Property owners who are looking for fresh ways to maximise their property income often find themselves asking whether long-term rental or a furnished holiday letting (FHL) would be more tax efficient, rental vs holiday let tax. You may want to take a closer look at how each type of letting arrangement might affect your income tax, allowable expenses, mortgage interest relief and future tax reliefs.
Below, we compare long-term rentals with FHLs for 2025/26, examine the impact of new furnished holiday lettings rules, and help you decide which option might deliver better returns.
Long-term residential rentals: What you need to know
Income tax treatment
When you run a standard rental property, any rent you receive is taxed under the property income rules. For the 2025/26 tax year, you’ll still be taxed on your net rental profit – that is, the income you receive less your allowable expenses (maintenance, repairs, letting agent fees, insurance and so on).
However, mortgage interest relief for standard buy-to-let properties remains restricted. Landlords receive a tax credit of 20% on their finance costs, even if they’re higher-rate or additional-rate taxpayers. This can affect your net profit and final tax liability.
Limited capital allowances
Owners of residential rentals are not eligible for capital allowances on furnishings or equipment in the same way that FHL owners often are. Although you can claim the replacement of domestic items, you won’t be able to claim for new or initial purchases of furniture.
Capital gains tax (CGT) implications
Selling a long-term rental property can result in a CGT charge on any profit above the relevant annual exempt amount. For the 2025/26 tax year, the top rate for residential property CGT is expected to remain at 28% (for higher and additional-rate taxpayers) and 18% (for basic-rate taxpayers). There are no special CGT reliefs specifically for standard rentals, which means potential exposure to a higher tax bill when you eventually sell.
Furnished holiday lettings: Different rules, different benefits
Income tax advantages
FHL income must be included on your tax return, but it differs from standard residential letting. You can deduct mortgage interest in full and you may claim extra reliefs if you meet the criteria for a FHL. For 2025/26, these criteria are as follows.
- The property must be available to let as furnished holiday accommodation to the public for at least 210 days in the tax year.
- It must be let to paying guests for at least 105 days in that same tax year. If you have more than one FHL property, there may be options to “average” across them if some properties don’t individually reach 105 days. There is also a “grace period election” if you’ve met the threshold in previous years but fall just short in the current year.
- Letting the property to the same occupant for more than 31 days at a time cannot total more than 155 days in the tax year. This condition aims to keep the property primarily available for short-term holiday use.
If these criteria are all met, FHL income is taxed under property income rules but with important differences compared to standard residential letting – including the ability to deduct mortgage interest in full.
Capital allowances for fixtures and fittings
FHL rules often allow you to claim capital allowances on items like furniture, white goods and equipment used in the holiday accommodation. That means you could deduct the cost of these items from your rental profits before calculating your income tax. Such allowances can help with your cashflow and free up funds for other improvements.
CGT reliefs
FHL owners may benefit from tax reliefs that are usually only available to businesses, such as business asset disposal relief (formerly entrepreneurs’ relief). This can reduce CGT to 10% on qualifying gains up to the lifetime limit when you sell your holiday property, provided you meet the eligibility criteria. This advantage can make FHLs much more attractive if you’re thinking about disposing of your property later.
2025 furnished holiday lettings rule changes
From April 2025, the minimum number of days your property must be actually let to paying guests is expected to rise to 105 days each year. This increase means you might need to let your property more often and for more weeks to maintain FHL status. If you fall short, you could lose access to the more generous tax treatment (including full mortgage interest relief and capital allowances).
The government has also signalled closer scrutiny of whether FHL owners are meeting these rules. Accurate records and careful planning will be more important than ever. If you’re uncertain about record-keeping obligations, you can refer to this HMRC guide to property letting.
Which is right for you?
The decision between a long-term rental or a furnished holiday letting often depends on your goals. You may prefer the relative stability of a long-term tenancy, with fewer property management tasks and expenses. However, a long-term rental means the ongoing restriction on mortgage interest relief could create a larger tax liability.
FHLs, on the other hand, can be more work. You might face higher turnover and more maintenance, including extra cleaning and marketing. If you can meet the letting requirements and manage the property carefully, you could enjoy higher net profits thanks to full mortgage interest relief, capital allowances and lower CGT rates.
Practical steps for property owners
- Work out your numbers: Speak to a professional adviser or use reliable tools to forecast 2025/26 profits. Include mortgage costs, maintenance and council tax or business rates.
- Keep track of occupancy: From April 2025, if your holiday let doesn’t meet 105 days of actual letting, you risk missing out on FHL treatment. Consider using a professional booking system to keep detailed records of occupancy.
- Think about your plans: If you have a long-term objective to sell your property, you might find the business-related CGT reliefs for FHLs appealing. If you intend to keep your property as an ongoing investment, standard rentals can provide steady income.
- Check compliance: Both types of letting are subject to rules on safety, insurance and property maintenance. If you prefer a corporate structure, you can find more information on setting up a property business at Companies House.
- Get professional help: Tax law and letting rules can change, so keep a close eye on government updates. Our team at Coveney Nicholls can provide tailored advice.
How we can help
We provide guidance on tax planning, compliance and property business structures. If you’d like to discuss which option suits you best under the 2025/26 rules, contact us to arrange a consultation. Our approach combines global awareness with practical, local knowledge.
We can help you plan ahead and decide on the right choice between rental vs holiday lettings. Get in touch so we can discuss your situation and guide you through the 2025 changes.