative. This can affect other areas of their tax return, including child benefit clawback calculations and personal allowance tapering above £100,000.

Capital Allowances and Replacement of Domestic Items

Under the FHL regime, landlords could claim 100% Annual Investment Allowance (AIA) on furnishings, equipment, and fixtures such as beds, sofas, white goods, carpeting, and boilers. A newly furnished FHL property could generate a substantial first-year capital allowance claim, often fully covering the capital cost in year one.

From April 2025, FHL properties are treated like standard residential lets. Capital allowances on furnishings are not available for residential property. Instead, only replacement of domestic items relief applies — which covers the cost of replacing items like-for-like. Initial provision of items is not covered, and upgrades beyond like-for-like are only partially deductible.

For an FHL landlord with £15,000 of furnishings and equipment, the loss of AIA means roughly £6,000 of tax relief (at 40%) that would have been available in year one of the old regime is no longer claimable.

CGT: Business Asset Disposal Relief Gone

Under the FHL regime, gains on the disposal of FHL properties qualified for Business Asset Disposal Relief (previously Entrepreneurs' Relief), giving a CGT rate of just 10% on qualifying gains up to the lifetime limit of £1 million. This was a substantial advantage compared to the standard CGT rates on residential property.

From April 2025, former FHL properties are residential property for CGT purposes. Gains are taxed at 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers. On a gain of £80,000, a higher rate taxpayer would previously have paid £8,000 in CGT (10% BADR rate); they now pay £19,200 (24%) — an increase of £11,200 on that sale alone.

Rollover relief and holdover relief for trading assets, which were available for FHL properties under the old regime, are also no longer available from April 2025.

Pension Contribution Impact

Under the FHL regime, FHL profits counted as relevant UK earnings for the purposes of calculating pension annual allowance contributions eligible for tax relief. This was particularly valuable for FHL landlords with limited other employment income — their FHL profits could support pension contributions and attract the associated tax relief.

From April 2025, FHL income is property income and does not count as relevant UK earnings. If FHL income was your primary source of relevant earnings, your ability to make pension contributions with full tax relief may be significantly reduced. For example, if your only relevant earnings were £30,000 from FHL, you could previously contribute up to £30,000 per year to a pension with tax relief. From April 2025, if you have no other relevant earnings, your pension contribution limit for tax relief purposes falls to the minimum £3,600 per year.