Furnished Holiday Let and residential housing issues in popular destinations update

Posted on March 28, 2024 Updated on March 28, 2024

Following the Budget Statement at the begin of the month, I gave a brief overview of the tourism related elements of the budget, including plans to abolish Furnished Holiday Let (FHL) rules.  In my comment on FHL I shared my concerns, especially around the impacts on established, larger letting business, an area that I am not that professionally familiar with and that I undertook to research in more detail and report back on. 

I also mentioned that there were two distinctly differing ends to the spectrum of popular opinion in play regarding FHL abolition, ranging from: “this is a disaster for accommodation provision and therefore destinations”, through to, “something needs to be done to combat the negative impacts of the relatively recent explosion in short-lets accommodation provision”.  I suggested the truth probably lies somewhere within the mid-ground but that by inclination and from a purely destination perspective, I would generally lean more towards supporting anything that might genuinely act to redress the residential housing crisis.

Having now looked at the Governments proposal and to be honest, educated myself on some of the finer detail of FHL provision, I find that I was entirely wrong to suggest that on balance there might be some significant social benefit rising from the Government’s plan, albeit at some economic cost.  The more I have looked at the issues involved the more I am convinced that the abolition of the FHL rules is entirely the wrong policy, addressing the wrong issue, in the wrong part of the short-let market. The update that follows hopefully explains and corrects my initial, unintended error, whilst giving a bit more background some possible food for thought for destination mangers and some sincere advice for owner operators caught up a nightmare of HM Treasury’s (HMT) making.

The detailed impacts on the estimated 127,000 registered FHL following the Chancellors budget announcement of the current tax concessions with effect April 2025 are still far from clear and will remain so until the draft regulation is published, “in due course”.  This surprise move, first aired as a possibility only days before the budget, has prompted justifiable concern among a number of trade and other bodies associated with this sector.  They are now raising their concerns about both the likely intended and unintended impacts on those individual owner/operators, on letting businesses that are registered with HM Revenue & Customs (HMRC) as FHL (by no means all properties in the short-term letting market). They are also raising justifiable concerns about the future availability and over time the quality of holiday accommodation stock in popular tourist areas and destinations and the probable knock-on effect on the wider tourism industry and the visitor economy in some or all of these areas. 

To put it into context for the majority of those registered as FHLs with HMRC, many of which will have been in business for years and trading before the creation, let alone the explosion in Airbnb type operations, this change of tax treatment is akin to HMRC suddenly deciding to abolish the established tax benefits, private pension arrangements and saving plans of any other entire business sector or “trade”, leaving many business models and personal succession and retirement plans in tatters.  Moreover, HMRC, or more accurately the Chancellor has done so without consultation, at no real notice and with little or no hard evidence to justify, either the ends or the means used to achieve his stated aims.  The only thing it might stop is anyone thinking seriously in future about opening a new or taking on an existing letting business and running it as a professional full-time enterprise.  It will not necessarily deter second home buyers or single property part-time “hobbyists”.

The move was heralded as being necessary to close a “tax loophole”, when in fact the FHL regulation were and still are a legitimate tax scheme. A longstanding tax scheme at that, purposely designed by HMRC to meet the needs of a specific, specialised trade. Notable a trade that, since the scheme’s inception 20 plus years ago, HMRC have actively encouraged eligible businesses to us and engage with.  To describe it now as a “loophole” is frankly bordering on disingenuous. To imply by the use of that phrase that those using FHL status are somehow exploiting a weakness to obtain unfair advantage is itself grossly unfair to the vast majority of registered FHL owner operators.

The quoted figures for the Chancellor’s financial estimates of a tax benefits arising varies significantly. The original figure on budget day (?) of £600m over a 5-year period, starting with a £35m benefit in in 2024/25 rising to £140m in 2026/27 and £245m for 2028/29, would appear to be predicated on HM Treasury (HMT) assumptions of urgent sale of some properties this financial year, presumably to obtain the current capital gains tax (CGT) concessions that are still available until 2025, whilst possibly forgoing the tax concession on trading costs?  The future HMT gains then accelerate as a consequence of both the abolition of the annual trading cost allowances (on fixtures fitting etc.) and the loss of CGT and pension contribution concessions, with the estimated gain build progressively in future years, presumably mainly from increased CGT payments on the gifting or sale of properties and/or businesses.  Subsequently other, sometime significantly lower, tax take estimates have been quoted by HMRC and others.  Whether these are revisions on the original estimates or different estimates of different components of the total package is unclear. Regardless, they only serve to further confuse an already confusing plan that real purpose appears to be to extract significantly more tax from a relatively small professional trade grouping working within a much larger and more diverse short-term letting market. 

