Treasury Tax Advisers Slam Holiday Let Rules

More financial grief is on the way for landlords as Treasury-linked advisers recommend scrapping tax perks for holiday lets.

The Office of Tax Simplification has issued a report slamming the financial benefits enjoyed by landlords with short-term lets and urges the government to abolish the separate tax regime for furnished holiday lets.

The report also questions if holiday lets should attract full mortgage interest tax relief.

If the holiday let rules are removed, the OTS recommends a property trading test and a restriction on private use.

The tests would confirm the property was a business and make the holiday let tax regime much more straightforward by removing the blurred line between part-time renting of a second home and a letting business.

The OTS report recommends better rules for offsetting repair and improvement costs other than spending on the initial fitting out of a holiday home.

Call for short-term let tax shake-up

Another section of the report wants to simplify joint ownership rules by scrapping the 50:50 ownership assumption. Instead, the call is to align property ownership rules with those of capital gains and inheritance tax.

The OTS also wants HM Revenue & Customs to overhaul the Making Tax Digital system for landlords.

MTD for landlords starts in April 2024 and is structured for individual taxpayers to make returns. The OTS wants this changed to make the property the MTD entity for joint owners.

The OTS says the UK has 127,000 holiday letting businesses registered with HMRC, including 17,000 owned in the European Economic Area - the European Union plus Iceland, Norway and Liechtenstein.

Key tax benefits too generous

“The widely held view was that this represents a relatively small core of people running a substantial short-term letting business, and a long tail of second-home owners renting one property,” says the report Property income review: simplifying income tax for residential landlords.

“In general, the responses were neutral on the benefits of the regime compared to its administration, and those who were positive felt the scope of who was included was too wide.

“The key benefits are seen as the availability of full relief for interest and the reduction in Capital Gains Tax on disposal. The OTS questions the need for a separate rule set of this nature.”

The report also compares the returns and tax rules for different types of property letting:

Source: OTS