The rental market in the UK has undergone something of a revolution in recent years, with a significant shift away from permanent or long-term renting towards Airbnb style holiday and short-term letting.

There are several reasons for this shift which could involve up to 20 per cent of the UK’s private rented sector. As the UK governments introduced stricter regulations and restricted tax benefits for traditional long-term buy-to-lets, landlords began to look to alternatives, either by putting their investments into a company scheme, switching to short-term self catering lets, which give them several advantages, or selling up altogether.

Why landlords shift away from long-term letting?

An increasingly regulated sector, with reduced tax benefits, has made long-term letting less profitable. Several pieces of legislation have made the business of letting in this way much more challenging for the average small-scale landlord.

Legislation such as MEES, the minimum energy efficiency standards, Right to Rent Checks, tenancy deposit protection, and the Tenant Fees Act 2019, which bans landlords from charging most letting fees, and caps the amount of tenancy deposits, have taken their toll on landlords.

Since 2015, landlords took a steadily increasing financial hit when rental income was added to a landlord’s employment and other incomes for income tax purposes, and tax relief on mortgage interest payments was gradually restricted down to the basic income tax rate. In addition, stamp duty was surcharged at an extra 3% (Stamp Duty Land Tax) imposed on purchasing additional residential properties, deterring potential landlord investments in the buy-to-let market.

Now an even greater onslaught is envisaged, with the ending of ‘no-fault” Section 21 evictions’ and effectively ending the assured shorthold tenancy under the proposed Renters’ Reform Bill Act, perceived by many to make it more difficult for landlords to remove tenants.

This, coupled with a host of other measures and required documentation is causing many landlords to reassess their strategies or to sell-up. Now that rising interest rates are putting even greater pressure on buy-to-let landlords, pushing some to finally “throw in the towel”, it’s been even more important for landlords to reassess their investment strategies: short-term letting being one option.

Some landlords have indeed decided to exit the market, or downsized their portfolios, or curtailed their future investment plans, some have gone the limited company route, while others have decided to explore short-term and holiday let alternatives.

What are short term lets?

There is no statutory definition of a short-term let, but one would generally be defined as a residential letting of less than six months (six months is the minimum period for a AST) where all utilities, TV and internet are included in the rent. These properties would be let fully furnished and landlords are expected to provide bed linen and a fully equipped kitchen with all the living utensils, pots and pans, china, glassware and cutlery.

Most short-term lettings would be measured in days, weeks and months. The advent of Airbnb and similar platforms has changed the way new tenancy occupations are arranged, making it easier to get new tenants, even at short notice, for much shorter periods of time.

Is short-term letting profitable?

Existing buy-to-let landlords need to think carefully before the change if they can manage a business-like profit, because six-month rentals may still be the right choice for them. Always seek professional advice before making a change like this. The longer term tenancy may last months or even years without changes, and it provides a guaranteed income without the need to constantly find new tenants, and importantly, deal with the headaches and hassles that can go with short-term letting. Tenancy changes mean a lot of cleaning, bed changes and paperwork for every new tenant.

The main difference between furnished holiday lets and residential buy-to-lets (BTLs), and this is a big advantage, is holiday lets are treated as trading businesses for tax purposes, whereas BTLs are regarded as an investment by HMRC, and taxed as such.

Another major difference is that furnished holiday lets, as opposed to buy-to-lets, allow landlords to claim full mortgage interest relief (section 24), deducted directly from the profits of FHLs. Ultimately, it means that landlords can charge higher rents, pay less tax and retain more of the profits.

These lets can be classed as trading businesses, providing they are let for at least 70 days per year and available to let for at least 140 days. They therefore would generally pay business rates as opposed to council tax and certain capital allowances and expenses can be claimed for with these holiday lets that can’t be claimed on typical buy-to-lets.

These would include the cost of refurbishing or upgrading the property, furniture, fixtures and equipment to set-up the letting to a high luxury standard - which could increase your profit – and the capital allowances are then offset against income, meaning that tax is further reduced.

Furthermore, as a business (commercial property) the income from a furnished holiday let is classed as Net Relevant Earnings (NRE) for pension purposes, allowing landlords to make tax-advantaged pension contributions.

