Yes, in such a case, an employee is entitled to either take the holidays or payment in lieu of the holiday days. I would imagine a combination is also reasonable.
I found that answer at Directgov, the website of the UK government. Specifically see Taking your holiday: Directgov - Employment. Here's the relevant excerpt:
When you leave your job
When you leave a job - for whatever
reason - you can take the statutory
holiday entitlement that you have
accrued up to the time you leave
during your notice period, as long as
you give the right notice and your
employer agrees.
You also have the right to be paid for
any untaken statutory holiday
entitlement that you have accrued.
[emphasis mine]
I also found another good reference at Adviceguide - Employment In England - Holidays and holiday pay. It goes a little deeper:
Leaving your job
If you have not been able to take all
the holiday you have built up before
your job ends, you have the right to
pay instead of the untaken holiday.
Your employer should pay you for all
the holiday you have built up. If you
have an agreement with your employer,
which says how much pay you will get
instead of untaken holiday, you may
get the amount in this agreement. If
your agreement with your employer does
not say how much pay you should get,
the rules on how much pay you should
get for untaken holiday are
complicated and you should seek
further advice.
If your employer refuses to pay you for untaken holiday
Your employer may refuse to pay you
for untaken holiday if you are leaving
or have left your job. If you are in
this situation you can enforce your
right to pay for untaken holiday at an
employment tribunal. If you are in
this situation you may have to raise a
written grievance with your employer
first. [...]
I hope that answers your question.