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The changing face of the holiday let market

Emma Graham
21st March 2024

Picture a holiday let, what comes to mind? Perhaps a quaint cottage nestled in a charming English village, a rustic wooden cabin in the open countryside, or a vibrant beach house, steps away from the sun-kissed sands of a blue flagged beach.  Idyllic. But will this always be the way we imagine a UK staycation?  

The spring budget brought some big changes for holiday let owners to think about. A year down the line will we see a dampening of enthusiasm to buy a holiday let and a reduced choice for those looking to rent one?  

Emma Graham, director of business development at Hodge, looks into how the balance between market appeal and economic influence is likely to shape the future of holiday lets and their owners. 

Furnished holiday lettings tax regime to be packed away 

First, let’s address the giant beachball on the balcony, the spring budget. Owners of holiday let properties are preparing for potential challenges following the Chancellor’s announcement that come April 2025, the Furnished Holiday Lettings (FHL) tax regime would be scrapped.  

Initially introduced in 2017, the advantageous tax relief aimed to give a more equal playing field between traditional Buy to Let (BTL) and short-term rentals. A few short years later, the financial glow of owning a Holiday Buy to Let (HBTL) grew even more luminous when demand for UK staycations hit an all-time high following the pandemic. In fact, the BBC reported a 40% increase in holiday-let homes between 2019-22. A trend which kept momentum as the rise in the cost of living spurred people to watch their purse strings and holiday at home. 

On the flip side, the housing shortage in the UK means more people are forced to keep renting, a market that can’t meet demand. So, it seems logical the UK government would explore alternative solutions to cater for long-term renters rather than short-term sun seekers (maybe not quite sun, we are talking about the UK after all). 

By removing the FHL tax regime, it dims the sparkle for those currently adding to their nest egg via Airbnb. Less tax breaks means a lower profit margin. By pricing out holiday lets, even in tourist hot spots, it opens up the playing field for longer term residential properties and BTL landlords. 

Will last minute deals be more appealing after changes in Capital Gains Tax? 

At present, holiday lets are treated like a business. So, in addition to offsetting expenses and tax-advantaged inheritance, you can sell a FHL today and only pay 10% on Capital Gains tax (CGT). And although the chancellor wrapped up the drop in CGT for higher rate taxpayers from 28% to 24% (staying put at 18% for basic rate taxpayers) on residential properties this is not close to the current 10% offered today. As of April 2025, FHLs will be taxed at standard residential property CGT rates.  

So, for FHL landlords thinking about selling, or disheartened by the increased tax and squeeze on their profit margin, selling up before April 2025 could be a tempting move.  

Local legislation: less romantic getaway, more structured retreat  

In some tourist towns, councils are finding locals can’t afford to live in their own community. So, new controls on holiday lets in parts of England, Scotland and Wales are being introduced to enforce people to seek permission from their local council before they can rent out their home as a short-term let. 

This uncertainty of local legislation is understandably concerning for a homeowner with just the one property unable to spread the risk, compared to a landlord with multiple holidays let properties.  

The changing face of the holiday let owner  

All these factors considered, current owners of a single HBTL may be more inclined to pack-up and close the suitcase on their holiday let rental.  

Those with a larger portfolio of multiple properties may be less inclined given their return is larger across their book. In the same breath, while the yield of a HBTL is still greater than that from a similar BTL, those who previously may have taken the plunge into the holiday let world as a landlord for a second home are more likely to be reconsidering their investment decision now the returns dwindle and complexity of compliance sparks. It seems on the face of it, a HBTL could feel more of a risk and commercial decision than just a nest egg for retirement. 

And we aren’t just surmising. At Hodge we’re seeing an increase in clients looking to build up a small portfolio of holiday lets and less one property landlords for our holiday let mortgage product. The drive of local councils and larger political bodies, to reduce the number of HBTLs in the UK, has started a shift towards more commercial investment ownership and less of the sole investor ownership.  

As we sit and watch this tipping point in the dynamics of the market, we can only wonder if it will be for the greater good, or have a lasting impact on the flourishing staycation market and the industries that benefit so immensely from the tourist economy. Fewer holiday lets could mean fewer visitors, less people eating in restaurants, drinking in bars, visiting attractions and spending money in the UK.  

If you’re looking for how to deliver the best outcomes for your clients in the changing holiday let marketplace, contact one of our BDMs today.

Find out more about Hodge Holiday Let mortgages.

Emma Graham
21st March 2024

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