Short-term letting has shifted again. With the furnished holiday lettings (FHL) rules abolished from 6 April 2025, tax planning for furnished holiday lettings in 2026 means treating income like any other residential property business, not a quasi-trade. That matters for cashflow, finance costs, losses and capital gains. It also matters commercially: demand is softer than the staycation peak and supply is up, so margins are tighter. For context, the Office for National Statistics recorded 90.1 million guest nights in UK short-term lets across 2024, underscoring the sector’s scale even as performance varies by region (ONS, 2025). The Office for Budget Responsibility also expects the FHL reforms, alongside other measures, to raise receipts by the later years of the forecast period (OBR, 2024). If you run holiday accommodation, 2025/26 is the first full year of the new rules, so your 2026 planning window is the time to reset how you structure, record and forecast your business.
We outline what changed, what stayed the same, and how to approach tax planning for furnished holiday lettings in 2026 with practical steps you can take now.
What changed from April 2025
The government has legislated to abolish the FHL tax regime from April 2025, removing the former tax advantages across income tax and capital gains tax. From 2025/26 you are taxed under the standard property income rules – not FHL – and capital gains reliefs specific to FHL no longer apply (HMRC, 2024).
Key shifts to understand:
- Income treatment: All rents and fees fall into the property business rules; FHL-specific treatment is removed (HMRC, 2024).
- Finance costs: Mortgage interest relief is restricted to a 20% tax reducer for individuals, rather than full deduction against profits. Companies deduct interest in the usual way, subject to corporate interest rules.
- Losses: Property business losses generally carry forward against future property profits; sideways set-off is not available.
- Capital allowances vs domestic items: No plant and machinery capital allowances for fixtures and furniture in dwellings. Instead, claim replacement of domestic items relief when you replace qualifying moveables like sofas, white goods and carpets (HMRC, PIM3210).
- Capital gains reliefs removed: Former FHL access to Business Asset Disposal Relief and rollover relief is withdrawn for disposals from 6 April 2025 for individuals, with company alignment from 1 April 2025.
These changes alter profit, timing and exit strategies, so tax planning for furnished holiday lettings must reflect the new baseline.
Finance costs, losses and practical record-keeping
Interest can no longer be deducted from rental profits for individuals. Instead, claim the 20% tax credit on the lower of your finance costs, property profits or adjusted total income. Companies continue to deduct interest but must consider corporate interest restriction where relevant. Good records of interest paid, capital repayments and any arrangement fees are essential to model after-tax returns accurately.
Losses must be tracked within the property business pool. If you have several lets, aggregate the results – losses carry forward to set against future property profits. This makes forecasting important: if you anticipate a soft season, plan repairs and replacements so you make the most of reliefs without creating stranded losses.
Action points for 2026:
- Interest evidence: Keep lender statements and apportion accurately if properties are mixed-use.
- Loss pools: Maintain schedules by property, then consolidate – it helps with pricing and lender discussions.
- Domestic items: Keep invoices and disposal evidence so your replacement claims are robust.
Replacement of domestic items – what you can still claim
With the shift away from capital allowances, replacement of domestic items relief is your main route to relief on furnishings in dwellings. You can claim the cost of the new like-for-like or nearest modern equivalent item, less any proceeds for the old item. Qualifying items include moveable furniture, furnishings, appliances and kitchenware. They exclude fixtures – for example, a fitted kitchen is part of the property and follows repair rules instead.
Common scenarios:
- Beds and sofas: Replacement qualifies; initial fit-out does not.
- Fridge-freezers: Replacement qualifies; upgrading to materially better may require an adjustment.
- Carpets and curtains: Replacement qualifies; initial installation does not.
Plan your refurb cycles so replacements coincide with profitable years – your relief is more valuable when you have profits to absorb.
