Short-Term Rentals and Holiday Lets: Investment Guide for 2026

The short-term rental market — holiday cottages, city break apartments, Airbnb listings — attracted enormous investor interest during the 2010s and early 2020s. Compelling gross yields, apparent tax advantages, and the accessibility of platforms like Airbnb and VRBO made short-term letting seem like a route to materially better returns than standard buy-to-let.

The landscape has changed significantly. The Furnished Holiday Letting (FHL) tax regime — which provided a suite of advantages — was abolished from April 2025. Market saturation has reduced occupancy rates in many popular areas. And a growing number of councils are introducing licensing or planning restrictions.

This guide provides an honest assessment of where the short-term rental opportunity stands in 2026.

The End of the FHL Regime (April 2025)

The Furnished Holiday Letting regime, which existed in UK tax law since 1982, provided significant advantages for properties that met specific occupation criteria (available for commercial letting for at least 210 days per year, actually let commercially for at least 105 days, not let to the same person for more than 31 consecutive days).

FHL advantages now lost (from April 2025):

1. Full mortgage interest deductibility: FHL properties could deduct 100% of mortgage interest as a business expense. Standard residential buy-to-let, under Section 24, is restricted to a 20% basic rate tax credit. For higher-rate taxpayers, this was a major advantage.

2. Capital allowances: FHL properties qualified for capital allowances on furnishings and equipment — tax relief unavailable on standard residential property.

3. Business Asset Disposal Relief (BADR): gains on FHL disposals could qualify for the 10% BADR CGT rate (versus 24% for residential property gains). This dramatically reduced the CGT on exit.

4. Pension contribution eligibility: FHL income counted as earnings for pension contribution purposes, enabling contributions to a SIPP up to the FHL income amount.

From April 2025, all these advantages are gone. Short-term lets are now taxed in exactly the same way as long-term residential lets:

• Mortgage interest restricted to 20% tax credit (Section 24 treatment)
• No capital allowances (replacement domestic items relief only)
• CGT at 24% for higher-rate taxpayers on disposal
• FHL income no longer counts as qualifying earnings for pension purposes

This is a fundamental change to the investment case for holiday lets held personally by UK taxpayers. Existing FHL investors who structured their business around these advantages need to reassess.

Gross Yield vs Net Yield Reality

Short-term rental proponents cite gross yields of 10–20%+ for well-located properties. The gap between gross and net is typically far wider than for standard buy-to-let.

Income drivers:

• Average daily rate (ADR): varies hugely by location, season, and property type
• Occupancy rate: 50–70% annual occupancy is realistic for most holiday locations; 70–80% is achievable for prime locations
• Revenue = ADR × occupied nights per year

Cost drivers for STR:

• Platform commission (Airbnb typically takes 3%; Booking.com 15–17%)
• Cleaning costs (£80–£200 per turnover, multiplied by number of stays per year)
• Property management (if used): 15–25% of gross revenue
• Linen, supplies, and small replacement items
• Higher insurance (specialist STR insurance)
• Higher maintenance (greater wear from frequent turnovers and varied guests)
• Council tax (where applicable) or business rates
• Void periods and pricing gaps between bookings
• Advertising and photography (ongoing costs)

A realistic example for a £350,000 coastal cottage:

• Gross revenue (60% occupancy at £150 ADR): £32,850
• Management, cleaning, platform fees: −£12,000
• Insurance, maintenance, utilities: −£4,000
• Mortgage (interest at 5%, 75% LTV): −£13,125 (now only 20% deductible as tax credit for higher-rate taxpayers)
• Net income before tax: ~£3,700
• After the Section 24 impact at 40% tax: effective net yield may be 1–2%

This illustrates that the headline gross yield of 9.4% translates to a net yield that is only marginally better — or potentially worse — than standard buy-to-let after all costs and the post-FHL tax position.

Market Saturation

The growth of Airbnb and similar platforms has been extraordinary. UK Airbnb listings reached approximately 250,000 by 2023. In popular coastal and rural destinations, the supply of short-term rentals now materially exceeds demand in shoulder and off-peak periods.

