Holiday Let: Continue vs Convert to AST vs Sell

You bought a holiday let for income, flexibility and tax perks. From April 2025 those FHL perks are gone, so in 2026 you are really choosing between running a standard short-let business, switching to an AST, or cashing in and getting out.

The decision in one line

If your cottage is in a top Cornwall spot and still clears a strong net profit after the new tax rules, continuing as a holiday let can still work.

If your numbers are marginal and the AST market is solid, a long-term let or a sale often beats running a seasonal hospitality business with worse tax.

Snapshot: continue vs convert to AST vs sell (Cornwall 3-bed)

Assume the example property: 3-bed Cornwall cottage, value GBP 350,000, mortgage GBP 200,000 interest-only at 5% (GBP 10,000/year).

Worked example: Cornwall 3-bed cottage

Baseline

• Value: GBP 350,000.
• Mortgage: GBP 200,000 at 5% interest-only = GBP 10,000/year interest.
• Holiday let: GBP 25,000/year gross bookings, consistent with Cornwall 3-bed averages around GBP 24,700+.
• AST: GBP 14,000/year (GBP 1,165/month).

We will ignore NIC and personal allowances so you can see pure marginal effects.

Option 1: Continue as holiday let under new rules

Post-abolition, from April 2025:

• Holiday let income taxed under standard property rules.
• Finance cost restriction applies: you get only a 20% credit for interest.
• No capital allowances on furniture/equipment, only replacement of domestic items.
• No FHL-specific CGT reliefs (no BADR, no rollover) on future sale.

Assume:

• Gross: GBP 25,000.
• Operating costs (cleaning, linen, utilities, marketing, commission, maintenance, council tax / business rates): roughly GBP 11,000.

Property profit before interest: 25,000 - 11,000 = GBP 14,000.

Interest: GBP 10,000.

For tax:

• Taxable profit (standard property rule) = GBP 14,000.
• Section 24 credit = 20% x 10,000 = GBP 2,000 off the tax bill.

Cash profit before tax is still: 25,000 - 11,000 - 10,000 = GBP 4,000.

Now apply three tax bands.

Basic-rate (20%):

• Income tax = 20% x 14,000 = GBP 2,800.
• Less Section 24 credit (2,000) = net tax GBP 800.
• Cash after tax = 4,000 - 800 = GBP 3,200.

Higher-rate (40%):

• Income tax = 40% x 14,000 = GBP 5,600.
• Less 2,000 credit = GBP 3,600 tax.
• Cash after tax = 4,000 - 3,600 = GBP 400.

Additional-rate (45%):

• Income tax = 45% x 14,000 = GBP 6,300.
• Less 2,000 credit = GBP 4,300 tax.
• Cash after tax = 4,000 - 4,300 = -GBP 300.

So:

• At basic rate, you still net about GBP 3,200/year after tax.
• At higher rate, you barely break even at GBP 400/year.
• At additional rate, you are losing money after tax.

Pre-abolition, full interest deduction and capital allowances made those numbers much better. That is gone.

Option 2: Convert to AST

You ditch the holiday business and set up as a long-term let.

Assume:

• AST rent: GBP 14,000/year.
• Operating costs (repairs, insurance, letting fees, voids): GBP 3,000/year.

Property profit before interest: 14,000 - 3,000 = GBP 11,000.

Interest: GBP 10,000.

Cash profit before tax: 14,000 - 3,000 - 10,000 = GBP 1,000.

Tax (Section 24 still applies):

• Taxable profit: 11,000.
• Section 24 credit: 20% x 10,000 = GBP 2,000.

Basic-rate:

• Income tax = 20% x 11,000 = GBP 2,200.
• Less credit 2,000 = GBP 200 tax.
• Net cash = 1,000 - 200 = GBP 800.

Higher-rate:

• Tax = 40% x 11,000 = GBP 4,400 - 2,000 = GBP 2,400.
• Net cash = 1,000 - 2,400 = -GBP 1,400.

Additional-rate:

• Tax = 45% x 11,000 = GBP 4,950 - 2,000 = GBP 2,950.
• Net cash = 1,000 - 2,950 = -GBP 1,950.

So:

• At basic rate, AST gives about GBP 800/year after tax.
• At higher or additional rate, on this gearing, a personal AST loses money after tax.

The key is: AST knocks your gross down from 25k to 14k, but also slashes operating costs. The tax regime is the same as for the holiday let now; only the pre-tax profit and volatility differ.

Option 3: Sell

Assume:

• Current value: GBP 350,000.
• Original cost: GBP 260,000 (for example).
• Gain: GBP 90,000.

Post-FHL abolition, your sale is taxed like any other residential property:

• CGT rates: 18% in basic-rate band, 24% above it.
• No FHL Business Asset Disposal Relief or rollover relief for disposals after April 2025.

Rough CGT (higher-rate): Most or all of the GBP 90,000 gain at 24%: = GBP 21,600.

Costs:

• Selling fees, legal, etc: say GBP 6,000.
• Mortgage redemption: GBP 200,000.

Net proceeds: 350,000 - 200,000 - 21,600 - 6,000 = GBP 122,400.

You then reinvest, reduce other debts, or bank it. You also remove all future regulatory, seasonal and tax risk from this property.

Location-specific factors (Cornwall)

You should pull out what is unique to your Cornwall example:

Holiday demand:

• Cornwall remains one of the strongest UK holiday-let markets, with typical 3-beds averaging around GBP 24,700-31,000 gross, depending on location and management.
• Occupancy is heavily seasonal: high in summer, weaker shoulder seasons, low winters.

AST market:

• Local rents vary, but a good 3-bed can achieve mid GBP 900s to GBP 1,200/month depending on town.
• Demand for long-term rentals is strong in many Cornish towns due to chronic undersupply, but some areas are dominated by holiday use.

Sale price and buyer appetite:

• Second-home and investor demand keeps values up for good cottages, but political pressure is growing against holiday lets in some Cornish communities, which could affect future rules or sentiment.
• If your cottage is in Padstow, St Ives or similar, continued holiday letting may still make sense; if it is in a marginal or over-supplied area, the risk profile is worse.

Decision criteria to hammer

1. How dependent are you on this income now?

If you rely on the holiday let to fund living costs and you are higher-rate, the worked example shows your after-tax profit is collapsing, especially with debt.

If this is "nice to have" income and you can leave profits inside a company or do planning, you can afford to ride out volatility.

2. Do you actually use the property yourself?

If you and your family use the cottage heavily and you value that lifestyle, that is a strong argument for continuing as a holiday let, so long as it does not become a big cash drain.

If you never go there, treat it ruthlessly as a financial asset.

3. Location and bookings

If your booking calendar is consistently strong across the year and you are nearer the GBP 30-35k+ gross mark, sticking with holiday letting is more compelling.

If you struggle to hit GBP 20k gross or rely heavily on peak summer only, the AST equivalent or sale option looks stronger.

4. Mortgage level and tax band

High leverage + higher/additional-rate taxpayer = extreme Section 24 pain.

In the example, a higher-rate owner with a 200k mortgage on 25k gross holiday income nets only about GBP 400/year after tax, versus -GBP 1,400/year on an AST. At that point, selling or deleveraging is on the table.

5. Age and retirement horizon

If you are 10+ years from retirement, you can justify keeping and restructuring (e.g. via a company, other planning, or overpayments) if the location is good.

If you are close to retirement, locking in gains and simplifying life (AST or sell) often beats clinging to a complex, seasonal, low-margin business.

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