Without clarity on what the new regulation will be, it is hard to see how HMT themselves can accurately predict the likely response from the industry, let alone go on to predict the additional tax take arising from it.  Presumably they know what they are planning to do but just aren’t tell anyone the options or the final plan yet?  In the apparent absence of any truly credible financial evidence on FHL, PASC UK (Professional Association of Self Caterers) has commissioning a detailed assessment to support their own and others’ future lobbying efforts.  This information, when available, should prove invaluable. It is to be hoped HMT will readily accept the offer of this evidence and assistance from outside, independent experts.

In addition to the use of the term loophole, there have also been suggestion of abuse of the FHL rules (essentially the claiming of the allowances by those not operating as genuine FHLs). It is conceivable that those few who may have been knowingly abusing the letter of FHL rules or those who may perhaps have abused the spirt by say “trading” more as a tax efficient hobby than as a business venture, may have very little to lose and be inclined to bailout immediately? Bailing out, particular on a single property basis doesn’t necessarily mean selling up, it could just mean carrying on as before just under different less beneficial set of tax rules. However, it is far more complex and painful issue for the vast majority in the FHL scheme who are genuinely trading and, in particular, for those businesses trading at any scale.

Currently running a furnished holiday let business is recognised for tax purposes as a trade largely only by dint of the FHL rules.  If those rules are abolished, how then does this not insignificant body of traders, access the tax concessions available to other similar trades and professions (tools of the trade, vehicles, insurances, training etc.)?  As intermated above, whole lives, livelihoods and significant local businesses have been built, often over many years, around and predicated upon the continuance of longstanding FHL rules and, in particular, capital gains and pension contribution concessions.  The justification for removing these concessions now, seem at best flimsy.  To remove them in the manner and at the pace seemingly proposed seems more like an injustice; potentially yet another injustice of the type that recently the British public have started to becoming all too familiar with.

I am led to believe that abolition of FHL rules is not being addressed within the Finance Bill to be tabled on 16 April, as we might reasonably have expected.  Why that is and how and when the changes to FHL are to be dealt with (if at all?) remains a bit of a mystery. Has there been a change of heart or pause for more thought already?   Unless and until the draft regulation is issued (with or without prior or post consultation) business operators would I suggest be very unwise to make any firm decisions on their immediate or future plans, based purely on the Chancellor’s announcements and the flurry of business, trade and news media reporting. 

FHL regulations aren’t in themselves that complex, their complexity lies in their interrelationship with and direct impact on all the other tax affairs of the individuals involved. Most notably, for many of professional traders involved, the treatment for capital gains on their major assets and also their assets’ treatment for pension pot purposes. Once the new regulations are issued, there may of course be very limited time and, potentially, a more limited/overcrowded market (?) for knee jerk but legitimate responses, like the sale of some or all of a portfolio of FHL properties before the April 2025 deadline.  Feeling pressured to sell some or all parts of a business in haste, in order to try and achieve the quite reasonably, long expected financial return offered under the FHL rules is one thing, doing so in the next year only then to potentially find there been a change of direction and there was or is now no pressing need to have done would be quite another.

There are also multitude of “what ifs” and unknowns yet to be addressed.  For example: the treatment of properties never built or intended for alternative residential usage like holiday lodges and apartments but also including shepherd’s huts, treehouse and glamping which can and do all full under FHL rules.  Or the rights and wrongs of a blanket application to properties purposefully built or converted with restricted planning consent that precludes their use for residential purposes.  Or thorny issues, like the potential disincentive to invest in to maintaining the product quality, or the obvious, to us at least, problems of the style, nature, price level or location of many but not all holiday let properties. Factors that make many, properties, particularly within the longer and more established letting stock, largely or totally unsuitable to first time buyer or local working age, or family residential usage.

