The landscape of holiday lets is poised for transformation as recent policy changes roll out. In the Spring Budget, Jeremy Hunt announced the abolition of the Furnished Holiday Letting (FHL) Regime, as well as alterations to Capital Gains Tax for holiday lets, and the removal of Stamp Duty relief for holiday let owners.
Hot on the heels of these announced changes, the planned general election on July 4th introduces an additional layer of uncertainty. Ongoing consultative work will be paused during the pre-election period, lengthening speculation over the proposed details of these measures. With forecasters suggesting that a post-election Autumn Budget is likely, holiday let owners are cautiously taking stock of campaigns to see what the future may hold for their investments.
The Welsh licensing scheme announced in January this year and proposed planning permission reforms for Airbnb lets further complicate the picture. Taken together, these changes prompt critical questions about the future viability and profitability of holiday lets. For property investors and professionals, understanding these shifts is crucial to navigating the evolving market.
Recent Holiday Let Policy Changes
After a four-year boom for short-term holiday lets, fueled by the rise of platforms like Airbnb, the Government is responding to the benefits and challenges that this growth has introduced with a bevvy of regulatory changes.
The Spring Budget has introduced several significant changes, which are likely to be reiterated in a post-election Autumn Budget. These include the abolition of tax breaks that holiday let owners have long enjoyed. Key to these is the end of the Furnished Holiday Lets (FHL) Regime, which offers tax advantages to those who let out a property as a holiday home.
Under the FHL Regime, landlords who let out their homes to vacationers can deduct the full cost of their mortgage interest payments from their rental income, as well as the cost of fixtures and fittings. The FHL Regime also allows holiday let owners to make tax-advantaged pension contributions and pay a 10% business rate rather than the full capital gains tax rate when selling or bequeathing their property.
Furthermore, the higher capital gains tax (CGT) rate on non-permanent residential properties such as buy-to-lets, second homes and holiday lets, will be reduced from 28% to 24%. Multiple dwellings relief for stamp duty land tax is also due to be scrapped, meaning that purchasers of multiple residences will no longer be able to pay SDLT based on the average price per dwelling.
These projected policy changes sit on top of various regional measures introduced in 2023, targeting the most popular holiday destinations in the UK. A policy of double council tax was announced for second homes in Scotland, and Wales increased the number of occupied days required for a holiday let to qualify for business rates. The government also announced a consultation on whether homeowners should have to acquire planning permission before using their homes as short-term lets.
Why the Rules Around Holiday Lets Are Changing
These regulatory changes are prompted by the rapid growth in residential properties used as short-term holiday lets over the past five years. The number of holiday lets in England surged by 40% between 2018 and 2021, particularly in hotspots such as Scarborough, the Isle of Wight, North Devon, the Cotswolds, and Norfolk. The Covid-19 lockdowns only intensified this market growth, as international travel faced restrictions and British holidaymakers opted for stays closer to home.
While this boom brought benefits such as boosts to local economies and additional income for homeowners, it raised significant concerns about residents being pushed or priced out of their communities. The tenants’ rights campaign group Generation Rent highlighted that over 35,000 privately rented homes have been lost to short-term lets like Airbnb since 2019, forcing locals to move further afield.
In response, the government has investigated measures to prevent the ‘hollowing out’ of communities in popular holiday towns, as well as working to combat anti-social behaviour by holidaymakers. Michael Gove, Secretary of State for Levelling Up Housing and Communities, emphasised that these changes should allow local communities to balance a visitor economy and necessary housing for local people.
Impact of the Election on Holiday Lets
The planned general election on July 4th introduces another level of uncertainty to the landscape of holiday lets, potentially delaying or altering the implementation of the Spring Budget’s promised policy changes. The potential for a new government this summer increases the likelihood of an Autumn Budget announcement, which could reinforce or rework the changes made in the Spring budget, depending on the winning party.
As the proposed reforms were announced under a Conservative government, they will likely proceed if the party secures a win in July. Michael Gove announced in February that second-home owners planning to let their properties on Airbnb will need to start seeking planning permission, while Rishi Sunak has spoken about new measures to penalise antisocial behaviour in Airbnb properties.
A Labour victory may signal an even stronger approach: Shadow Housing and Planning spokesman Matthew Pennycock announced last year that Labour does not think the government’s proposed reforms go far enough to clamp down on second homes.
The election will certainly shape the landscape for FHL policy changes, but whichever party is victorious, change is on the cards. Property owners and professionals should prepare for any election outcome with proactive planning and strategic adaptation.
Financial Implications for Holiday Let Owners
These looming policy changes will have significant financial repercussions for holiday let owners, with the abolition of tax breaks calling for adjustments. While owners could previously deduct various expenses from their taxable rental income they will now face higher taxable incomes, translating into increased tax bills. On average, this change is forecast to result in a loss of approximately £2,835 per year for holiday landlords.
