Tax Clampdown on Short Lets Will Not Change, claims government

The government is ruling out any U-turn on the tax changes regarding furnished holiday lettings - despite substantial complaints from Tory MPs.

At the Budget in early March, Chancellor Jeremy Hunt announced that the Furnished Holiday Lettings (FHL) tax regime would be abolished from April 2025. 

The effect of abolishing the rules will be that short-term furnished holiday lets and longer-term residential lets are treated the same for tax purposes and individuals will no longer need to report the two income streams separately.

Applying to properties rented for over 210 days annually, the changes will impact approximately 300,000 FHLs in the UK. The removal of access to Capital Gains Tax relief, beneficial capital allowances, and exemption from finance cost restriction rules will make holiday letting substantially less profitable for many.

The justification given by Hunt in March was that holiday lettings, especially short lets, contribute to longer term housing shortages in tourist areas of the country and that this tax change would level the playing field - and encourage more landlords into long term letting.

In a debate in the Commons this week, the Financial Secretary to the Treasury - Nigel Huddleston - told fellow MPs: “There is broad recognition that the current system is contributing to some distortions. In my former capacity as Tourism Minister, I travelled around the country …  I had colleague after colleague and industry after industry making claims for and demanding the exact policy that we are introducing.”

He continued: “The problem is that if I were an investor thinking of buying a property in a certain area, it would make pure economic sense for me to get a short-term let rather than a long-term let. Therefore, in certain communities across the country, when a new property becomes available, there is an incentive for an investor to straightforwardly go for a short-term let rather than a long-term let because there is beneficial tax treatment. 

“We are not eliminating the tax incentives but levelling the playing field so that the perverse incentive no longer exists.”

Huddleston went on to claim that not all tax benefits for landlords were disappearing.

“After the abolition of the FHL tax regime, a higher rate paying landlord with mortgage interest costs of £12,000 per year would still get up to £2,400 taken off their income tax bill through the relief. 

“If they spend a further £8,000—for example, on insurance, letting agent fees and replacing domestic items such as sofas, fridges, washing machines—they could save a further £3,200 in income tax by using the reliefs that are available for all landlords. 

“It is about levelling the playing field. There will still be tax incentives, but we do not want that distortion. When somebody buys a new property or an existing property, there is a false incentive that is causing some problems, because human behaviour that naturally seeks a better return on investment leads them towards short-term lets, rather than long-term lets. That is what we are trying to correct.”

The irony is that the legislation required to enact the abolition of the FHL tax regime is unlikely to pass before the General Election, widely expected later this year. At that point the proposed changes fall, rendering the debate largely pointless as the current benefits will therefore not change for some time at least ,even if the Conservative return to power.

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