In the case of stock unsuitable for local residential usage, forcing them out of the FHL market would only serve to facilitate many of them becoming, oft vacant second homes or less well unregulated and often far less welcome Airbnb type operations. Certainly, the aim of removing FHL concessions should not be to try and force the closure of the, more often that not, fulltime, all year round, professional traders and do so in favour of a further glut of gifted amateurs, often unregulated and more likely to be part-time, seasonal provision. That isn’t progress it is the route to anarchy, particularly if domestic tourism wishes to be regarded as an industry and an industry that has accepted standards, cohesive organised approaches, that is well coordinated at every appropriate level and is capable of delivering consistently good products and services, everywhere.

An unintended shift in who owns and/or who operator or doesn’t operate short-term lets isn’t going to help to correct owner occupier or long-term rental housings supply issues.  It could, almost certainly would do far more harm to communities than good.  Especially in rural and/or urban honeypot location where the affordable residential housing, residential work force, resident community and residential public and private service balance is now already often badly out of kilter.  So out of kilter that, without effective intervention, there is a serious danger of it getting to the point at which a lack of authenticity, lack of staff and lack of product capacity combined starts to kills off completely the appeal and restricts or denigrate the communities, products and services that the visitors come to enjoy. Maintaining communities and a sustainable residential workforce is as much tourism and economic issue as it is a social on community concern.  It’s a common mistake, usual made outside the areas impacted, to view them as complete separate and often competing issues.  They are conjoined and balance is the key.

Meanwhile, following a forthright lobbying effort there is a possibility that the current Government might change or amend its approach before the General Election, or that a new or different Government may adopt a different economic strategy and/or seek to fill budgetary holes from other sources, allowing them to rescind the planned abolition of the FHL rules after the election and before the April 2025 implementation date, or possibly soon after.  While there can be absolutely no certainty unless and until such a change of direction happens, the genuine possibility of an about face, prompted by the unusual circumstances of economic conditions and of a looming General Election, can’t be ignored.  In my view it gives further reason to recommend that professional furnish holiday let owners and operator bide their time for as long as possible and think very carefully before making any irreversible decisions on how to react to this March Budget’s announcement.

The now defunct Officer for Tax Simplification (OTS) in its report and recommendations on FHL was unconvinced that tackling FHL alone would address the much wider problem of second homes and Airbnb type usage.  Nonetheless, as was their remit they made some recommendations around simplifying the existing scheme which is an outlier or special case for a relatively small number of businesses.  In trying to address FHL, they suggested a differentiation between small operators and larger letting businesses offering a two-tier approach with a “bright-line test” (a clear and objective rule that leave no doubt) to distinguishes between those who should and those who should not legitimately continue to benefit from a revised FHL regime, as opposed to abolition for all. 

Headline elements for the test suggested by their report were:

• A minimum number of properties let
• Letting on a short-let basis only
• No personal use of the let
• A level of personal time devoted to the property letting business and service provided.

The principle of bright-line test is now being suggested in some quarters as a potential alternative to abolition.  This seemingly plausible compromise solution has some significant problems associated with it, or more accurately critical faults with its predictable and therefore most likely implementation.   The OTS report gave a few ill-considered, almost “off the cuff”, suggestions around what the test might or might not include. In, particular, it suggested what the potential scale might be based broadly on a minimum of 5 letting properties, regardless of bed spaces, usage or turnover.  “Letting properties” or even “letting units” sounds plausible but in reality, it is a pretty meaningless measure of the true scale of a letting business, given all the other variables at play from bed spaces to quality and standard, through to occupancy level and length of letting season.   It is ironic that the key element of the suggest bright-line test for FHLs turns out to fail to meet the basis definition of a bright-line test I.E. an unambiguous, objective rule.  Before its abolition OTS itself was forced to agree with PASC UK that their report’s suggestions where seriously flawed and would not achieve their intent.  Sadly, it would appear that OTS by then had no time or the inclination to officially correct their unintended errors (?). 

There is now a major pitfall in broadly supporting the adoption of the OTS recommendations for a bright-line test.  In all likelihood, if persuaded, Government would default to the line of least resistance, adopting both the principle and the official but flawed, essentially, off the cuff “proposals” made in the OTS report in their entirety.  Unless the Government were willing and able to consider and then adopt a far more nuanced definition of scale, say involving properties, bed spaces, usage, occupancy season length and/or turnover, only a tiny percentage of the estimated 127,000 professional operators in the FHL scheme would pass the, back of a fag packet, suggested first bullet of test that OTS made.  Since OTS no longer exists, who now confirms to the satisfaction of HMT that their original suggestions were indeed flawed and who works up the suitably nuanced alternative within Government? Adopting a far more consider approach means resource, consultation and critically sufficient time to do the consideration; none of which are readily available, especially time to either an outgoing or potential new incoming Government both of which will almost certainly be seeking quick wins in the closing or open months (typically 100 days) of their administrations.  Support bright-line proposals as they stand is case of, be careful of what you wish for, or beware the laws of unintended consequence.

