Taxation of UK Holiday Rental Businesses
Revenue and capital expenditure — what is deductible, what is not, and why the distinction matters more than ever.
Important — Regime Change
The Furnished Holiday Lettings (FHL) regime was abolished on 6 April 2025. Holiday rental properties are now taxed as ordinary residential property letting businesses. Several significant tax advantages have been lost as a result. This note reflects the law as it stands for 2025–26 and beyond.
Prior to 6 April 2025, holiday lets that met the qualifying conditions under the Furnished Holiday Lettings rules enjoyed a suite of tax advantages unavailable to ordinary residential landlords — including capital allowances on furniture and equipment, the ability to offset losses against general income, and access to Capital Gains Tax reliefs including Business Asset Disposal Relief. All of those advantages ended when the FHL regime was repealed. For tax purposes, your holiday let is now treated in the same way as any buy-to-let residential property. The core question — what expenditure can be deducted against rental income, and what must instead be treated as capital — therefore governs the tax position entirely.
Revenue Expenditure
What Is Allowable Against Rental Income
Expenditure is deductible as a revenue expense where it is incurred wholly and exclusively for the purposes of the letting business, and where it is of a recurring, maintenance, or operational nature — as opposed to one that creates a lasting asset or improvement to the property.
Principle
Revenue expenditure restores or maintains the property in its existing state. Capital expenditure creates, improves, or enhances it. The distinction is a question of fact and degree in every case.
Operational and letting costs
Repairs and maintenance
Expenditure on repairing the property — restoring it to its original condition without adding anything new — is a revenue expense deductible in the year it is incurred. This includes redecoration, re-pointing brickwork, fixing plumbing leaks, replacing a failed boiler with an equivalent model, and mending structural defects that existed before acquisition.
HMRC applies the "entirety" test: the question is what constitutes the asset being repaired. Replacing a roof is a repair to the property as a whole, even though it replaces the entire roof structure. Context matters, and professional judgement is often required.
Pre-trading expenditure
Expenditure incurred before the property first becomes available to let — but within seven years of that date — may be treated as if it were incurred on the first day of letting, provided it would have been deductible had the business already been trading.
Replacement Domestic Items Relief
Furnished Properties — The Replacement Rule
The initial cost of furnishing a holiday let is a capital expense and is not deductible against income. However, the cost of replacing domestic items is relievable under the Replacement Domestic Items Relief (RDIR) introduced at s311A–311E ITTOIA 2005. This is the mechanism that has largely replaced capital allowances following the abolition of the FHL regime.
Where the replacement item is superior to the old one — a more expensive sofa with new features, or an upgraded appliance — only the cost of a like-for-like equivalent is relievable. The additional expenditure attributable to the improvement is capital and not deductible.
What RDIR covers
Moveable furniture (sofas, beds, tables, chairs), appliances (washing machines, dishwashers, televisions), kitchenware, curtains and blinds, carpets and flooring, and bed linen. The item must be a domestic item, not a fixture.
What RDIR does not cover
The initial purchase when first letting the property. Fixtures integral to the building (baths, boilers, fitted kitchens as a structure). Any element of the replacement that constitutes an improvement beyond the original standard.
Finance Costs
Mortgage Interest — The Basic Rate Restriction
The practical consequence is that the gross rental income figure is higher than the net profit figure, and tax is computed accordingly before the 20% credit is applied. For landlords with significant mortgage debt, this can produce a tax liability even where the economic profit is modest.
Finance costs on loans used to purchase or improve a residential property are no longer deductible as an expense for individual landlords. Instead, under the rules in s274A ITTOIA 2005 (the "finance cost restriction" introduced in stages from 2017–20), mortgage interest and other finance charges are relieved as a 20% tax credit against the income tax liability. This means higher-rate and additional-rate taxpayers receive less than full relief. Companies are not subject to this restriction and continue to deduct finance costs in full.
