Earlier this month the Office for Tax Simplification (OTS) suggested the favourable tax treatment of holiday lets should be scrapped to level the playing field between short and long-term lets.
In recent years there has been a sharp increase in the number of properties let through sites such as Airbnb. A survey of members by estate agency trade body Propertymark last month showed that three quarters of respondents in tourist hotspots, and a third on other areas, noted an increase in short-term lets.
Agents attributed the growth to higher demand for staycations in the pandemic and legislative changes on landlords.
But critics say the trend is impacting housing for local communities, especially in popular holiday spots including Devon, Cornwall and the Lake District.
Tax on long-term landlords has progressively become more strenuous since 2016 with a reduction in tax relief on mortgage interest deductions.
On the other hand, holiday homes may benefit from lower capital gains tax, full income tax relief for mortgage interest deductions and profits counting as earnings for pension contributions.
The OTS said: “The government should consider whether there is continuing benefit to the UK in having a separate tax regime for furnished holiday lettings.”
Holiday lets ‘one of many contributing factors to the UK housing crisis’
Some believe that increasing tax on holiday lets could slow down the recent increase and create more housing supply for locals.
Graham Cox, director at Self Employed Mortgage Hub, said: “Holiday lets are just one of many contributing factors to the UK housing crisis. Speculative investment is pricing out locals.
“Just look at the situation in Devon and Cornwall. The tax benefits are substantial. I would certainly be looking to increase Capital Gains Tax when selling a holiday let property. At the moment, vendors can benefit from a whole raft of tax reliefs on disposal.”
However, Andy Soye director at Holiday Cottage Mortgages, said tax changes wouldn’t make a significant impact on the sector.
He said: “Personally, I don’t recall speaking to a buy-to-let owner who wanted to switch to furnished holiday lets purely for tax purposes. The business models and their pros and cons are quite different and as an investor you need to consider the whole proposition, not just one aspect.”
Soye believes the business models of short and long-term lets are very different and people with holiday homes are usually focused on a longer term plan which doesn’t revolve around bottom line.
He added: “In terms of tax treatment, the process of running a proper holiday let is most definitely a business. You need a marketing strategy, pricing strategy, customer service plan, on call support, property maintenance, housekeeping, legal and insurance plans etc. It’s a dynamic, constantly moving enterprise.
“As such, HMRC treat its revenues and costs as it would a normal trade and allows mortgage interest to be offset as a cost. I still feel this is correct and reflects the nature of the business and the risk/rewards the owner takes. It’s nothing like a buy to let.”
Soye added: “I hope that such an idea to harmonise tax is not implemented, but if it was, I’m not sure it would impact the overall attractiveness of the holiday let model that badly.”
‘More innovation and help on building new houses is needed’
Prime Minister Rishi Sunak and Chancellor Jeremy Hunt will be giving their Autumn Statement – the first in their new roles – next week.
Brokers are now waiting for changes that could impact holiday lets.
The last thing the sector needs is a sledgehammer approach that brings the sector to the level of buy to let, according to Joe Stallard, director and adviser at House and Holiday Home mortgages.
He said: “Local economies are based on tourism and we don’t want to drive that away. More innovation and help on building new houses is needed, rather than looking to dampen the holiday letting and tourism side of those economies – as they will fall over without other job opportunities.
“Looking at the taxation on buy to let, it’s going to be a tricky time coming up.”
Stallard said that buy to let had been “hammered” on the taxation side and rather than doing that to another sector it would be better to “look at the relief around buy to let and bring some of those back”.
“The whole piece needs looking at – the government needs to consider how to effectively get the type of regulation needed, rather than thinking lets bring holiday lets down to buy-to-let level,” he concluded.
