Will the Chancellor’s attack on holiday lets really help renters and first-time buyers?

Jeremy Hunt announced two measures in the Budget last week aimed at making more homes available for first-time buyers and renters, by changing the rules for those that already own more than one home. 

First, tax perks for holiday let businesses were on the chopping block as the Chancellor pledged to abolish the furnished holiday lettings (FHL) tax regime from April 2025. 

It means holiday home firms will lose a number of tax benefits, and find themselves on a more level playing field with buy-to-let landlords.

Buy-to-let boost: Jeremy Hunt announced the rate of capital gains tax charged on the sale of second homes will be slashed

About 127,000 properties in the UK are registered under the FHL regime, according to the think tank Tax Watch.

The aim of the new policy, according to Hunt, is to free up more homes for the private rental sector.

Speaking during the Budget, Hunt said: ‘The furnished holiday tax regime has meant […] there are not enough properties available for long-term rental for local people.’

Also in the Budget was a surprise tax cut aimed at buy-to-let landlords who let property on a long-term basis.

The higher rate of capital gains tax charged on the sale of second homes is to be reduced from 28 per cent to 24 per cent from 6 April this year. 

The policy would also affect those selling holiday homes, though landlords are much greater in number.  

CGT is charged on the profit second home owners make on a property that has increased in value when they come to sell it.

The aim, according to Hunt, is to encourage more landlords and second home owners to sell their properties, freeing up more homes for first-time buyers.

Some experts have noted a contradiction here, however. The holiday let tax measures are designed to create more long-term rental homes, while the capital gains tax cuts are designed to get landlords to sell up.

Will the Chancellor’s new measures make a difference to those looking for a home to rent, or to get a foot on the housing ladder? 

Will holiday let owners become landlords?  

Holiday let owners with mortgages can currently deduct the full cost of their interest payments from their rental income when they file their tax return, reducing what they owe. 

Capital allowances for items such as furniture, equipment and fixtures are also deductible – but under Hunt’s plans these benefits will cease to exist from 6 April next year. 

Many property commentators believe this should do as the Chancellor intends and return holiday homes to the private rental sector. 

Chris Sykes, technical director at mortgage broker Private Finance, says: ‘In recent years, many landlords have been converting long-term rentals into holiday lets for higher yields. 

‘A less tax-efficient environment could discourage this behaviour, supporting local housing availability by reversing this process and restoring long-term rentals back into the market.’

 However, while some may hope this will lead to a transition of holiday let homes into the private rental sector, holiday let owners may prefer to sell instead thanks to Hunt’s capital gains tax cut.

Those who choose to sell their property after 6 April 2024 will benefit from the reduction in the higher rate of CGT for residential property gains which is due to drop from 28 per cent to 24 per cent. 

‘These tax changes make it less attractive to own holiday lets and more attractive to sell them,’ says Paul Falvey, tax partner at BDO.

‘The Chancellor is clearly hoping that this will lead to significant numbers of property owners putting their holiday homes on the market in the 2024-25 tax year.

‘Whether this does lead to a significant increase in the availability of rural homes to buy or longer term residential lettings remains to be seen.’

Jonathan Hopper, chief executive of buying agents Garrington Property Finders, adds: ‘The furnished holiday let was arguably the last tax sanctuary for landlords who owned property assets in their private names. 

‘The removal of the tax incentives looks short-sighted in the extreme and will trigger a flurry of landlord exits from the sector thus harming tourism and local jobs in the process. 

‘Switching to standard rentals will typically not work for these investors, as owning in their private name is not tax efficient – and typically holiday homes are not of the type of property or in best locations for traditional lettings.’

Jeremy Hunt is aiming to free up more homes for the private rental sector by removing tax benefits bestowed on holiday let businesses

What will the CGT cut mean for the rental sector?

The Chancellor said the cut to CGT on the sale of second homes will encourage more landlords and second home owners to sell their properties. 

This, he said, would make more properties available for buyers including those looking to get on the housing ladder for the first time, while also raising tax revenue. 

Jeremy Leaf, north London estate agent and a former Rics residential chairman, says: ‘Whether the reduction in CGT will prove beneficial remains to be seen.

‘The reduction in CGT could encourage even more buy-to-let investors who were thinking of selling up to leave the market, in case a Labour Government increases CGT again in the future. 

‘This could further reduce the availability of rental property and push up rents, making it more difficult for tenants and young people in particular.’

This fear of a sudden landlord exodus is shared by the campaign group, Generation Rent.

Ben Twomey, its chief executive, says: ‘This tax giveaway to landlords could make thousands of renters homeless. 

‘The only reason the Chancellor is doing this is because of the expectation that a lower tax rate will boost the number of sales, but apparently no thought has been given to the people living in those homes, who will generally face eviction before the landlords put them on the market.’

Buying agent Jonathan Hopper agrees, saying that incentivising landlords to sell will only ‘diminish the pool of available homes to rent.’

‘For existing financially weary landlords in the private rental sector, who own assets in their own names, an improving sales market and lower CGT tax bills from property sales sounds like a starter gun to see more stock leave the sector,’ says Hopper.

‘On the one hand it could be argued this will suppress house prices and give more choice to first time buyers, but this will do nothing to calm rental inflation levels with a diminishing pool of available homes to rent. 

‘With an average of over 40 tenants chasing each newly listed rental property, the last thing the sector needed was encouragement for landlords to sell up and leave.’