HMRC holiday let tax changes 2026: what contractor-landlords need to know

The five key changes you need to act on

1. Mortgage interest: restricted to a 20% tax credit

Previously, FHL landlords could deduct mortgage interest in full as a business expense before calculating their taxable profit. From April 2025, holiday lets are subject to Section 24 — the same restriction that has applied to residential landlords since 2017. You can no longer deduct mortgage interest from your rental income. Instead, you receive a 20% basic-rate tax credit on your finance costs.

For a higher-rate (40%) taxpaying contractor-landlord with £10,000 annual mortgage interest on a holiday let:

• Under old FHL rules: £10,000 deducted before tax, saving £4,000 in tax (at 40%)
• Under new rules: 20% credit of £2,000 — an additional tax cost of £2,000 per year on the same loan

For those with significant holiday let mortgage debt, this is the most material financial change from the abolition of the FHL regime.

2. Capital allowances: no longer available for new items

FHL properties could claim capital allowances on furniture, fittings, and equipment — meaning you could write down the cost of a new kitchen or new furnishings against your tax bill over time. This is no longer available from April 2025.

What is still available is replacement of domestic items relief: when you replace an existing item like-for-like (same sofa, same standard of appliance), you can deduct the cost of the replacement. What you cannot do is claim on the initial purchase of new items, or on upgrades beyond a like-for-like replacement.

3. Capital gains tax reliefs: removed

FHL properties qualified for several CGT reliefs that standard rental properties do not:

• Business Asset Disposal Relief (formerly Entrepreneurs' Relief) — allowing gains up to £1m to be taxed at 10%
• Rollover relief — deferring CGT on gains reinvested in new qualifying assets
• Hold-over relief — available on gifts of business assets

From April 2025, none of these apply to holiday lets. Gains on the sale of a former FHL property are now taxed at residential property CGT rates — 18% for basic-rate taxpayers and 24% for higher-rate taxpayers (the rates applying from October 2024). If you are considering selling a holiday let property, the timing and tax position should be reviewed in light of these changes.

4. Pension contributions: holiday let income no longer qualifies

One of the more obscure benefits of the FHL regime was that qualifying income counted as "earned income" for pension contribution purposes — meaning FHL profits could be used to support higher pension contributions and tax relief. From April 2025, holiday let income is rental income, not earned income. It no longer supports pension contributions beyond what your other earned income (salary, contracting income) permits.

For contractor-landlords who structured pension contributions partly around FHL income, the maximum allowable contribution may have decreased. This is worth reviewing with your accountant.

5. What is still deductible — running costs and replacement relief

The following expenses remain fully deductible against holiday let income:

• Repairs and maintenance (not improvements)
• Cleaning costs
• Property insurance and contents insurance
• Letting agent and platform fees (Airbnb, Vrbo, Booking.com etc.)
• Utilities where paid by the landlord
• Accountancy and professional fees
• Advertising and photography
• Replacement of domestic items on a like-for-like basis

The core deductibility of running costs is unchanged. The changes are specifically to finance cost relief, capital allowances, CGT treatment, and pension eligibility.

The interaction with your limited company

Most contractor-landlords hold holiday let properties personally rather than within their limited company. This is important: the FHL changes affect your personal tax return (Self Assessment), not your company accounts or corporation tax return.

However, the overall tax picture needs to be reviewed together. The combination of contractor income (drawn as salary and dividends from your limited company) and holiday let income (now treated as rental income) affects:

• Your total personal income and the rate band at which the holiday let income is taxed
• The amount of mortgage interest restriction you face under Section 24
• Your pension contribution capacity (since contracting salary + dividends constitute your main earned income)
• Your MTD obligations (income from both streams counts toward the threshold)

Reviewing the two income streams in isolation — one with your limited company accountant, one separately for the property — risks missing interactions that affect the overall tax position. AutoBooks handles both.

Frequently asked questions

What happened to the FHL regime?

The Furnished Holiday Lettings special tax regime was abolished from 6 April 2025. Properties that previously qualified are now taxed as standard residential rental properties. HMRC published updated guidance in June 2026 to clarify the transition.

Can I still deduct mortgage interest on a holiday let?

Not as a full deduction. From April 2025, holiday let mortgage interest is subject to the Section 24 restriction — you receive a 20% basic-rate tax credit on finance costs rather than a full deduction from rental profit. For higher-rate taxpayers, this increases the effective tax cost of a mortgaged holiday let significantly.

Does holiday let income count toward MTD thresholds?

Yes. Holiday let income is rental income and counts toward the MTD for Income Tax thresholds (£50,000 from April 2026, falling to £30,000 from April 2027, £20,000 from April 2028). Contractors with holiday let income alongside contracting income are likely to breach these thresholds.

What deductions are still available?

Running costs (repairs, cleaning, insurance, platform fees, utilities) remain fully deductible. Replacement of domestic items relief covers like-for-like replacement of furniture and appliances. What is no longer available: capital allowances on new items, the full mortgage interest deduction, and FHL-specific CGT reliefs.