Government urged to scrap holiday let tax breaks

A government adviser is urging the scrapping of tax perks for holiday lets which could see tax bills increasing by thousands of pounds every year for landlords.

The Office for Tax Simplification (OTS) is recommending that the government stops the owners of a furnished holiday let from offsetting mortgage interest payments against their income tax bills.

The ending of the so-called ‘furnished holiday let system’ would then bring to an end one of the last tax-efficient forms for small-scale property investment. It would also force the owners of holiday lets to pay tax on their earnings in the same way that a traditional BTL landlord does. Buy to let landlords had, until 2017, the same perk but this was phased out and then replaced with the 20% tax credit in 2020. However, holiday let landlords kept the relief.

One accountancy firm has calculated that a landlord in Cornwall renting out a four-bedroom house as a holiday let will be forking out an extra £2,000 every year in tax. Accountancy firm RSM says that a landlord with a holiday let who earns £24,000 every year, will have an income tax bill of £5,775 – assuming that the property is jointly owned by a couple who are also higher rate taxpayers.

If the government decides to follow the OTS advice and scraps the furnished holiday let system, the owners of the holiday let would see their tax bill rising to £7,687. Experts claim that if the benefit is scrapped, the ultimate result is that people will sell up because their properties will become commercially unviable.

In a report, the OTS says there are around 127,000 furnished holiday lets owned by individuals with the income being declared on their HMRC personal tax returns. The organisation says that short-term rentals enjoy a more favourable tax treatment than the main property income tax rules with more tax relief available for costs, including interest. There’s also, potentially, a reduced capital gains tax bill when the property is sold. Now, the OTS recommends that the government considers whether there is a benefit in having a separate tax regime for furnished holiday lets and if the rules are abolished there will be a need to determine whether some property letting activities that are subject to income tax should be treated as trading activities.

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Sources: Techlink