Holiday let tax changes 2026: what contractor landlords need to know
Direct Answer
HMRC abolished the Furnished Holiday Lettings (FHL) regime from 6 April 2025. Holiday lets are now taxed as ordinary rental income — which means mortgage interest is restricted to a 20% tax credit, FHL-specific CGT reliefs have ended, capital allowances no longer apply to new items, and holiday let income no longer qualifies as relevant earnings for pension contributions. Making Tax Digital for Income Tax became mandatory from 6 April 2026 for those earning above £50,000 gross. And from April 2027, property income tax rates increase again. Contractors who earn through a limited company and hold a holiday let personally now face a dual compliance picture that requires joined-up accountancy across both income streams.
What changed from 6 April 2025: the FHL regime abolished
The Furnished Holiday Lettings special tax regime applied to short-term holiday rental properties that met specific usage criteria (available to let 210 days per year; actually let 105 days). Properties that qualified were treated more like a business than a standard rental, unlocking reliefs not available to ordinary residential landlords.
From 6 April 2025, all of that changed. Properties that were previously classified as FHLs are now treated as ordinary rental income for all tax purposes. HMRC updated its official guidance in June 2026 to clarify the transition. The changes apply from the 2025–26 tax year onwards.
The four key tax changes for holiday let owners
1. Mortgage interest: now subject to Section 24 restriction
Previously, FHL landlords could deduct mortgage interest in full as a business expense. From April 2025, holiday lets are subject to the Section 24 restriction that has applied to residential landlords since 2017. You receive a 20% basic-rate tax credit on finance costs rather than a full deduction from your rental profit. For higher-rate taxpaying contractors, this significantly increases the effective tax cost of a mortgaged holiday let.
2. Pension contributions: holiday let income no longer qualifies
Under the FHL regime, qualifying profits counted as relevant earnings for pension contribution purposes — enabling landlords to make higher pension contributions and claim full tax relief on them. From April 2025, holiday let income is rental income, not relevant earnings. Only other earned income (salary from your limited company, self-employed income) now counts. If your pension contribution planning was based partly on FHL earnings, it needs to be restructured.
3. Capital allowances: ended for new items
FHL properties could claim capital allowances on furniture, fittings, and equipment — writing down the purchase cost over time. This no longer applies. For items that need replacing, you can use Replacement of Domestic Items Relief (like-for-like replacements only). What you cannot do is claim on initial purchases of new items or on upgrades beyond like-for-like.
4. CGT: FHL-specific reliefs removed
When selling a former FHL property, you no longer have access to the CGT reliefs that previously applied:
- Business Asset Disposal Relief (formerly Entrepreneurs' Relief) — the 10% CGT rate on gains up to £1m is no longer available
- Rollover relief — deferring gain on reinvestment into new qualifying assets
- Hold-over relief — previously available on gifts of qualifying business assets
Gains on former FHL properties are now taxed at residential property CGT rates: 18% for basic-rate taxpayers and 24% for higher-rate taxpayers (rates applying from October 2024). If you are considering selling a holiday let, the tax position should be modelled carefully before exchange.
Making Tax Digital: now mandatory if you earn above £50,000
Making Tax Digital for Income Tax (MTD ITSA) became mandatory from 6 April 2026 for individuals whose gross trading and/or property income exceeded £50,000 in the 2024–25 tax year. Holiday let income is property income for MTD purposes.
For a contractor earning through a limited company, the MTD threshold assessment looks at personal income — salary, dividends (if self-employed equivalent), and property income. Holiday let rental income counts. If your holiday let gross rents plus any personal income sources exceed £50,000, you need MTD-compatible software and must submit quarterly updates to HMRC.
AutoBooks is MTD-compatible. We can manage quarterly MTD submissions for both your contracting and property income within the same service.
April 2027: property income tax rates increase
From April 2027, personal income tax rates on property income are increasing:
- Basic rate: 20% → 22%
- Higher rate: 40% → 42%
- Additional rate: 45% → 47%
This represents a further squeeze on landlord returns beyond Section 24. For contractors who are higher-rate taxpayers — earning substantial income through their limited company alongside property rental — the combined effect of Section 24 restriction and the rate increase from April 2027 makes now the right time to model the long-term financial case for continuing to hold a holiday let personally.
In some cases, the tax position may support restructuring how the property is held. In others, the returns may still be positive even after the changes. The calculation depends on individual numbers — current gross yield, mortgage debt, contractor income level, and the CGT cost of a sale if that becomes relevant. This is exactly the kind of analysis AutoBooks can run as part of a broader tax review.
The dual reporting challenge for contractors
Most holiday let owners who are also contractors hold the property personally while their contracting income flows through a limited company. This creates two separate reporting obligations:
- Limited company: annual accounts, corporation tax return, payroll, confirmation statement
- Personal self-assessment: rental income, salary, dividends, any other personal income — and now MTD quarterly updates if income exceeds £50,000
These two streams interact in ways that matter for tax planning. The rate at which rental income is taxed depends on total personal income, including salary and dividends from your company. How much you can contribute to a pension depends on your relevant earnings from salary, not your rental income. The CGT position on any future property sale depends on whether you have used your annual CGT allowance through other disposals in the same year.
Running these two streams through separate accountants — or worse, handling one yourself — increases the risk of interactions being missed. AutoBooks handles both contractor and property income in one place, which means the interactions are visible and the overall tax position is optimised rather than managed in isolation.
Contractor accountancy that covers both streams
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