Chancellor Targets Furnished Holiday Lets

The dust is settling on last week’s budget announcements, some of which were the UK’s worst-kept secret, whilst others were largely anticipated. Few were surprised by the Chancellor’s changes to tax rules and allowances on short-term holiday lets which have benefitted from preferential tax treatment until now.

How big is the second homes problem?

Part of the problem is that no one really knows. In 2022, HMRC estimated the UK to have around 270,000 second homes. This figure included properties managed by online operators for short-term lets such as Airbnb. However, owing to the incidence of informal arrangements on the one hand, and listings across multiple platforms on the other, plus privately owned holiday homes, it’s difficult to gain an accurate figure.

Unofficial estimates suggest there could be as many as half a million second properties, excluding buy-to-let residences in the UK. Sticking with the 270,000 figure, however, this represented around 6% of the private rental sector in 2022.

Localised impact

By their very nature, second properties are concentrated in coastal and rural areas and where again, by nature of geoeconomics, are in areas where the major employment opportunities are within relatively low-paid services where seasonal work, part-time and zero-hours contracts prevail.

The Pandemic effect

The Pandemic created a rush to buy property in the country’s picturesque and more remote areas. This has pushed house prices up beyond the reach of local families and young people whose wages can never keep up with wealthy outsiders looking for a weekend bolt-hole, or a permanent bid for a better quality of life.

A popular move, politically speaking

Politically speaking, targeting tax breaks for what could be seen as the wealthy few who have more homes than they can possibly live in, will be a popular move.

However, as we discussed in our previous blog on this topic, not all FHLs are spare homes but are businesses.

Can I run a furnished holiday let as a business?

Tourism industry fallout

Many holiday rental and tourism business owners will feel aggrieved that the sector has been tarred with the same brush as wealthy second-home-owning individuals. Soaring operating costs and a very competitive market are squeezing profit margins to the extreme, while budget-conscious travellers are taking fewer and shorter breaks.

What’s happening?

The Furnished Holiday Lettings tax regime will be abolished from April 2025. This means landlords who currently let out short-term furnished holiday properties will lose their tax advantages compared to landlords who let out private residential properties for longer-term tenancies.

Target 1: Tax relief on furnishings and home kit. Owners of FHL will lose tax relief on the cost of furnishing and kitting out their properties from April 2025.
Target 2: Stamp Duty Land Tax and Multiple Dwellings Relief. The Chancellor has abolished Stamp Duty Land Tax relief (SDLT) known as Multiple Dwellings Relief (MDR) from April 2025. This tax relief scheme was originally introduced to encourage the bulk purchase of homes as rental property, however, the loophole that included FHL was never closed, until now.
Target 3: Mortgage interest relief and CGT rollover relief. Currently, FHL landlords can deduct the full cost of their mortgage interest payments from their rental income. Landlords are entitled to capital allowances on the furniture, pay lower capital gains tax (CGT) when they sell and can claim CGT rollover relief.
Target 4: Local powers regarding vacant property. Back in April 2023, councils obtained powers to double the council tax on any home left empty for a year, rather than two years previously. This was introduced to encourage more empty homes back into productive housing stock. Some areas have already applied this ruling, whereas others are watching what happens.

What are the likely financial impacts of the various measures?

The various tax changes are likely to take away £300m of tax breaks from FHL owners and could cost landlords up to £10,000 per property per year.

The government has claimed that the changes are as much about simplifying the system and having parity of tax treatment for all types of rental property, whether they be based on short or longer-term rental arrangements.

There is also the intention to increase the availability of housing stock in high tourism areas to the benefit of the local population. Two routes anticipate this; FHL owners sell their properties and rationalise their property portfolios, bringing more property onto the market, and/or, as FHL owners divert properties to be residential private rentals with standard tenancy agreements.

Winners and losers

No one knows whether these changes will make a meaningful positive impact on the amount and nature of housing stock. Meanwhile, properties owned as second-home weekend bolt-holes for personal use are unaffected by these changes.