A guide to holiday let taxes

As a holiday let landlord, or prospective holiday let property investor, it is important to be aware of the tax position for this area of the Private Rental Sector, especially since the tax position changed in April 2025.

This guide gives you the top points you need to be aware of, so that you can ask the right questions when seeking professional tax advice.

As mortgage brokers, our Commercial Trust team cannot give you tax advice, as it is a different area of expertise that we are not qualified in.

Tax in the private rental sector

In the past, holiday lets were automatically categorised as a business operation and taxed accordingly, but this changed in April 2025 and is the second area of the PRS to be targeted with tax changes in recent years.

When changes to mortgage interest tax relief were introduced for standard, long-term, rental properties, this led to large number of landlords incorporating to retain these tax benefits. 

Switching personally held property into a limited company means ‘selling’ the property from the existing legal entity (you) to the new legal entity (your company), so stamp duty is typically payable by the limited company (you). So, some landlords retained existing properties in personal name and only put new property they bought via a limited company.

Your personal tax position and investment plans influence which is the most cost effective outcome for you.

Whilst all this was going on, holiday lets skirted the issue, as they continued to be treated as business operations from the perspective of tax.

At a time when holidaying at home was driving demand and strong rents within the holiday let sector, this additional element of appeal (not having to incorporate to enjoy favourable tax benefits) also saw smart investors switch to this avenue of investment, or even convert formerly long-term lets into holiday lets to reap the rewards.

Key changes to furnished holiday let taxation

Under the Conservative government, Jeremy Hunt proposed changes to taxation within the holiday let sector, but the Labour government decided to continue with the proposed plans and delivered them, with April 2025 being the date for change.

The key changes were:

1. Mortgage interest tax relief: Pre-April 2025, holiday let owners could deduct the full amount of mortgage interest from their rental income. From April 2025, this was replaced with a 20% tax credit, aligning with the treatment for standard buy to let properties. 
2. Capital allowances: Pre-April 2025, holiday lets allowed for capital allowances on items like furniture and equipment. Post-April 2025, these are no longer available, and landlords can only claim relief under the 'replacement of domestic items' rules applicable to standard rentals. 
3. Capital Gains Tax (CGT) reliefs: Pre-April 2025, holiday let owners benefited from reliefs such as Business Asset Disposal Relief, which can reduce CGT to 10%. These reliefs were withdrawn, and standard CGT rates of 18% or 24% apply upon disposal. 
4. Pension contributions: Pre-April 2025, income from holiday lets was considered 'relevant UK earnings,' allowing for tax-advantaged pension contributions. This classification ended, removing the associated pension tax benefits.

Transitional measures

To ease the transition in the changes to tax rules the following steps were taken:

Existing Capital Allowances: Claims made before April 2025 were able to continue under the previous rules.

Losses:Losses from holiday lets could be carried forward and offset against future profits from the owner's overall UK or overseas property business. 

Anti-Forestalling rule: An anti-forestalling rule has been in effect since 6 March 2024 to prevent taxpayers from obtaining a tax advantage through the use of unconditional contracts to obtain capital gains relief under the pre-April 2025 holiday let tax rules. 

Are holiday lets still worth investing in?

Holiday lets are still well known for their high yields. Imagine the price you pay for a week in a holiday let, multiply that by four and think about how that might compare to a standard monthly rental income. 

Admittedly, there is a high, medium and low season for rents in this sector but, nonetheless, the rental peaks typically far outweigh the troughs. For this reason, regardless of the tax changes, you could enjoy a highly profitable outcome. 

It is a matter of getting the right tax advice, planning your costs and rental charges appropriately (whilst making sure you remain competitive for your geographic area and property type) and – if you are borrowing to buy your property, getting the right holiday let mortgage advice. 

Mortgage advice is what our team are here for, so once you have an offer accepted on the property you want to buy, call us or enquire online.