A Holiday Letting Guide to Understanding Tax

Owning a holiday home in Dorset can be rewarding, whether you’re welcoming guests to the Jurassic Coast, generating additional income or creating a long-term lifestyle investment. But holiday let tax rules have changed significantly nationally and for Dorset.

If you’ve owned a furnished holiday let for a while, or you’re considering entering the market, it’s important to understand that the previous Furnished Holiday Lettings (FHL) tax regime no longer applies. Since April 2025, holiday lets are generally taxed in line with other residential rental properties.

Read the Dream Cottages guide to what Dorset holiday homeowners need to know.

The Biggest Change: Furnished Holiday Let Tax Rules Have Ended

For many years, qualifying holiday lets benefited from special tax treatment that made them more advantageous than standard residential rentals.

However, from 6 April 2025 (Income Tax and Capital Gains Tax) and 1 April 2025 (Corporation Tax), the government abolished the Furnished Holiday Lettings regime.

This means holiday lets are now generally treated as part of a standard UK property rental business for tax purposes. The change applies whether your property is in Weymouth, Swanage, Lyme Regis, Bridport or elsewhere across Dorset.

How Holiday Let Income Is Taxed Now

Income generated from your holiday property is generally treated as property income.

You’ll still declare rental income through your normal tax reporting process, but some of the previous FHL-specific tax advantages are no longer available. Always keep detailed records and receipts to support claims. Your taxable profit is usually calculated by:

Rental income – allowable running expenses = Taxable property profit

Allowable expenses may still include items such as:

• Cleaning and housekeeping
• Repairs and maintenance (not improvements)
• Advertising and marketing
• Insurance
• Utilities
• Management and booking fees
• Professional services related to operating the property.

Mortgage Interest Relief Has Changed

One of the most significant changes affects finance costs. Under the previous FHL rules, many owners could deduct mortgage interest more favourably.

Today, holiday lets generally follow the same finance cost restriction rules as residential rental property. For many individual owners, mortgage interest relief is now limited to the standard residential property rules rather than being fully deductible against profits.

If your holiday let is financed, reviewing projected returns with an adviser may be worthwhile.

Capital Allowances and Furniture Rules

Another major change is how expenditure on furnishings and equipment is treated. Previously, qualifying furnished holiday lets could claim capital allowances on certain items.

Now, holiday let owners generally move to the same treatment as residential landlords, meaning replacement relief for domestic items may apply instead of the old capital allowance approach. If you’re planning a refurbishment or upgrade programme, timing and classification of expenditure can make a difference.

Do holiday lets still need to meet occupancy thresholds?

The previous Furnished Holiday Let (FHL) occupancy tests (210 days available and 105 days let) no longer apply for tax qualification purposes following the abolition of the FHL regime in April 2025. Holiday let income is now generally taxed under standard residential property income rules.

However, owners may still encounter separate occupancy or availability requirements for other purposes, such as business rates eligibility, planning controls, mortgage conditions or local authority requirements.

Selling Your Holiday Home: Capital Gains Tax Considerations

Historically, furnished holiday lets could access certain Capital Gains Tax reliefs designed for trading businesses. Those FHL-specific reliefs are no longer available for disposals after the rule changes.

If selling your Dorset holiday property is part of your medium-term plan, it’s worth taking advice before listing your property to understand the potential tax implications and any transitional rules that may still apply.

Business Rates and Council Tax

Business rates and council tax rules remain separate from the abolition of the FHL regime. If your holiday property qualifies for business rates rather than council tax, eligibility conditions continue to operate independently of the income tax changes.

A holiday let in Dorset may be assessed for business rates instead of council tax if it meets the English self-catering accommodation criteria. To qualify, the property must:

• Have been available to let commercially for short stays for at least 140 nights in the last 12 months
• Have actually been let commercially for at least 70 nights in the last 12 months
• And be intended to remain available for at least 140 nights in the next 12 months.

If those conditions are met, the Valuation Office Agency (VOA) may place the property into business rates rather than council tax.

A few important details for Dorset owners:

• Being available for 140 days alone is not enough, you must also meet the 70 days actually let requirement.
• As mentioned above, you are not automatically moved from council tax to business rates, the VOA decides the classification.
• If eligible for business rates, some owners may qualify for Small Business Rate Relief, depending on rateable value and circumstances.
• Dorset Council notes that properties will generally remain on council tax initially until the qualifying conditions are met and reassessed.

The Valuations Office sets the rateable value and business rates are charged accordingly.

Find out more about Holiday Letting in Dorset

For many Dorset owners, holiday letting still offers flexibility, lifestyle benefits and income potential—but understanding the updated tax position is now more important than ever.

If you would like to discuss any of the above with our knowledgeable new property team or owner relations team, we’d love to be able to guide you in talking to the right people.

Get in touch with Dream Cottages today and talk to Dorset’s leading holiday letting agents.

Please Note: The information contained in this article was accurate at the time of writing, based on our research. Rules, criteria and regulations change all the time, so please contact our prospective new owner team if you’d like to hear how. Nothing in this article constitutes the giving of financial, tax or legal advice to you; please consult your own professional advisor (accountant, lawyer etc). in this regard. If we have referred within the article to a third-party provider of unregulated holiday let mortgages, this is due to the fact that such mortgages aren’t currently regulated by the FCA. 

As a helpful reminder, your home may be repossessed if you do not keep up repayments on a mortgage, so again anything you decide to do in this particular area this is one on which you should take your own professional advice on too, as we aren’t providing and can’t provide you with this.