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A post-Budget Spring holiday anyone?

It was recently announced by the Government as part of the Spring 2024 Budget that the favourable tax regime applying to furnished holiday lettings (FHL) is to be abolished from 6 April 2025.  

Currently, landlords who rent out short-term holiday properties (for example, traditional holiday lets and flexible short-term holiday lets available via online platforms) and which meet several conditions benefit from certain tax advantages. These tax advantages (such as a full tax deduction for mortgage interest costs) do not apply to landlords that rent out residential properties on a long-term basis (such as under assured shorthold tenancies (ASTs)).  So, going forward, FHL landlords will be on an equal footing, in tax terms, with buy-to-let landlords.

The aim of the new policy, according to the Chancellor's Budget announcement, is to make the property tax system fairer and more efficient, free up more homes for the private rental sector (with FHL landlords now supposedly changing to let their properties to long-term tenants) and to 'support people to live in their local area'.  

The draft legislation is yet to be published (interestingly, it was not included in the published Finance Bill so there may be a question mark over whether this change ever becomes law) but the announcement did confirm that any such legislation will include anti-forestalling measures (effective from 6 March 2024) to prevent the use of unconditional contracts to obtain capital gains tax (CGT) relief under the current FHL rules. 

This measure, together with the reduction in the CGT rate (from 28% to 24%) on residential properties and the withdrawal of Stamp Duty Land Tax (SDLT) Multiple Dwellings Relief (MDR), aims to raise over £600million a year in total in 2028-29.  Whether this is achieved is yet to be seen and in respect of the abolition of MDR, this will increase SDLT costs for those investing in residential portfolios such as BTR and student accommodation. 

Planning to keep homes available?

The proposed changes to the tax regime are accompanied by a recent announcement from Michael Gove in respect of proposed changes to planning regulation which are designed to 'keep homes available'. The tax changes alongside the changes to the planning regime are a coordinated effort by the Government to make it more difficult, and less profitable to use C3 dwellings as holiday lets/Airbnb type accommodation.   

Currently (outside of London) there is no prescribed limit on the number of days a property may be let on a short-term basis. This means that, provided there has not been a "material change of use", planning permission would not be required to use an existing residential dwelling as a holiday let or short-term Airbnb-style rental. 

The Government has announced they are planning to introduce new legislation this summer that would allow local planning authorities to control the use of residential dwellings and require planning consent for the use of short-term rentals or holiday lets.

The current position on use of C3 dwellings for short term lets

In most cases the use of a residential dwelling as a short-term rental or holiday let would not be treated as a "material change of use" requiring planning permission. However, there is no statutory definition of a "material change of use"; rather it is a consideration of fact and degree which means that cases are determined on their own individual merits. 

Short-term lets are generally considered to fall within Class C3 (Dwelling Houses). This use class is defined as follows: 

  1. a single person or by people to be regarded as forming a single household;
  2. on more than six residents living together as a single household where care is provided for residents, or
  3. not more than six residents living together as a single household where no care is provided to residents.

The situation is slightly different in London, where legislation explicitly states that letting on a short-term basis for more than 90 nights a year constitutes a material change of use and planning permission is therefore required. However, it is well reported that there are difficulties with enforcement of this control as it can be difficult for a local authority to monitor how many nights a property is let.  

The proposals 

The Government intends to introduce a new use class for short-term lets and holiday lets. Short-term lets and holiday lets would fall within a new use class which would be known as 'Class C5'. Whilst permitted development rights would also be introduced to allow a change between Class C3 (residential) and Class C5 (short term or holiday lets) without the need for planning permission this will enable local authorities to remove these permitted development rights by introducing an article 4 direction which would mean that full planning consent would need to be obtained before changing the use from Class C3 (residential) to Class C5 (short-term let or holiday let). 

Therefore, the specific regulation of the sector would be dependent upon the specific local authority (and therefore your postcode) which could lead to a situation whereby holiday 'hotspots' such as Devon and Cornwall are subject to the increased regulation whilst other areas may not be. If you own an existing holiday let you would not be affected by this change in regulation. 

Separately, and in the meantime a new mandatory register will be introduced to give local authorities greater information about the level of short term lets in their area – presumably so they can decide whether or not they will be implementing an article 4 direction when these new rules are introduced.

A two-tier housing market

Where these planning controls are put in place, a two-tier housing market could operate: those properties that were used for short-term lettings before the changes and can continue as such, and those that were not in use for short-term lettings prior to the new rules coming into force and where planning permission would be required for any change to short-term lettings. Some fear that it could result in a rush to convert dwellings into short-term lets ahead of the changes coming into force, thereby exacerbating the problem that the changes seek to address. The tax changes might provide a brake of sorts on that desire, although typically holiday let rental income tends to exceed long term rental income. So with the tax regime being equalised, holiday letting is still likely to be more profitable in many cases.   

In summary

The combination of tighter planning regulation and the abolition of favourable tax rules means that the holiday let sector is facing a more difficult outlook, albeit whilst the tax rules will apply across the board, the planning regulation will be dependent on postcode. 

If you wish to discuss any issues of this nature, then please do not hesitate to get in touch with our Planning team or Tax team at Trowers & Hamlins.