What did the FHL regime give owners, and what ended?
Until 5 April 2025, a property that qualified as a Furnished Holiday Letting was taxed more like a trading business than an ordinary rental. That gave owners a specific package of advantages that ordinary landlords did not get:
- Full mortgage interest deduction. Finance costs could be deducted in full against rental profit, rather than restricted to a basic-rate credit.
- Capital allowances. Owners could claim capital allowances on furniture, equipment and certain fixtures used in the let.
- Business Asset Disposal Relief (BADR). A qualifying FHL could benefit from a reduced 10% CGT rate on disposal, the relief normally reserved for business assets.
- Rollover relief. Gains on disposal could, in qualifying circumstances, be rolled over into a replacement business asset and deferred.
- Pension-relevant earnings. FHL profits counted as relevant UK earnings for pension contribution purposes, unlike ordinary rental income.
From 6 April 2025, all of that ended. A former FHL is taxed as ordinary property income: no new capital allowances claims, no BADR, no rollover relief on disposal, and no pension-relevant earnings treatment. This is a change to tax treatment; the letting and licensing rules that govern short-term holiday letting itself, where they exist, are separate and are not covered here.
How does the Section 24 finance cost credit work now?
The restriction that already applied to ordinary buy-to-let landlords since the 2020-21 tax year now applies to holiday lets too. Rather than deducting mortgage interest and other finance costs from rental profit before tax, an individual landlord instead gets a flat tax credit worth 20% of the lowest of three figures: the finance costs for the year, the property business profit for the year, or the landlord's adjusted total income above the personal allowance.
This 20% rate is fixed UK-wide for the credit itself and does not vary with the landlord's marginal income tax rate, including for Scottish taxpayers who are taxed under a different set of income tax bands (see below). The restriction does not apply to a holiday let owned and operated through a limited company, where interest remains fully deductible against Corporation Tax; that structure carries its own separate tax and administrative considerations not covered on this page.
The practical effect is greatest for higher and additional-rate taxpayers, because a credit worth only 20% of the finance cost is worth less to someone taxed at 42% or 47% than a full deduction would have been, even though the arithmetic still reduces the tax bill either way.
What is the £1,000 property allowance?
Landlords with modest gross rental income can use the £1,000 property income allowance instead of deducting their actual allowable expenses. If gross rental income for the tax year is £1,000 or less, no tax is due and, subject to conditions, no reporting of that income is required. Above £1,000, the landlord chooses between deducting the flat £1,000 allowance or their actual allowable expenses, whichever gives the better result, but not both together.
The property allowance is a separate mechanism from the Section 24 finance cost credit: it covers running expenses (excluding finance costs), while the Section 24 credit deals specifically with mortgage and other finance costs. A holiday let owner with a mortgage will typically still need to work out the Section 24 credit separately even if they choose the £1,000 allowance for other expenses.
What changes on 6 April 2027?
A further, separate change was announced at the Autumn Budget on 26 November 2025 and legislated in the Finance Act 2026: from 6 April 2027, property income earned by individuals in England, Wales and Northern Ireland will be taxed at its own set of rates, distinct from the general income tax bands for the first time.
| Band | Current general rate | New property income rate from 6 April 2027 |
|---|---|---|
| Basic | 20% | 22% |
| Higher | 40% | 42% |
| Additional | 45% | 47% |
Every band rises by 2 percentage points specifically for property income, while general employment and self-employment income stays on the existing 20/40/45 structure. This means a landlord's overall tax position depends on both their total income and, separately, how much of it is property income once the two schedules diverge.
Multiple accountancy and property-tax commentators reported alongside this announcement that the Section 24 finance cost credit is expected to rise in step, from 20% to 22%, so that it continues to match the new basic property rate. At the time of writing this was reported consistently across several professional summaries of the Autumn Budget and the Finance Act 2026, but we have not been able to confirm the specific 22% credit figure against a primary HMRC page or the Act's finance cost provisions directly. Treat the rise to 22% as expected rather than confirmed, and check HMRC's own guidance nearer 6 April 2027 before relying on it.
Does this apply in Scotland?
Scotland sets its own income tax rates and bands through the Scottish Parliament, currently a six-band structure running from a 19% starter rate up to a 48% top rate for 2026-27. The Section 24 finance cost credit itself stays fixed at the UK-wide 20% rate for Scottish taxpayers too, rather than following the Scottish bands.
