Holiday Let Tax Loophole Set to Close

Holiday let landlords and second homeowners face a year tax hike that closes a business rates loophole. Levelling Up and Housing Secretary Michael Gove is set to announce the business rates shake-up that could cost property owners up to £1,000 a year in extra tax. 

The new rules are expected to stop second homeowners from registering for business rates unless they can show the property was rented out to paying guests for 70 days or more a year.

What is the loophole?

It’s not a loophole exploited by financially astute landlords but a measure to help small businesses that also applies to holiday let owners. The loophole works like this:

• A homeowner rents out a furnished, self-catering holiday let for no less than 105 days a year out of the advertised availability of 210 days.
• The letting allows the owner to claim small business rates relief as a business premises rather than council tax.
• The property is exempt from rates if the rateable value is £12,000 or less. Small business rate relief applies to single business premises with a rateable value of £15,000.
• Thanks to the relief, properties with a rateable value of £12,000 or less pay no business rates. Homes with a rateable value between £12,000 to £15,000 benefit from taper relief. Taper relief ranges from100 per cent for a home with a rateable value of £12,000 to zero for one with a rateable value of £15,000.

Regardless of the uproar, the loophole is triggering in some areas; landlords are entitled to claim relief for small business rates for holiday lets and are not breaking the law or evading tax if they follow the abovementioned steps.

What’s the government doing about holiday let taxes?

Governments in England and Wales have consultations about the holiday let tax loophole underway. Michael Gove is expected to announce the new business rates rules for holiday and second homes in England soon. 

The government in Wales favours a localised approach to stopping the number of holiday lets outnumbering main homes. One plan under consideration is a ban on holiday lets qualifying for small business rates relief.

Climate Change Minister in Wales Julie James said: "We want young people to have a realistic prospect of buying or renting affordable homes in the places they have grown up, so they can live and work in their local communities." 

"High numbers of second and holiday homes in one area can threaten the Welsh language in its heartlands and affect the sustainability of some rural areas."

James also intends to change planning laws to make second homeowners apply for permission to change the use of their properties.

Holiday home controversy

Councils in popular holiday resorts complain holiday homes are getting a free ride because they use services without making a council tax or rates contribution. But research by the Welsh government published in July 2021 suggests this is false.

“A limited number of studies explore the impact of second homes and outward migration and service decline. These studies tend to conclude that the outward migration of young people and young families from rural areas is more closely allied to a lack of appropriate employment, education and leisure activities than to a lack of housing. The literature again largely fails to isolate the impact of second homes specifically and independently from the range of other factors that contribute to outward migration,” says the report. “However, other publications do claim that second homeownership is a cause of a decline in services within particular localities whilst the literature from within and beyond the UK claim that rises in second homeownership leads to culture clashes and tensions between local people and communities and a more transient population.”

The data reveals almost one in ten homes in Gwynedd, North Wales, are second homes or holiday lets. Across Wales, 25,000-second homes pay council tax, with a fifth based in Gwynedd, home to Snowdonia National Park. England has 772,000-second homeowners, with 495,000 in the UK and the rest overseas. 

The most popular reasons for owning a second home are investment (35 per cent) or a holiday escape (36 per cent).

Why reform property tax for second homes?

Data shows that property taxes account for about £1 of every £8.50 collected in tax, and that the figure is falling from 12.4 per cent of all tax collected in 2020 to 11.8 per cent in 2021. The government is facing pressure from two sides:

• Local council and campaigners protesting about ‘greedy second homeowners’ avoiding tax and lost public revenues
• The impact of the coronavirus pandemic on Treasury coffers

Property taxes include council tax, business rates and stamp duty. The taxman collected £81.4 billion from property owners in 2021 - down from £90.3 billion the year before. According to data from the Organisation of Economic Co-operation and Development (OECD) rates, Britain is midway in the table of property tax revenues collected by member governments. South Korea takes first place, with the USA, France, Germany and Canada all above the UK.

Holiday let tax FAQ

What is a holiday let?

Holiday lets are typically self-countering, furnished homes let to guests for short terms of between three and 30 days at a time. Currently, to qualify for tax breaks, a holiday let should be available for letting for 210 days in the year and let for 105 days.

Why do landlords like holiday lets?

It’s about the money. Most holiday lets charge out for the same amount of weekly rent that a buy-to-let generates in a month. IN down periods or out of season, the owner can stay in the property as a second home.

Can I buy a holiday let with a mortgage?

Yes, you can buy a holiday let with a mortgage, but they are specialist products that often come with higher fees and interest rates. Most residential and buy-to-let mortgages don’t allow short lets.

Do I need planning permission for a holiday let?

The rules vary between England, Scotland and Wales. In Wales, the government wants property owners to apply for planning permission to change a home into a second home or holiday let. 

The law is expected to change in Summer 2022 but will only apply in selected areas. In England, no planning permission is needed, but each council can implement their own 'change of use' rules. 

London has a 90-day short-let period each year before planning is needed. In Scotland, councils can impose their change of use rules.

Do holiday lets need tenancy agreements?

No, where the use is for a holiday, they do not require tenancy agreements; instead, a holiday letting agreement is used.