The UK’s holiday-let landlords are usually rubbing their hands with glee at this time of year. The sharp rise in ‘staycations’ that began soon after the Covid pandemic was sustained by the cost of living crisis as inflation soared. This summer, however, landlords are being hit by a double whammy of unhelpful factors.
A soggy start to the season dampened domestic bookings, just as the prices of overseas package holidays began to ease. The prospect of almost guaranteed good weather for not much extra cash, if any, became a no-brainer. A longer term problem, though, is the abolition of the furnished holiday lettings tax regime. Originally floated by former Chancellor Jeremy Hunt at his spring Budget, the necessary legislation was passed before the General Election; however, the new Labour government has now confirmed that the change will still happen from spring next year.
Interest income tax relief will be restricted to the basic rate for all holiday let owners; capital allowances will not be available for new expenditure but will be replaced with relief for replacing domestic items; there will be no business CGT reliefs on chargeable gains on disposing of property; and income from holiday lets will be excluded when calculating maximum pension relief.
The woe won’t all be piled on at once: existing holidays lets will continue to benefit from capital allowances on expenditure already incurred; losses generated from a holiday lets business can be carried forward and set off against other property rental income; and roll-over relief, business asset disposal relief, gift relief, relief for loans to traders and exemptions for disposals by companies with substantial shareholdings will remain available to current qualifying lets, as long as certain conditions are met. Nonetheless, the net result is that landlords who offer short-term holiday lets will lose valuable tax advantages over those offering normal residential properties.
As ever, the situation is more complex than simply missing out on a tax loophole. In some rural communities and sectors, notably farming, diversifying into holiday lettings is a vital revenue stream. In any event, some properties used for lettings aren’t necessarily suitable for permanent residence. Broader local economies clearly lose out too: shops, pubs and restaurants rely on seasonal trade and employ many thousands of people across the country.
Research house Mintel is optimistic about the holiday rental market in the long term, once it has adapted to these changes. Overall growth, both by volume and value, is expected to continue on a five-year view, helped by continued cost of living concerns, regardless of interest rates easing. Rental properties also lend themselves to meeting demand created by the trend towards ‘multigenerational’ family holidays.
Beyond tax changes, many holiday landlords presently face the same problems and exposure as residential operators. Thousands, whether individuals or incorporated, are still coming off fixed rate mortgages into a higher rate scenario every month. Many are struggling to pay down debt before re-mortgaging and have relied on the potential to lift rents. While some holiday landlords may hold off selling, several are expected to leave the market, perhaps closing companies, after this latest slice off their margins from government and banks.
If you are a holiday landlord considering unwinding a portfolio of letting properties or a company structure, contact us at Buchler Phillips to take early professional advice for a managed process with an optimal outcome.
Written by Bea Vakharia, analyst at Buchler Phillips, a UK based independent boutique firm with an impeccable Mayfair heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.