Ownership structure and splitting income between spouses
Most owners hold personally, often jointly. Post-abolition, property income held jointly by spouses or civil partners is normally taxed 50:50. Where you actually own in unequal shares and wish to be taxed on that basis, file Form 17 with evidence of your beneficial interests (HMRC, 2014). Form 17 does not create the split – it declares an existing one, so update your deed of trust first if needed.
Points to consider:
- Basic vs higher rate bands: Shifting income to the lower-taxed spouse can reduce the household tax bill.
- Mortgage ownership: Align beneficial shares with economic reality and lender arrangements.
- Administration: Form 17 must be filed within 60 days of signing, and it applies to that property until facts change.
If you operate multiple lets with different ownership patterns, keep a property-by-property register of beneficial interests for clarity.
Incorporation – pros and cons in 2026
Some owners are weighing company ownership now that FHL perks have gone. Companies can deduct finance costs fully and may offer better long-term cashflow if profits are retained. However, incorporation can trigger capital gains tax and stamp duty land tax, and future profit extraction may be taxed again when paid as dividends or salary. Lenders also price limited company borrowing differently.
When a company can make sense:
- Reinvestment plan: You expect to retain profits for expansion or refurb.
- Higher leverage: Interest deductibility inside a company improves effective returns.
- Multiple properties: Scale can justify administration.
When to pause:
- Imminent sales: You could crystallise taxes now and again on extraction.
- Small portfolio: Costs may outweigh benefits.
We can model company vs personal ownership for your portfolio and your income needs – get in touch via our advice and planning page on our website to discuss options (speak to us).
VAT on holiday accommodation and local property taxes
Short-term holiday accommodation is standard-rated for VAT in the UK. If your taxable turnover exceeds the registration threshold, you must register and charge VAT. Special rules apply for stays over 28 consecutive days – part of the charge may be relieved – but the supply remains taxable. Review your pricing, channel fees and cleaning charges to make sure VAT is treated consistently.
On local property taxes, self-catering and holiday let accommodation can be liable to business rates if availability and letting criteria are met; otherwise council tax applies. The Valuation Office Agency guidance explains when you should be on business rates and how to notify the VOA if your status changes (VOA, 2025). Rates reliefs vary locally, so build them into your cashflow. If you stop meeting the criteria, you can be moved back to council tax – adjust your budgets promptly.
How to approach tax planning for furnished holiday lettings in 2026
Make 2026 the year you standardise under the property rules and protect margins:
- Pricing and VAT: Review net-of-VAT pricing, platform fees and minimum stays. Consider whether the VAT threshold strategy still works for your occupancy pattern.
- Refurb schedule: Map replacements you plan to claim under domestic items relief, prioritising items with the biggest guest impact.
- Debt strategy: For individuals, model the 20% finance cost credit effect on different interest rate scenarios. For companies, test lender covenants and interest caps.
- Ownership review: Where property is jointly owned, assess whether a Form 17 filing aligns tax with economic ownership (HMRC, 2014).
- Exit planning: Without FHL capital gains reliefs, factor standard CGT rates and any available annual exempt amounts into your five-year plan.
- Records and software: Keep detailed income, cost and occupancy records. If you need help streamlining bookkeeping and VAT, our team can set this up and monitor results throughout the year.
Bringing it together for 2026
The abolition of FHL rules resets the tax baseline. That does not make holiday letting unviable, but it changes the levers that drive returns. In 2026, tax planning for furnished holiday lettings should focus on finance cost management, timing of refurb and replacements, evidence-backed ownership splits, and VAT-aware pricing. Keep an eye on occupancy and demand – national data shows the sector remains large, with 90.1 million guest nights in 2024 – but profitability depends on tight control of taxable profits and cashflow. Policy costings indicate the exchequer expects higher receipts from these reforms, which is another way of saying the margin for error is smaller.
If you operate or are considering a short-term let, we can review your structure, model personal vs company ownership, and prepare a 12-month plan tailored to your occupancy and rates. Contact us for tax planning for furnished holiday lettings and we will help you set a clear course for 2026 and beyond.