How holiday lets are taxed now: the changes that hit your bill

The first returns that reflect this cover the 2025/26 tax year. They're due by 31 January 2027, filed through standard Self Assessment, and many holiday let owners working through them now are realising their bill has gone up. This chapter walks through the four income-tax changes behind that, so nothing on your return takes you by surprise.

The short version

For more than a decade, a holiday let that met the qualifying tests was treated as a trade rather than a passive investment. That trade-like status carried a set of tax advantages that ordinary buy-to-let landlords never got. From April 2025, that status no longer exists.

Four of those advantages were about how your income is taxed year to year:

• Mortgage interest was fully deductible. Now it falls under Section 24, the same restriction long-term residential landlords have had since 2017.

• Profit on a jointly owned let could be split flexibly between owners. Now it follows beneficial ownership share, like any other jointly held property.

• Holiday let profit counted towards how much you could pay into a pension with tax relief. It no longer does.

• Losses could be set against your other income in some cases. Now they're locked inside your property business.

A fifth change covers what you can claim as expenses and capital allowances. That's a topic in its own right, so it has its own chapter: what you can claim now.

Mortgage interest: Section 24 now applies

This is the change most likely to push your bill up, and it's worth understanding exactly how it works, because the mechanics are not intuitive.

Until April 2025, you deducted 100% of your mortgage interest from your rental income before working out the profit you paid tax on. A holiday let with strong rent and a sizeable mortgage could show a modest taxable profit, even when the cash was healthy.

Under Section 24, you no longer deduct mortgage interest as an expense at all. Instead, your taxable profit is calculated as though the interest didn't exist, and then you get a separate 20% tax reducing relief based on the interest you paid. For a basic-rate taxpayer, the maths roughly nets out. For a higher-rate or additional-rate taxpayer, it doesn't, because you're taxed on a bigger profit figure and only handed relief at 20%.

There's a second sting. Because your taxable profit is now higher on paper, it can tip you into a higher tax band, reduce your personal allowance, or affect things like the High Income Child Benefit Charge, even though your actual cash position hasn't changed.

A worked illustration

The numbers below are round and hypothetical, chosen to show the mechanism rather than to predict your bill.

Say a holiday let brings in £20,000 of rent, has £5,000 of running costs, and £10,000 of mortgage interest in the year.

Under the old FHL rules, mortgage interest was just another expense:

• Income £20,000, less £5,000 costs, less £10,000 interest = £5,000 taxable profit

• For a higher-rate (40%) owner, tax of £2,000

Under Section 24, the interest comes out of the expenses and becomes a 20% reducer instead:

• Income £20,000, less £5,000 costs = £15,000 taxable profit (interest no longer deducted)

• Tax at 40% on £15,000 = £6,000

• Less the 20% relief on £10,000 interest = £2,000

• Tax due = £4,000

Same property, same rent, same mortgage. The higher-rate owner's bill has doubled, from £2,000 to £4,000, purely because of how the interest is now treated. A basic-rate owner in the same example would see little or no change, which is exactly why this lands hardest on higher and additional-rate owners. One detail worth knowing: the relief is 20% of your finance costs, or of your property profits if those are lower, so in a low-profit year the benefit can be smaller than 20% of the interest you paid.

Profit splitting on a jointly owned let

Plenty of holiday lets are owned jointly, between spouses, civil partners, family members or business partners. Under the old regime, because a qualifying holiday let was treated as a trade, the profit didn't have to follow the ownership shares. Couples could allocate more of the profit to whoever was the lower earner, which often shaved the overall tax bill.

That flexibility has gone. A holiday let is now treated like any other jointly owned residential property, so the income follows the rules that apply there.

For married couples and civil partners, jointly held property carries a 50/50 default for tax, regardless of the actual ownership split, unless you make a Form 17 declaration. Form 17 lets you be taxed on your real beneficial shares instead, for example 75/25, but only where two things are true: your beneficial interest in the property and in the income from it genuinely match those shares, and you can back it up with evidence such as a declaration of trust. It also takes effect from the date it's made, not the start of the tax year, and it has to reach HMRC within 60 days of signing to be valid.

For other co-owners who aren't married or in a civil partnership, you each report your share based on your actual beneficial ownership.

The practical upshot: the days of moving profit to a lower earner just because it suited the tax position are over. If the ownership split no longer matches your circumstances, fixing it now means changing the underlying beneficial ownership, not adjusting the figures on the return.

Pension contributions

This one catches people out because it's invisible until you look. The amount you can pay into a pension and get tax relief on is capped at your "relevant UK earnings" for the year (or £3,600 if that's higher). Things like employment income and trading profits count. Rental income normally doesn't.

Under the old regime, holiday let profit was an exception. Because the let was treated as a trade, the profit counted as relevant earnings, so a holiday let owner with little other income could use it to support tax-relieved pension contributions. From April 2025, holiday let profit no longer counts.

If you've been relying on holiday let income to underpin your pension contributions, it's worth a conversation with both a property tax adviser and a pension adviser, because the room you have to contribute with relief may now be smaller than you think.

Losses

If your holiday let made a loss, the old regime gave you more options for what to do with it. Now it works the way every other property business does: a loss is carried forward and set only against future profits of the same UK property business. You can't set a holiday let loss against your salary, your dividends or any other income.

There's a wrinkle worth flagging. Holiday let losses built up under the old regime were already ring-fenced to the FHL business specifically, separate from your ordinary lettings. On abolition, those properties fold into your single UK property business, and brought-forward losses generally carry into it, to be set against the future profits of that business.

What you can and can't claim

The other half of the picture is expenses and capital allowances, and this is where holiday let owners hit the most confusion. The headline is that capital allowances on furnishings and fittings have gone, and a different, narrower relief applies instead. There's a clear line now between the repairs you can still deduct and the upgrades you can't.

It's enough material to deserve its own chapter, so rather than squeeze it in here, read what you can claim on a holiday let now for the full detail, including the revenue-versus-capital breakdown.

If you're weighing up whether to keep the property at all now the reliefs have gone, that's a separate decision, covered in sell, hold, or incorporate.

Watch: the FHL tax changes explained

In this episode of The Property Tax Show, Nadeem and James break down what the abolition means in practice and where owners are getting caught out.

Getting your first non-FHL return right

The 2025/26 return is the first one most holiday let owners will file without holiday let status, and the four changes above all surface on it at once: a higher taxable profit from Section 24, income that has to follow ownership shares, a pension figure that no longer includes the let, and losses that can only go one place. None of it is impossible to get right. It just has to be got right, because the figures interact and HMRC can unpick a return that doesn't add up.

For how to record any of this in Provestor, see the help centre's guidance on mortgage interest and finance costs. If you'd rather hand the whole thing over, the option below routes you to a specialist who does property returns every day.

Frequently asked questions

How much tax do you pay on a holiday let now?

Holiday let profit is taxed as standard residential property income at your marginal rate. The main difference from the old regime is mortgage interest, which now gives a 20% basic-rate tax reducer under Section 24 rather than a full deduction, so higher-rate owners pay more on the same rent.

Can you still claim mortgage interest on a holiday let?

Not as a deduction. Since April 2025, finance costs give a 20% tax reducer instead, calculated on the lower of your finance costs or your property profits. Higher-rate and additional-rate owners feel this most.

Can holiday let owners still split profits flexibly?

No. Income now follows beneficial ownership shares. Married couples and civil partners default to a 50/50 split unless a Form 17 declaration reflects unequal beneficial shares.

Does holiday let income still count towards pension contributions?

No. From April 2025 it no longer counts as relevant UK earnings, so it cannot support tax-relieved pension contributions on its own.