Almost a decade after George Osborne announced a major shake-up of buy-to-let (BTL) taxation, chancellor Jeremy Hunt has launched another crackdown on landlords — this time in relation to holiday lets.
Back in 2015, when then-chancellor Osborne revealed plans to gradually reduce the tax relief that landlords could claim against their mortgage interest, down to the basic rate, he said it was to “create a more level playing field between those buying a home to let and those buying a home to live in”.
The tax advantages of holiday lets have encouraged landlords to evict tenants in favour of tourists
The changes were phased in from 2017, but an unintended consequence of toughening up taxes on long-term rentals was to make the short-term holiday-let sector more attractive by comparison.
Not only are landlords often able to attain higher rents by leasing property on a short-term basis as a furnished holiday let, but up to now they have also been allowed to offset all their mortgage interest and many other expenses.
Community harm
Housing campaign group Generation Rent calculates that the combined number of second homes and commercial holiday lets in England has soared by 20% in eight years, from 284,000 in 2015 to 340,000 last year.
It argues this trend is leaving locals with fewer homes — driving up rents and forcing them to live further away from their workplace and family.
If this is meant to boost first-time buyers in Devon and Cornwall, it is flawed
Seeking to halt this shift, in his Spring Budget current Conservative chancellor Hunt said: “I am concerned that this tax regime is creating a distortion, meaning there are not enough properties available for long-term rental by local people.
“So, to make the tax system work better for local communities, I am going to abolish the Furnished Holiday Lettings regime.”
Policy costings published alongside the Budget estimate that the holiday-let tax clampdown will boost the Treasury coffers by a total of £600m over the first four years from its planned implementation next April.
Housing campaigners have broadly welcomed the reforms but argue they do not go far enough. Generation Rent deputy chief executive Dan Wilson Craw says holiday lets have been making life a misery for renters in popular tourist destinations.
Holiday-let properties are more expensive than average homes
He says: “The tax advantages of holiday lets have encouraged landlords in many parts of Britain to evict their tenants in favour of tourists.
“Abolishing this tax regime will help nudge landlords back into the residential sector and make their homes available to live in again, which will bring rents down.”
However, Wilson Craw thinks the government should do even more.
“Although there are plans to introduce a register of tourist accommodation, holiday lets should also need a licence to operate, and councils should have powers to control the number of these,” he says.
“The proposed planning changes could backfire if it becomes harder to bring properties that switched only in recent years back into the residential market.”
Another campaign group, Action on Empty Homes, is unconvinced that the changes will have the desired impact.
Practical measures to nurture a dynamic private rented sector are the solution
Its national campaign manager, Chris Bailey, says: “Jeremy Hunt says he hopes to see this tax lead to greater housing availability in coastal and rural areas.
“We would love to see that too but don’t expect it anytime soon; not least because the government has recently introduced the lightest of regulatory touches to the short-let market, with a register promised and rules allowing every homeowner in England to convert their home to an Airbnb unless their local council undertakes time-consuming policy changes to avoid this.”
Landlord lobby
On the other side of the debate, the landlord lobby also questions the effectiveness of the reforms in achieving the government’s aim of boosting the long-term rental market. However, rather than calling for a stronger clampdown on short-term rentals, it wants a let-up in the tax regime for landlords buying long-term rental property.
I have not yet met anybody thinking of switching to BTL
National Residential Landlords Association (NRLA) director of policy and campaigns Chris Norris says: “Squeezing the holiday-lets market does nothing to solve the ongoing question of where the UK’s homes of the future will come from. Practical, effective measures designed to nurture a dynamic private rented sector, which works in the interests of landlords and tenants, are the only solution.”
He adds: “The NRLA has for some time highlighted the supply crisis across the private rented sector, and we are eager that the government introduces pro-growth policies that address the issues in this area as soon as possible.
“The way to do this is by scrapping the stamp-duty levy on the purchase of additional homes to rent — a move that, according to Capital Economics research, would see nearly 900,000 rental properties become available in the private rental market.”
