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Preferential tax treatment for holiday lettings could be scrapped under the recommendations of a report urging the government to reconsider the economic benefits of the sector’s tax regime.
Holiday homes rented for short lets may benefit from lower capital gains tax on the sale of a property, full income tax relief for mortgage interest deductions and profits counting as earnings for pension contributions — unlike the arrangements applying to longer-term buy-to-let rentals.
There are around 127,000 businesses owning furnished holiday lets — a number that has risen sharply in recent years.
The report by the Office of Tax Simplification (OTS), an independent adviser to the government, said: “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 surveyed more than 3,500 people on how the taxation of income from property might be simplified and found that respondents were “neutral” on the benefits of the holiday lettings regime, compared with its administration, and those who were positive felt “the scope of who was included was too wide”.
David Fell, senior analyst at estate agency Hamptons International, said that “some buy-to-let investors have diversified into holiday lets over recent years given their more favourable tax treatment” but he added that this has been met with political pressure “given the rapid growth in the number of holiday homes in a handful of rural locations”.
If the government retains the current scheme, the OTS recommended it remove the current distortion of allowing the regime for properties in the European Economic Area, either by permitting worldwide properties to qualify, or by limiting the regime to UK properties.
The review by the OTS suggested that the government simplify tax rules applying to repairs and improvements, which affect around 2.8mn people who receive rental income in the UK. The report described distinguishing between the two as “hard to interpret” yet repairs are tax deductible and improvements are not.
Stefanie Tremain, partner at accountancy firm Blick Rothenberg, said: “As a starting point, any work incurred to improve the energy efficiency or sustainability of a property should be automatically deductible to encourage such work without landlords worrying they will not be able to get an immediate tax break for the expense incurred.”
The report identified that some 1.5mn — almost half — of all taxpayers letting property do so jointly, mainly with a spouse or civil partner. Those not married or in a civil partnership by default declare the split of income based on beneficial ownership, while spouses and civil partners default to a 50:50 split.
The OTS recommended that “the government should consider removing the anachronistic 50:50 rule for spouses and civil partners”. Tremain called the need for spouses to submit a form with proof of the ownership split to be taxed on an unequal share of property income as “an unnecessary area of complication and additional administrative burden”.
“This part of the legislation could be simplified with little, if any, wider implications or repercussions and therefore seems to be a ‘no brainer’,” she said.
Other suggestions made by the OTS included ensuring Making Tax Digital — due to come into scope for landlords earning over £10,000 a year from April 2024 — is able to cope with jointly owned properties as well as multiple agents, and suggested the earnings threshold of £10,000 could be raised.
In September, former chancellor Kwasi Kwarteng announced plans to scrap the OTS, and instead “embed simplification” within government departments.
Susan Ball, president of the Chartered Institute of Taxation, has written to Kwarteng’s successor Jeremy Hunt, arguing that keeping the OTS as an independent organisation would help prevent the risk of in-house tax simplification efforts retreating to “group-think”.
The government said: “Tax simplification is a priority for this government, and we thank the Office of Tax Simplification for this review.
“Now is the right time to close the Office of Tax Simplification because we are rethinking our approach. We will embed tax simplification into the institutions of government and a mandate has been set to focus on simplifying the tax code.”
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