Higher taxes proposed for short-lets and holiday properties

An influential new report wants higher taxes for landlords letting holiday properties.

The Office for Tax Simplification - a division of HM Treasury that feeds its reports directly to the Chancellor of the Exchequer, the Bank of England and many other financial sector opinion formers - says short term rentals described as holiday lettings enjoy more favourable tax treatment than the main property income rules with more tax relief for costs, including interest, and potentially a reduced Capital Gains Tax bill on disposal.

It says there are roughly 127,000 furnished holiday lettings businesses owned by individuals declared to HMRC in personal tax returns, including 17,000 relating to properties outside of the UK but in the European Economic Area. 

“The widely held view of respondents 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.

But the OTS says bluntly: “The OTS recommends that the government consider whether there is continuing benefit to the UK in having a separate tax regime for furnished holiday lettings.The OTS recognises that removing the furnished holiday lettings regime could put pressure on the boundary between whether a taxpayer has a property business or a trade, as many would currently use that regime as a proxy for many of the benefits of the trading rules.”

If the government acts on this in the Autumn Statement next week, the OTS recommends “that the government consider whether certain property letting activities subject to Income Tax should be treated as trading and whether it would be appropriate to introduce a statutory … test to define when a property trading business is being carried on.”

The Daily Telegraph reports that under the current rules, an owner earning £24,000 a year pays about £5,775 in income tax, assuming the property is owned jointly by a couple who are both higher rate taxpayers. Under a new system, they would have to fork out £7,687.

Perhaps the good news for landlords fearful of yet more possible tax rises, is that the Office for Tax Simplification is itself to be abolished - one of the few proposals in the calamitous September mini-Budget that has not been reversed.

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