Scrap tax perks for holiday let landlords, urges Government’s adviser

Second home owners could lose out on tax breaks worth thousands after the Government’s adviser called for a crackdown on holiday lets.

The Office for Tax Simplification recommended it stops owners of furnished holiday lets from offsetting their mortgage interest payments against their income tax bill – a benefit that matters even more since rates have soared.

Scrapping the so-called “furnished holiday let system” would bring an end to one of the last tax-efficient forms of small-scale property investment. This would force holiday let owners to pay tax on their earnings in the same way as traditional buy-to-let landlords.

It means that someone renting out a four-bedroom house in Cornwall as a holiday let will pay an extra £2,000 a year in tax, according to calculations by RSM accountants.

Under the current rules, a holiday let owner earning £24,000 a year pays an estimated £5,775 in income tax, assuming the property is owned jointly by a couple who are both higher rate taxpayers. If the “furnished holiday let” system is scrapped, this bill would surge to £7,687, RSM found.

Until 2017, buy-to-let landlords also had this perk, but it was phased out and replaced with a 20pc tax credit in 2020. Holiday let landlords, however, kept the relief.

Chris Etherington, of RSM, said: “If they get rid of that benefit, the ultimate result is that people will sell up because their properties will become commercially unviable.”

But selling up could also become more expensive. The FHL system means that holiday let owners can qualify for Business Asset Disposal Relief, which allows owners to pay capital gains tax at 10pc when they sell. If this was scrapped, they could pay at the same rate as buy-to-let landlords, which is 28pc for a higher rate taxpayer.