Former FHL income pulled inside s272A from 6 April 2025: what changed for higher-rate landlords

The Finance (No. 2) Act 2024 abolished the furnished holiday lettings (FHL) tax regime with effect from 6 April 2025 for income tax and capital gains tax, and 1 April 2025 for corporation tax. Income that used to sit inside the FHL "trade" rules now falls into the ordinary UK property business — which means s272A ITTOIA 2005 applies for the first time, and mortgage interest relief drops to a basic-rate tax credit.

For a higher-rate FHL owner with a typical £150,000 interest-only mortgage at the Bank of England 75% LTV 5-year quoted rate of 4.32% (April 2026), the change costs £1,296 a year in lost relief on the interest line alone. This piece walks through the mechanism, the worked numbers, and the wider knock-ons.

This is general information, not advice. The mechanism is technical and interacts with personal allowance, dividend stack, pension contributions and CGT reliefs in ways that depend on individual circumstances. Speak to a qualified adviser before acting.

What the FHL regime did before April 2025

Until 5 April 2025, a property let on a short-term, fully-furnished basis that met the FHL qualifying tests in Part 3 Chapter 6 ITTOIA 2005 (and Part 4 Chapter 6 CTA 2010 for companies) was treated as a trade for several specific tax purposes. The qualifying tests, broadly:

• Availability: available for commercial letting as holiday accommodation for at least 210 days in the tax year.
• Letting: actually let commercially as holiday accommodation for at least 105 days.
• Pattern of occupation: any single letting longer than 31 days, taken in total, must not exceed 155 days in the year.
• Furnished, in the UK or EEA, and let commercially with a view to profit.

If the tests were met, the income was reported on the FHL pages of the tax return and the property was treated as a trade for these specific purposes:

The FHL regime had been in HMRC's published Property Income Manual at PIM4100 onwards for decades and was the subject of repeated review (Office of Tax Simplification, 2022; Spring Budget 2024 announcement).

What F(No.2)A 2024 changed

The Finance (No. 2) Act 2024 repealed the FHL regime in its entirety. The relevant statutory hooks were removed from ITTOIA 2005, CTA 2010, TCGA 1992 and CAA 2001. From 6 April 2025 (1 April 2025 for companies), income that previously qualified for FHL treatment is taxed as part of the property owner's ordinary UK property business.

The single largest cash-flow consequence for owners with leveraged FHLs is that section 272A ITTOIA 2005 — the "tenant tax" finance-cost restriction introduced for ordinary buy-to-let between 2017 and 2020 — now applies to former FHL income for the first time. Mortgage interest, arrangement fees amortised over the loan term and any other "costs of a financial nature" stop being a deduction against rental profit and become a basic-rate (20%) tax credit against the income tax bill instead.

The mechanism matters because the deduction and the credit move different tax bills:

• A deduction reduces taxable rental profit pound for pound. For a higher-rate taxpayer that is worth 40p in the pound; for an additional-rate taxpayer 45p.
• A 20% credit is worth 20p in the pound for everyone, applied after the tax on the gross rental profit has been computed.

For a basic-rate taxpayer the two reliefs are numerically identical. For a higher-rate or additional-rate taxpayer the gap is the headline cost of the abolition on the interest line.

Worked example — £150,000 interest-only mortgage at 4.32%

Using the Bank of England's published average quoted rate for 75% LTV 5-year fixes in April 2026 (4.32%), a £150,000 interest-only mortgage costs £6,480 a year in interest. That sits inside the typical price band for a holiday cottage in the post-2025 classic FHL belt: 2025 Land Registry transactions average £247,000 in TR14 (Camborne, Cornwall), £286,000 in LA9 (Kendal, Lake District) and £270,000 in LL30 (Llandudno, North Wales). A £200,000 purchase with a 75% LTV interest-only loan is the canonical worked example.

A higher-rate FHL owner sees the cost of carrying the mortgage rise by £1,296 a year — not because the contractual interest changed, but because the gross rental profit reported to HMRC is now £6,480 higher, taxed at the marginal rate, then partially clawed back via the 20% credit.

The headline figure scales linearly with the loan: a £300,000 interest-only mortgage at the same rate would cost a higher-rate owner an extra £2,592 a year of lost relief; a £75,000 mortgage, £648. The arithmetic is the same — the loss is 20% of the interest figure for higher-rate and 25% for additional-rate taxpayers.

Why the gross rental profit calculation matters more than it looks

The s272A mechanism does not just change the £ figure of relief. It changes the gross figure that other tax rules look at. Two of the most consequential knock-ons:

1. Personal allowance taper. The £100,000 income-tax cliff begins to bite at adjusted net income of £100,000, and the allowance is fully withdrawn by £125,140. Because s272A re-routes mortgage interest from a deduction (which would have reduced adjusted net income) to a credit (which doesn't), an FHL owner with employment or trading income near £100,000 can find that abolition both costs them the headline £1,296 and pushes some of their employment income through the 60% effective rate band created by the taper. The interaction is set out at HMRC's Personal Income Manual PIM3320 and explored in the Section 24 personal-allowance taper piece on Homecost.