The new 22/42/47 property income rates described above are reported as applying to England, Wales and Northern Ireland. Whether Scotland introduces a matching change to its own property income treatment from April 2027 had not been confirmed at the time of writing; Scottish landlords should check for a Scottish Government or Scottish Budget announcement nearer the date rather than assuming the England/Wales/NI figures apply north of the border.
What does a geared holiday let look like before and after?
Illustrative example only, not a real property. Figures are rounded for clarity and ignore other reliefs, allowances and the owner's other income.
Consider a holiday let generating £24,000 a year in rental income, with £9,000 a year in mortgage interest and £5,000 a year in other allowable running costs, owned by a higher-rate taxpayer.
| As a qualifying FHL (before 6 April 2025) | As ordinary property income (2026-27) | |
|---|---|---|
| Rental income | £24,000 | £24,000 |
| Other allowable costs | −£5,000 | −£5,000 |
| Mortgage interest | −£9,000 (fully deductible) | £0 deducted (finance cost instead gets a tax credit) |
| Taxable profit | £10,000 | £19,000 |
| Tax at 40% higher rate | £4,000 | £7,600 |
| Less: Section 24 credit (20% of £9,000 interest) | not applicable | −£1,800 |
| Tax after credit | £4,000 | £5,800 |
In this illustrative case, the same underlying income and costs produce a higher tax bill once the property is taxed as ordinary income rather than as a qualifying FHL, because a higher-rate taxpayer's finance costs are relieved at only 20% instead of at their full 40% marginal rate. From 6 April 2027, if the property basic and higher rates move to 22% and 42% as currently legislated, both the taxable-profit tax charge and, if the reported 22% credit figure is confirmed, the finance cost credit would each shift by 2 percentage points, without changing the underlying structure of the calculation.
Work out your own numbers
- Second home running costsTrack rental income against costs for the year.
- Second home mortgage affordabilitySee what a geared purchase can support.
- Remortgage break-evenWork out when refinancing pays for itself.
- UK second home CGT calculatorEstimate CGT on an eventual sale.
Common questions
Can a holiday let still claim capital allowances it registered before April 2025?
Existing capital allowances claimed while the property still qualified as an FHL are not clawed back by the abolition, but no new capital allowances claims can be made on qualifying expenditure incurred from 6 April 2025 onward.
Does the FHL abolition affect VAT registration for holiday lets?
VAT is a separate tax with its own registration threshold and rules that were not part of the FHL income tax and Capital Gains Tax regime, and is outside the scope of this guide.
Is a holiday let owned through a limited company affected the same way?
No. The Section 24 finance cost restriction, and the reported 2027 property income rate change, apply to individual landlords. A company holding a holiday let is taxed under Corporation Tax rules, where loan interest remains deductible in the normal way, subject to the separate corporate interest restriction rules.
Where can the 22/42/47 rates and the credit change be checked closer to April 2027?
HMRC updates its Income Tax rates and allowances guidance and its property income guidance ahead of each tax year. Check gov.uk directly in early 2027, since the credit figure specifically was not confirmed at a primary-source level at the time this guide was last reviewed.
Sources
- GOV.UK policy paper, "Abolition of the Furnished Holiday Lettings tax regime", checked 15 September 2026: confirms the 6 April 2025 effective date and the loss of capital allowances, BADR and rollover relief.
- HMRC Property Income Manual, checked 15 September 2026, for the general Section 24 finance cost restriction framework.
- GOV.UK, "Income Tax rates and Personal Allowances", checked 15 September 2026, for the current 20/40/45 general income tax bands for 2026-27.
- gov.scot, "Scottish Income Tax 2026 to 2027: technical factsheet", checked 15 September 2026, for the Scottish six-band structure.
- Autumn Budget 26 November 2025 and Finance Act 2026: the new 22/42/47 property income rates from 6 April 2027 and the reported (not primary-source confirmed) rise of the Section 24 credit to 22% are widely reported by professional tax commentators, including the National Residential Landlords Association and Deloitte's Budget analysis; checked via multiple independent secondary sources 15 September 2026. We recommend confirming the exact figures against HMRC's own guidance before relying on them for a filing.
Last reviewed 15 September 2026. Next review April 2027, when HMRC is expected to publish primary guidance on the property income rate change. Written by the OwnersLog team from the official sources listed above. No professional reviewer is named on this page yet.
This guide is general information about how the rules work, not financial, tax, legal or mortgage advice, and it cannot account for your circumstances. Confirm anything that matters with a qualified professional. See the full disclaimer.