Capital Gains Tax (CGT) relief when selling a furnished holiday let gives certain CGT reliefs which are available including: Entrepreneurs relief, Business assets disposal relief, Business assets rollover relief and Gift hold-over relief. Also, when the time comes to sell, rather than pay 28 per cent CGT, landlords will be taxed at 10 per cent, using the entrepreneurs relief.

Paying Business Rates can be both an advantage and disadvantage but it has been possible to claim Small Business Rate Relief, exempting the property from Council Tax.

VAT is chargeable if turnover reaches the VAT threshold of over £85,000. Having to charge VAT (20 per cent) on top of the usual rent may put landlords at a disadvantage with the competition though.

There is generally a higher rate of wear and tear with short-term lets so landlords need to factor in more replacements: kitchen, furniture, appliances, floor coverings etc.

Finally don’t forget to factor in a lot more day-to-day, week-to-week or month-to-month (depending on changeovers) work involved in running a holiday let. This also involves marketing, admin work and dealing with issues with tenants. It is difficult to run these types of lettings from a distance unless you can find reliable help locally, but online platforms make for easy administration and marketing.

Taxation of Furnished Holiday Lettings

That’s all very well, what’s the catch?

The catch is regulatory risk – that government and local authorities changing the rules.

For some time councils have been making noises about owners of second homes and holiday lets benefiting from these tax advantages, while a surge of Airbnb style short-term letting is removing long-term rental properties from the market, making it difficult for locals and workers to find somewhere to live, especially in many sea side holding town.

It’s reached the stage where landlords and investors are now being warned off holidays lettings as Scotland and now Bristol City Council are coming down hard on these types of lettings.

Law changes in Scotland

The Scottish Government says that councils will be given new powers to crack down on Airbnb-style lets, which have boomed in the nation as new laws on traditional lettings made life a lot more difficult for landlords.

Short-term lets have been welcomed by many consumers including workers needing temporary accommodation in the week, and they offer a more affordable alternative to traditional holiday accommodation. But there have been issues, notably anti-social behaviour and the impact on traditional rental housing supply.

In Scotland councils are now able to introduce licensing schemes for short-term lets, with the deadline to apply for licences extended until October 1, 2023, enabling them to establish designated areas where planning permission is required before properties can be let out on a short-term basis. Additionally, the Scottish scheme will introduce buy-to-let style safety requirements for all short-term lets and there will be further conditions to help tackle littering or overcrowding of properties.

The Scottish Government has also promised a review how short-term lets are taxed in the future to make sure they support local services and “provide an appropriate contribution to local communities.” A so called “tourist tax” may be linked to the licensing scheme in Scotland.

Calls for a clampdown prompted the Scottish Government to run a consultation on the issue of short-term lets and a majority of the over 1,000 respondents said they supported the idea of short-term let reforms, though these have yet to be clarified.

Airbnb has insisted that its short-term lets are good for cities, despite the opposition from some local residents, while details of the Scottish government's plans including the financial cost of licensing and how taxation of short-term lets would operate alongside existing proposals for tourism taxation would be implemented.

Change coming in England

Bristol is also considering a crackdown on Airbnb where cross-party of councillors want to reduce the impact Airbnb and shot-term letting is having on the city’s rental market.

Counsellor Nicola Beech, who has responsibility for spatial planning in the city, has said that currently, “local authority policy-making powers simply do not enable us to have sufficient regulation. This springboards these new industries into life, as they are free to operate how they choose with so few controls in place, creating a completely uneven playing field.”

Regarding short-lets she had said:

“There are 2,000 registered properties for Airbnb (in Bristol) and this is rising year-on-year. Meanwhile, we have 12,000 people on our housing waiting list, hundreds in temporary accommodation and a generation of people renting. We are asking for support of full council to lobby for change and level the playing field.”

Meanwhile, the Conservatives are looking at a batch of reforms and Labour have pledged that they will close tax loopholes for second homes and short-term lettings. One quarter of councils in England have made plans to double council tax on second homes and the government is planning to give councils the power to raise the tax on second homes, but so far not on holiday lets.

In contrast, Labour has said it will make licensing mandatory for all holiday let owners in order to control the number of these types of accommodation being offered. Labour and some Conservative councils are against these operations moving to business rates, when, they argue, they are still using local services such as refuse removal.

So, while there are many advantages currently to shifting to short-term lets, these are under threat from many directions.

If you are considering changes in your letting strategy you should speak to your accountant or taxation specialist before making any changes.