1. High Income Child Benefit Charge (HICBC). The HICBC threshold rose to £60,000 of adjusted net income with full taper by £80,000 from 6 April 2024 (F(No.2)A 2024 s.13). The s272A interaction is the same shape: gross rental profit before interest now feeds into adjusted net income, so an FHL owner with a working partner near the threshold can find a child benefit clawback they did not have under the FHL regime.

These are not new risks — they have applied to ordinary buy-to-let owners since the 2017-2020 phase-in — but they are new for former FHL owners.

Capital allowances, CGT and pensions: the other parts of the FHL package

Mortgage-interest relief is the headline change but it is not the only one.

• Capital allowances. Under the FHL regime, plant and machinery allowances (mostly the Annual Investment Allowance) could be claimed on integral features and qualifying furnishings inside the property. From 6 April 2025, new expenditure on furnishings and equipment in a former FHL falls into the ordinary property business rules, where only replacement of domestic items relief (s311A ITTOIA 2005) is available. Existing pools continue under the transitional rules at HMRC's transition policy paper; written-down value is carried forward and allowances continue on it but no fresh AIA is available.
• CGT business reliefs. Under the FHL regime, BADR (Business Asset Disposal Relief — formerly Entrepreneurs' Relief), rollover relief and gift hold-over relief were potentially available on disposal. From 6 April 2025 they are not. Transitional rules at the policy paper allow a disposal to qualify for BADR if the FHL conditions were met up to cessation of the qualifying activity (i.e. up to 5 April 2025) and the disposal occurs within the normal three-year post-cessation window — but only on the pre-cessation gain. This is detailed and adviser-territory; the HMRC paper sets out the rule but the application is fact-specific.
• Pension contributions. FHL profits no longer count as "relevant UK earnings" for personal pension contribution caps from 6 April 2025. The £60,000 annual allowance still applies; the constraint is the lower of 100% of relevant UK earnings and the annual allowance, so an owner whose only earned income was FHL profits will see the contribution ceiling fall to the basic £3,600 gross floor unless they have other relevant earnings.

The combined effect — mortgage relief, capital allowances, pension headroom, CGT reliefs — is what made the FHL regime attractive enough to support a roughly £200k-£500k holiday cottage as a viable leveraged investment. The abolition removes the four most material reliefs in a single step.

Commencement and transitional anti-forestalling

The commencement dates are:

• Income tax and CGT: 6 April 2025
• Corporation tax: 1 April 2025

F(No.2)A 2024 also contains an anti-forestalling rule for CGT, with effect from the Spring Budget announcement on 6 March 2024: unconditional contracts entered into before 6 March 2024 are protected, but conditional contracts and contracts entered into between 6 March 2024 and 5 April 2025 with completion after 6 April 2025 are caught by anti-forestalling unless the parties can demonstrate the contract was not entered into to lock in the pre-abolition CGT treatment. The HMRC policy paper sets out the test in detail.

There is also a loss treatment transitional rule: FHL losses brought forward at 5 April 2025 can be used against future profits of the same UK or overseas property business (no longer ring-fenced to the FHL activity, which is the helpful side of the change).

How to model the cash impact on your own portfolio

The simplest way to size the impact is to take the current interest-only annual cost on the FHL mortgage, multiply by either 20% (for a higher-rate owner) or 25% (for an additional-rate owner), and add that to the post-2025 tax bill on the property. That gives the recurring annual cost of the s272A change on the interest line. A £150,000 mortgage on a typical £200,000 holiday cottage at the current BoE 75LTV5Y rate plays through to the worked-example table above; you can sense-check the underlying mortgage figure for your own loan and rate at the Homecost mortgage calculator.

To compare the cost stack with running the same property through a limited company, where the s272A restriction does not apply but corporation tax and dividend tax replace personal income tax, the corporate vs personal buy-to-let cost stack on Homecost sets out the line items. Incorporation has its own SDLT and CGT consequences — a sibling explainer on s162 TCGA 1992 incorporation relief walks through the mechanics. And the same s272A border applies to early repayment charges on buy-to-let mortgages, covered in ERCs on buy-to-let mortgages.

For a complete view of the surrounding tax stack, the Cost Intelligence guides on Homecost cover the related buy-to-let, mortgage and SDLT topics.

This is general information, not advice. The FHL abolition and the s272A mechanism interact with personal allowance, dividend stack, pension annual allowance and CGT reliefs in ways that depend on individual circumstances. Speak to a qualified adviser before acting.

Based on HM Land Registry pp-complete 2025 transactions (190,000+ in the postcode areas cited above), the Bank of England's published quoted mortgage rate file (April 2026 print) and HMRC's Property Income Manual. Data accessed June 2026.