It is a judgement call but unless and until the this or any future Government have firmly rejected any call to rescind the ablution of FHL rules, I would urge colleagues to resist any obvious temptation to suggest the adoption of the bright-line test as a plausible alternative to the abolition or retention of existing FHL rules. Retention has to be the first and preferably only objective sought until it is achieved or is no longer a viable lobbying option. In addition, if and when bright=line tests are raised, as they are almost certainly bound to be over the coming weeks and months, please consider mentioning to anyone and everyone who will listen that while the principle outlined by the OTS may be sound, the off the cuff, untried and untested potential approaches “suggested” rather than officially “proposed” in the OTS report are seriously flawed.  So seriously flawed that if adopted without radical revision, they would do nearly as much harm, if not more, than that of the proposals for the total abolition of the FHL rules. PASC UK are without doubt the undisputed experts on all of these matters, should you need to seek further much more detailed information.

Personally, I find it disappointing that Government appears to have chosen to latch on to the abolition of the FHL rules and publicly promote their demise as the desired means of addressing residential housing issues found in many destinations. Particularly, when all the other evidence available suggests that the real driving force behind the move was an urgent requirement to generate a quick tax fix, to help balance financial forecasts and, thus, facilitate popularist tax give aways elsewhere in the system. 

It is all the more disappoint when you consider that all the other potentially effective measures in combination, like changes to use class orders for short-term lets within planning regulation and a registration scheme for short-term holiday lets, that have been in train and consulted upon to death over many years, have yet to be finally pronounced upon, let alone adopted (latest forecast for long awaited announcements on both is now by mid-July).  Other much needed changes like the outlawyering of no-fault evictions, that already been enacted are now not to be implemented until after major reforms to the Courts are completed, I.E. kicked down the road to well beyond the next election and, thus, potentially far enough away to ignore for now and far enough for it to potentially become someone else’s problem not mine. The Chancellor’s proclaimed desire to satisfy the urgent need to address the residential housing crisis via the abolition of FHL rules aired in the Budget Statement now seem to me to ring a little hollow, especially given the rest of Government’s complete lack of urgency on the matter elsewhere.

That said, bring in legislation or changing regulation in haste like the proposal to abolish FHL tax rules, generally results in poor legislation or ineffective regulation and is therefore almost always ill-advised, poor practice. Bring in legislation or regulation in haste and doing so, apparently for reasons other than those you are claiming, is something far in a way worse than just poor practice. Whether the FHL decision is actually just a smoke and mirrors based tax grab, or to what degree the main purpose of changes has been misrepresented for PR/political reasons, or indeed how that misrepresentation, if true, could or should be viewed, I will leave to others to judge.

I hope that the current Government can now find both the humility to admit the proposals to abolish FHL rules might be ill-conceived and to find the financial headroom elsewhere in the budget to allow them to rescind the proposals at the earliest opportunity.  Preferably well before too many good and much needed professional traders are spooked into rashly abandoning FHL provision in the coming 12 months.  The Government are certainly coming under considerable pressure to do so. Failing that it is to be hoped that an incoming new Government, of whatever colour, will have both the sense and financial manoeuvrability available to them to abandon the FHL changes. Given that by that stage it could well be someone ese’s bad idea, there is then no political capital to be lost from it and potentially much to be gained.  

This and any other future Government also undoubtedly needs to get to grips with both the provision of more residential housing and sensible controls and balances between short-term holiday and long-term residential letting, especially but not exclusively in popular domestic holiday destination. The means have or are seemingly about to been agreed, it just needs a Government, any Government, willing to implement them, regardless of the flak they will attract from among others, second and holiday home owners.  Abolishing FHL rules, either in isolation or as part of that wider package of measure, is the wrong tool, hitting the wrong segment of the short-term holiday let market, in the wrong way.  If pursued as currently proposed, it will do far more harm to the visitor economy and, thus, to local communities, than it will do good to those communities via any forlorn hope of it releasing a wave of affordable properties back into the local residential rental or owner occupier housing markets.