Mortgage products
From a mortgage perspective, most specialist brokers and lenders do not predict a substantial fall in demand for finance.
Figures from comparison website Moneyfactscompare.co.uk show that mortgage products for holiday-let borrowers have more than trebled over the past three years. There are currently 496 products from 35 lenders, compared to only 156 products from 23 lenders in April 2021.
Affordable housing is needed in those coastal areas and other areas, but I don’t think freeing up former holiday lets is the answer
Some predict lenders will respond to the tax changes by introducing more holiday products for limited companies, in the same way that BTL lending shifted towards this structure after Osborne’s tax clampdown.
Holiday Cottage Mortgages founder Andrew Soye says: “When I speak with current and potential holiday-let buyers, we have seen a real interest in switching from personal name to limited company models where you can circumvent the furnished holiday-let issue altogether.”
Hodge director of business development Emma Graham agrees that this will be the likely outcome and says: “It is very much on our product roadmap. It is something that we are going to look to do.”
She also stresses that Hodge remains committed to the holiday-let market and will not follow in the footsteps of Leeds Building Society, which is limiting lending in north Yorkshire and north Norfolk as part of a 12-month pilot starting this month.
We are eager that the government introduces pro-growth policies that address the issues in this area as soon as possible
Leeds chief executive Richard Fearon said the decision had been taken after consulting with councils in those locations in a bid to reduce barriers to homeownership for residents.
He said: “In some areas, holiday lets have grown to have a significant stranglehold on the pipeline of homes available for local people to live in and we want to play our part in removing it.”
But Soye does not believe that restricting lending or clamping down on tax reliefs will fix the problem.
He says: “Affordable housing is needed in those coastal areas and other areas, but I don’t think freeing up former holiday lets is the answer.
“When you look beneath the surface, holiday-let properties are more expensive than average homes. Our data shows that, on average over the past two years, a holiday-let property costs around £360,000 versus the national average of £288,000.”
We have seen a real interest in switching from personal name to limited company models where you can circumvent the furnished holiday-let issue altogether
Soye says the reason for the price differential is that holiday lets tend to be premium properties in beauty spots, with picturesque features such as a thatched roof or an inglenook fireplace that makes them particularly desirable for holidaymakers.
So he does not envisage the price of these properties falling far enough to make them affordable for homebuyers. Nor does he see them as a viable proposition for long-term rentals because the interest coverage ratio is unlikely to satisfy BTL lenders.
“Having spoken to many holiday-let owners recently, a minority of them feel that the additional taxation costs will make holiday letting less attractive and now they are thinking of selling,” says Soye.
Squeezing the holiday-lets market does nothing to solve the ongoing question of where the UK’s homes of the future will come from
“I have not yet met anybody thinking of switching to BTL. Indeed, most existing owners feel that the additional tax bill, while annoying, is immaterial to them when compared to their long-term plans for the holiday-let business. They will continue regardless.”
House & Holiday Home Mortgages founder Mark Stallard is similarly sceptical that the Budget changes will free up affordable housing.
“If this is meant to provide a boost for first-time buyers in the villages of Devon and Cornwall, that is absolutely flawed, I’m afraid,” he says.
Vital contribution
Like Soye, Stallard argues that the types of property currently run as holiday lets are unlikely to suddenly become affordable enough to meet the needs of first-time buyers.
Plus, he warns that holiday rentals make a vital contribution to the local economy because guests spend money in shops, pubs and restaurants and on tourist activities, while the properties create work for local cleaners, gardeners and others.
Jeremy Hunt hopes to see this tax lead to greater housing availability in coastal and rural areas. We would love to see that too but don’t expect it anytime soon
Groups campaigning on behalf of renters and first-time buyers are, understandably, more supportive of the chancellor’s announcement than are lenders and brokers with a financial interest in the holiday-let sector.
However, both sides tend to agree that these measures alone are unlikely to be a quick fix for housing affordability.
This article featured in the April 2024 edition of MS.
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