Organisers of the pageant decided to "dethrone" her as they felt Zara is no longer a positive role model because of her antics on the ITV2 show.
But Love Island host Caroline isn't impressed.
Caroline tweeted: "Feel even more sorry for Zara now she's been decrowned. She's a very sweet girl. What even is 'Miss GB'? Are we living in the dark ages?"
She also retweeted a follower who said: "Surely the 'role model' should be how Miss GB handles her mistakes. Not to be punished for making them."
A statement from Miss Great Britain Organisation read: "Following recent actions within the ITV2 show Love Island, it was with deep regret that we, the Miss Great Britain Organisation, have to announce that Zara Holland has formally been de-crowned as Miss Great Britain 2015/16.
"As an organisation we have not taken this decision lightly, we are close to all of our winners and wherever possible stand by them during their reign. That said, we feel we have no choice but to make this decision under the current circumstances.
"Although Miss Great Britain is the oldest pageant system in the UK, we pride ourselves on promoting the positivity of pageants in modern society and this includes the promotion of a strong, positive female role model in our winners.
"The feedback we have received from pageant insiders and members of the general public is such that we cannot promote Zara as a positive role model moving forward.
"We wholly understand that everyone makes mistakes, but Zara, as an ambassador for Miss Great Britain, simply did not uphold the responsibility expected of the title.
"We will meet with Zara upon her return to the UK to fully explain our decision and wish her the very best going forward."
The statement was posted to Miss Great Britain's official Twitter alongside, alongside a message that read: "To be clear we have no problem at all with sex - it is perfectly natural. We simply can't condone what happened on national TV."
The Miss Great Britain title has now passed to runner-up Deone Robertson.
Love Island viewers saw Zara spend the night with Alex Bowen earlier this week, although she later admitted she regretted doing the deed because she wanted to couple up with Adam instead.
"Alex and I got to know one another. Putting it in so many words. You know when you're in the moment and it just happens. That's really not like me at all," she confessed the next day.
"Why couldn't we have just gone to sleep? I'm really disappointed. It's my own fault though. I can't blame anyone else for my own actions. What's done is done, but it isn't like me that's what I'm trying to say. This is so out of character for me to do anything like this. I shouldn't have done it, I shouldn't have. I've probably ruined everything with Adam as well, which is more annoying."
Love Island airs nightly on ITV2.
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