Indicators of saturation:

• Falling occupancy rates in many markets (2022–2024 data shows declining occupancy in Cornwall, the Lake District, and parts of Scotland)
• Increasing price competition — hosts are forced to reduce rates to maintain occupancy
• Growing negative reviews of "commercialised" villages where STR has crowded out residential tenants, leading to local authority action

Destinations that remain buoyant: prime London locations, Edinburgh during festival periods, and niche rural destinations with insufficient hotel supply retain strong STR demand. But even in strong markets, competition from new supply is ongoing.

Planning and Licensing Restrictions

The planning landscape for short-term lets is changing rapidly:

Scotland: Scotland introduced a licensing scheme for short-term lets in 2022. All operators must obtain a licence from their local council. The scheme varies by area — in Edinburgh, the council set a cap on the number of licences in some areas. Non-licensed operators face fines.

England: the government consulted on a registration scheme for STR in England in 2023. The scheme proceeds gradually. Planning reform proposals in 2024 included changes to permitted development rights that would require planning permission for new STR conversions in certain areas.

London: the 90-night rule (under the Deregulation Act 2015) limits STR of a primary residence in London to 90 nights per year without planning consent. Enforcement is inconsistent but growing.

Overseas destinations: Lisbon, Barcelona, Amsterdam, and other popular European cities have implemented severe STR restrictions — in some cases banning new Airbnb listings entirely. UK investors in overseas holiday lets should research the local regulatory position carefully before purchasing.

The Overseas Holiday Let Opportunity

Despite the abolition of the FHL regime for UK tax purposes, overseas holiday lets can still offer genuine returns — particularly in markets with strong, sustainable tourism demand and limited quality supply.

Portugal (excluding Lisbon): the Algarve retains strong UK visitor demand. Portugal's original Non-Habitual Resident (NHR) regime closed to new applicants from 1 January 2024 and was replaced by the IFICI incentive scheme (NHR 2.0); local taxation on rental income for UK investors requires specific professional review.

Spain: the Balearic and Canary islands attract year-round visitors. Municipal restrictions vary significantly — Mallorca has limited new STR licences in some municipalities.

Greece: Greek islands with limited hotel supply (Kefalonia, Paxos, Hydra) command premium STR rates for quality villas. Greek Airbnb regulation is evolving but less restrictive than other Mediterranean destinations.

Bali: extraordinary gross yields are achievable; see our dedicated Bali property guide for details on leasehold structures and currency considerations.

The currency return on overseas holiday lets can amplify or reduce sterling returns for UK investors. Euro and USD denominated revenues are favourable when sterling is weak; the reverse when sterling strengthens.

ATED Interaction for Corporate-Held Properties

For UK residential properties worth more than £500,000 held through companies (including those used for STR), the Annual Tax on Enveloped Dwellings (ATED) applies at rates scaled by property value. STR operators who use corporate structures to mitigate Section 24 should be aware that ATED relief is available for properties let to unconnected third parties on a commercial basis — but the conditions must be met and claimed each year.

Management Companies: Essential for Non-Resident Owners

Non-resident STR investors — including UK investors with overseas holiday lets and overseas investors with UK holiday lets — require a professional management company. Self-management from abroad is not practical for properties with frequent guest turnovers.

What to look for in an STR management company:

• Proven local track record (request occupancy and ADR data for comparable properties)
• Clear, transparent fee structure (flat percentage is cleaner than complex tiered arrangements)
• 24/7 guest support capability
• Professional photography and optimised listing management
• Clear reporting on income, expenses, and occupancy
• Transparent handling of cleaning, maintenance, and supply costs

How Global Investments Can Help

Global Investments advises clients on short-term rental investment as part of a broader international property strategy — helping investors understand the post-FHL tax position, evaluate specific markets, assess management options, and determine whether STR fits within their overall property and income objectives. For clients with existing FHL properties, we can help model the impact of the 2025 changes and consider restructuring options.

Property values and rental income can fall as well as rise. Returns are not guaranteed. Tax rules have changed and will change further. This article is for general information only and does not constitute financial or tax advice. Always seek qualified professional advice before investing in short-term rental properties.