Holiday lets – the dream solution?

With the Renters’ Reform white paper making residential buy-to-lets less attractive, is it time to look at snapping up a country cottage holiday let? It may be, but be careful, warns Richard Reed.

We’ve all probably dreamed of owning a cosy country cottage in an idyllic part of the country, let out for chunks of the year to bring in a nice, fat income.

With the government cracking down on residential tenancies, it may seem the time is ripe for a change.

The writing has been on the wall for the traditional buy-to-let tax (BTL) market for some time.

The ending of the 10% annual wear-and-tear allowance on furnished properties in 2016 was a sign of things to come.

But it was the phasing out of mortgage tax relief in 2017 that prompted many savvy investors to start looking elsewhere.

One obvious solution was to buy UK or European holiday lets, which enjoy a large number of tax concessions denied to traditional BTL owners.

They still incur the higher rate stamp duty, but crucially qualify for 100% mortgage tax relief, while residential lets are now reduced to a flat rate 20% tax credit on a mortgage.

Arguably the proposed Section 21 eviction ban in the Renters’ Reform Bill white paper could push many residential buy-to-let landlords to transition to holiday lets.

Attractive proposition

With no eviction issues, a 100% mortgage allowance, deductible expenses and an income north of £20,000 a year, a country cottage that you can use yourself a few weeks of the year is an attractive proposition.

But there are storm clouds on the horizon.

Residents in tourism hotspots such as Devon and Cornwall have been campaigning for a crackdown on second homes for many years, complaining that they have pushed house prices out of the reach of local buyers – and leave many small villages ‘dead’ during the winter months.

As a result of this pressure, the Levelling Up and Regeneration Bill published in May 2022 will, when drafted into law, give councils in England the power to double the council tax on empty and partially-occupied properties. That could lead to a potential council tax charge in Devon of more than £4,000 in 2022-23.

In addition, a government consultation paper published on 29 June 2022, set out plans for a possible tourist accommodation registration scheme in England.

Northern Ireland already has such a scheme, while Scotland will be imposing one this October. Wales has also announced it will be introducing a register.

Airbnb growth

The move has been largely prompted by the rapid growth in the number of both first and second homes being rented out through organisations such as Airbnb.

The most recently available Airbnb data shows a 33% increase in UK listings between 2017 and 2018, from 168,000 in 2017 to 223,000 in 2018.

There has also been a surge in second home-ownership. According to government figures, in 2018-19, 2.4 million households in England reported having at least one additional residential property. Most are standard residential rentals, but 772,000 are classified as second homes – up from 572,000 in 2008-09. Just over a third (35%) of second-home owners bought their properties for income or as a long-term investment.

The post-Covid ‘escape to the country’ phenomenon could see those figures move dramatically higher when they are released.

Health and Safety regulations

In addition to a possible compulsory registration scheme, the government consultation paper proposes ensuring that holiday rentals comply with the relevant fire, gas and health and safety regulations for commercial properties.

The paper states: “It has been argued that some short-term and holiday-let operators are not aware of and/or not abiding by these regulations, potentially resulting in the provision of unsafe guest accommodation.

“On health and safety regulations, it has been argued that some hosts and providers are not undertaking… any risk assessments of their premises before offering them to paying guests.

“If this is the case, then it could lead to increased health and safety risks for the consumer. These could vary from property to property but could include, for example, no provision of basic first aid equipment, unsafe electrical systems or the provision of deficient products to guests such as a faulty kettle, hairdryer or gym equipment.”

The paper continues: “On gas safety, homeowners offering short-term lets may not consider themselves subject to annual safety inspections because they do not consider themselves ‘landlords’. However, guidance from the Health and Safety Executive, responsible for enforcing compliance, is clear that landlord duties apply to a wide range of accommodation, including rented holiday accommodation. Non-compliance could put paying guests at risk.”

While the consultation paper will not deal directly with the impact on rural housing and communities, the government says the feedback received will inform future policy.

‘Important role in tourism economy’

Merilee Karr, chairperson of the UK Short-Term Accommodation Association (STAA), said: “Short-term and holiday rentals play an increasingly important role in the English tourism economy by contributing significant numbers of jobs in local communities and generating valuable sources of income for local homeowners and businesses.

“Any new regulatory solution should recognise this contribution and seek to support the industry as an important part of the wider UK tourism sector.

“As an industry we look forward to working with the government to ensure that a simple, cost-effective regulatory solution is found, which takes into account the needs and benefits to communities, and supports owners to rent out properties that would otherwise sit empty.

“We are glad to hear that the government is committed to a solution which gets the balance right, and we look forward to sharing our insights and thoughts on practical solutions with policymakers.”

Huge growth

Tourism minister Nigel Huddleston said: “We’ve seen huge growth in the range of holiday accommodation available over the last few years.

“We want to reap the benefits of the boom in short-term holiday lets while protecting community interests and making sure England has high-quality tourist accommodation. While no decisions have been taken, this review will help us work out the options to look at so we can protect our much-loved communities and thriving holiday industry.”

Former housing minister Stuart Andrew, who published the paper, added: “Holiday let sites like Airbnb have helped boost tourism across the country, but we need to make sure this doesn’t drive residents out of their communities.

“We are already taking action to tackle the issue of second and empty homes in some areas by empowering councils to charge up to double the rate of council tax.

“This review will give us a better understanding of how short-term lets are affecting housing supply locally to make sure the tourism sector works for both residents and visitors alike.”

The call for evidence will run for 12 weeks until 21 September – you can submit your evidence online here.

Alternatively, you can email answers to the call for evidence questions to tourism-accommodation-registration-scheme@dcms.gov.uk.

Do you have any experience, good or bad, of holiday rentals? Please post a comment in the forum and let us know.

Tax rules for holiday lets

To qualify as a furnished holiday letting (FHL) and receive the tax breaks that go with it, a property must be either in the UK or the European Economic Area, and must be furnished so that guests can use it.

It must also be available for letting for at least 210 days every year, and must be let out for at least 105 days. It must not be let continuously to one person for more than 31 days.

If your property does qualify, you can claim Capital Gains Tax reliefs for traders and you’re entitled to plant and machinery capital allowances for items such as furniture, equipment and fixtures. The profits also count as earnings for pension purposes, though you must keep the accounts for your holiday rentals business separate from any residential lettings.

For more detailed information on the accounting rules, visit the HMRC website.

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