Capital Expenditure
What Goes to the Capital Account
Capital expenditure is not deductible against rental income in the year it is incurred. Instead, it is added to the base cost of the property and is relevant only for Capital Gains Tax purposes when the property is eventually sold.
The following categories are unambiguously capital:
Capital allowances — significantly curtailed
Capital allowances on plant and machinery (the Annual Investment Allowance and Writing Down Allowances) are no longer available for holiday lets following the abolition of the FHL regime. They were a major benefit of the old regime and their loss is a significant disadvantage for owners who have invested heavily in equipment and furnishings. RDIR on replacement domestic items partially compensates but does not provide relief for the initial outlay.
Capital allowances may still apply in narrow circumstances — for example, where a property functions in part as a commercial unit, or where expenditure relates to a separate commercial structure. These cases are uncommon and require individual assessment.
The Critical Distinction
Repair or Improvement? Common Scenarios
The distinction between a revenue repair and a capital improvement is frequently the most contested area in a property letting context. The following table illustrates how the same type of work can fall on either side of the line depending on what is actually done.
Revenue — Repair
- Restores to its former condition
- Like-for-like replacement of function
- No new capability or material enhancement
- Addresses wear, damage, or deterioration
Capital — Improvement
- Goes beyond restoring former condition
- Adds something previously absent
- Materially enhances value or standard
- Creates a new or substantially different asset
| Expenditure | Treatment | Reason |
|---|---|---|
| Replacing a failed boiler with equivalent model | Revenue | Like-for-like repair |
| Upgrading to a new combi system with additional capacity | Split | Repair element revenue; improvement capital |
| Repainting interior rooms | Revenue | Maintenance and decoration |
| Replacing single glazing with double glazing | Capital | Enhancement beyond prior standard |
| Replacing fitted kitchen (same quality, same layout) | Revenue | Like-for-like restoration |
| Extending kitchen and fitting new units | Capital | New asset — structural enlargement |
| Replacing carpets (same quality) | Revenue / RDIR | Maintenance; RDIR applies on replacement |
| Installing a hot tub | Capital | New asset not previously present |
| Re-pointing external brickwork | Revenue | Structural repair; no enhancement |
| Adding an external decking area | Capital | New feature — enhancing expenditure |
| Repairing a section of roof after storm damage | Revenue | Repair to part of the whole |
| Replacing entire roof with an upgraded specification | Split | Repair element revenue; specification uplift capital |
Where expenditure falls partly on each side — as in several examples above — the cost should be apportioned between its revenue and capital elements on a just and reasonable basis. Professional advice should be sought before submitting returns in contested cases.
Practical Guidance
Record-Keeping and Points to Watch
The burden of establishing that an expense is deductible rests with the taxpayer. Good records are therefore not optional — they are the foundation of a defensible position on enquiry.
Recommended practice
Keep receipts for all expenditure, including photographs of work done where the revenue vs capital distinction is not immediately obvious. Note the condition before and after any significant work. Classify at the point of incurring rather than at year-end. Separate invoices wherever work spans both revenue and capital elements.
Finance cost restriction: Deserves particular attention in financial projections. Owners operating with significant leverage who have not modelled the 20% credit effect (rather than full deduction) may find tax liabilities materially higher than expected.
Losses: Can no longer be offset against general income; they are ring-fenced within the property letting business and carried forward against future property income only. This is a significant change from the FHL position, where trading loss relief gave much greater flexibility.
CGT on disposal: Is now taxed at residential property rates (18% or 24% for 2025–26), not the 10% Business Asset Disposal Relief rate that formerly applied to qualifying FHLs. The base cost calculation — including all capital expenditure properly classified — is therefore more important than ever, as it directly reduces the gain on sale.
Smallbutcool Chartered Accountants — This guide is provided for general guidance only and does not constitute advice for any specific transaction. The law is stated as at September 2026. Clients should seek advice on their individual circumstances before taking action.
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