The changes to Capital Gains Tax (CGT) rules will also see FHL owners tightening their belts as they become party to higher CGT rates and a higher tax burden on FHL sales. This makes the prospect of selling holiday rental properties less attractive for owners. Consequently, some owners may rush to sell before the new rules take effect, while others might hold onto their properties longer, impacting market dynamics.
The end of Stamp Duty relief for holiday properties is another significant blow. This relief has previously made acquiring holiday lets financially viable by reducing the upfront costs. Without this, prospective FHL buyers will face higher initial expenses, which could deter new investments in holiday lets. This change may slow the growth of the holiday let market, as fewer investors are willing or able to absorb the increased costs.
Impact on the Housing Market
As FHL owners grapple with higher tax liabilities and increased regulatory burdens, many may reconsider the viability of their investments. This re-strategising by holiday let owners will have significant knock-on effects on the broader housing market.
The increased financial pressure on holiday let owners may result in properties being converted from short-term holiday rentals to long-term residential rentals. This potential influx of rental properties could help alleviate rental shortages in some areas, particularly in regions where holiday lets outnumber long-term rental options. For example, coastal and rural areas popular with tourists might see a rebalancing of the rental market, providing more options for residents.
This shift could lead to an oversupply of rental properties in certain areas, potentially driving down rental prices. While this will benefit tenants, it could further reduce the profitability for landlords, prompting more to sell their properties. This trend could be particularly pronounced in desirable holiday destinations where property values are high, such as Cornwall or the Lake District. The increase in new stock in these areas could balance out demand, decreasing prices.
FHL owners looking to sell up will be deterred by the changes to Capital Gains Tax. In response, the market may see a temporary surge in property sales as owners rush to sell before the new rules fully take effect. This influx of properties onto the market could create short-term volatility in property prices. Over the longer term, however, the reduced incentive to sell could lead to fewer properties being listed, potentially tightening supply in some areas and supporting higher prices.
However, the end of Stamp Duty relief for holiday lets could deter new investors from purchasing holiday properties, leading to slower growth in this sector. As a result, areas with prior rapid increases in holiday let developments might experience a stabilisation or even a decline in property prices, as the market adjusts to the decreased demand.
A Period of Revitalisation?
While the proposed changes could lead to a difficult period of readjustment for FHL owners, they could have a positive long-term effect of enlivening “holiday ghost towns”.
These areas see significant population drops during the off-season due to a lack of permanent residents. This makes it difficult for local businesses to thrive, forces local residents to move away from the centre, and decreases the sense of local community.
With more holiday let owners potentially selling their properties or converting them to long-term rentals, these areas could experience a stable year-round population, stimulating local economies and leading to more sustained demand for local services and amenities. This will lead to a greater sense of community and care for the local area, making these holiday havens all the more desirable to home buyers, renters and visitors.
Adapting to the New Landscape
Regardless of the election results, policy changes are set to reshape holiday lettings this year. The resulting challenges and opportunities will no doubt be felt by the wider housing market. Property professionals should stay attuned to these shifts, advising clients on how best to navigate the evolving landscape.
One key strategy for FHL owners is diversifying rental income streams. Landlords can consider offering both short-term and long-term rentals to ensure a steady flow of income. By attracting a mix of tourists during peak seasons and longer-term tenants during off-peak times, owners can mitigate the impact of seasonal fluctuations and maintain more consistent occupancy rates. This dual approach can help balance the financial load and reduce the risk of relying solely on short-term holiday rentals.
Another approach is enhancing property management and marketing to increase rental income. Holiday let owners can invest in professional property management services to streamline operations, improve guest experiences, and increase positive reviews. Effective marketing strategies, such as optimising online listings, leveraging social media, and offering special promotions, can help attract more bookings, allowing a holiday letting to thrive despite the policy changes.
With the end of tax breaks and Stamp Duty relief, holiday let owners may also need to explore refinancing options, leveraging equity in existing properties, or diversifying investments to provide a more robust financial foundation. Advice from tax and property professionals will become a valuable asset.
In light of the regional licensing schemes and planning permission reforms, staying informed and compliant with local regulations is essential. Owners should regularly review and understand the legal requirements in their area, ensuring they meet all licensing, safety, and health standards.
Conclusion
The holiday let market is hovering in a period of uncertainty, driven by recent policy changes and prolonged by the coming election. Regardless of the election results, it’s clear that change is coming for FHL owners. The proposed abolition of tax breaks, changes to Capital Gains Tax, and removal of Stamp Duty relief collectively create a new financial and regulatory landscape, with regional licensing and planning permission restrictions only adding to the load.
However, these changes present both challenges and opportunities. While the increased financial burdens and regulatory requirements may deter some investors and owners, they also pave the way for a more balanced and sustainable market in popular holiday areas. By adopting innovative diversification and marketing strategies and staying informed about local policies, holiday let owners can continue to thrive in an evolving market.
