Tax Changes on the Way for Holiday Let Landlords

Councillors in Britain’s beauty spots are accusing greedy landlords of cheating on council tax by claiming their second homes are short-term holiday lets. 

The government has picked up on protests from North Wales, Cornwall, the Lakes and other popular holiday destinations and has revealed tax changes for holiday rental owners are on the way. Local politicians argue councils are strapped for cash and cannot afford to pay for vital services because wealthy second homeowners avoid paying council tax by falsely classifying their homes as short-term holiday lets. 

The owners can sidestep paying council tax in favour of rates by listing their homes as business premises. Because the rateable value of a holiday let is so low, they do not meet the threshold for paying rates.

Why are landlords switching to holiday lets?

The switch from a buy to let or second home to furnished holiday letting is all about money. Although registering a property as a holiday letting avoids council tax and rates, the real prize is renting the home out for as long as possible in the season, which typically lasts between Easter and the autumn school half-term break. Some landlords also benefit from lucrative Christmas and New Year holidays. 

The average rent for a two-bed cottage or terraced house is around £750 a month as a long-term let to a family. The average holiday rental is around £100 a night - almost trebling the buy-to-let return. Not all that money is profit. Short-term let landlords pay marketing costs, utilities, and cleaning besides other business expenses. Short-term lets are also outside local landlord and rental property licensing rules. Holiday lets have other tax advantages -

• Property owners can claim capital gains tax reliefs for traders, such as Entrepreneurs Relief and Business Asset Rollover Relief.
• Holiday lets qualify for capital allowance tax relief on fixtures, fittings and equipment used in the hospitality business.
• Holiday letting profits count as earnings when working out pension contributions

What makes a home a holiday let?

HM Revenue & Customs (HMRC) have strict rules determining if a home is a holiday. The first essential boxes to tick are the home must be:

• In the UK or European Economic Area (EAA)
• Fully furnished, so guests only have to bring their possessions along to use the property
• Commercially let - that means not used by the owner, their family or friends for free or at a discount, although the season’s let can cover costs by making a profit

HMRC also lays down three occupancy conditions that must be met each year if a property is to be a furnished holiday let:

• If any lettings of 31 days or more throughout the year add up to 155 days rented out, the property is not a holiday let
• The property must be available to let for at least 210 days a year; days, when the owner stays, do not count
• Guests must rent the home for at least 105 days, not counting your stays, visits by family or friends, or stays of more than 31 days.

How is holiday let tax changing?

Housing minister Lord Greenhalgh has pledged a government crackdown on holiday homeowners pretending their second homes are holiday lets to avoid paying council tax but not taking steps to let them to guests. 

Greenhalgh told the Lords that he was taking steps to ensure second homeowners did not ‘game the system’ with false letting claims.

He said: “The government will legislate to require that holiday rentals meet an actual letting threshold before being assessed for business rates. This will ensure that only genuine holiday businesses can access the rate relief for small businesses. We have not yet finalised what that threshold will be.”

Its likely ministers will tinker with the Small Business Rate Relief threshold. Businesses with premises with a rateable value of £15,000 or less qualify for the relief, meaning they pay no council tax and little or no business rates. Greenhalg also hinted the government might introduce a holiday home register as part of the new package of measures to reduce tax avoidance. However, holiday letting trade body the Short-Term Accommodation Association wants business rates in England to apply once a property is let for 140 nights.

“We think this would result in more tax being collected across the UK, since increasing the threshold would mean fewer operators qualifying for small business rates relief than would be the case under a 70-night threshold,” said chair Merilee Karr. 

“Only genuine, year-round businesses should be paying business rates, and everyone else should be contributing to their local community via council tax.”

How much do holiday rentals earn?

According to market sector analysts, Airdna, Gwynedd, North Wales, is the UK’s top holiday let hot spot, worth a daily rate of £186, generating an annual income of £47,984. The results are based on data from 4,340 holiday letting properties in the county.