Taxation of the Furnished Holiday Let (FHL) Regime Debate

Furnished Holiday Lettings: Taxation

16:00:00

Peter Aldous (Waveney) (Con)

I beg to move,

That this House has considered the taxation of furnished holiday lettings.

It is a pleasure to serve with you in the Chair, Dame Siobhain. I welcome the Minister and other colleagues to their respective places.

This debate arises because of the changes announced in the Budget to the taxation of the furnished holiday letting—FHL—regime, which have already acquired the nom de plume “the staycation tax”. As I mentioned in the Budget debate on 12 March, I am concerned that the proposal could have unintended consequences.

I acknowledge the thinking behind the change, because there are areas of the country where local people are having great difficulty renting local properties, and it is possible—I will put it no more strongly than that—that holiday lettings might be contributing to that. In other areas across the UK, however, holiday lettings are not having such a negative impact, and they are a vital component of local economies all around our four nations. That is the case in the Waveney constituency, although I acknowledge—this may be where we have difficulties—that there are significant challenges for local people looking to rent a home in nearby Southwold, in the constituency of my right hon. Friend the Member for Suffolk Coastal (Dr Coffey).

Duncan Baker (North Norfolk) (Con)

I thank my hon. Friend for giving way on that point, which is a good one for North Norfolk, where there are clearly problems with housing supply. I put it to him that, in an area such as mine, which has a large number of second homes, the policy change may well lead to more homes coming on to the market to be snapped up by people who are buying them as second homes, making the situation even worse in picturesque places like North Norfolk.

Peter Aldous

My hon. Friend may have read my speech, because that is one of the issues that I will highlight, and I will mention some statistics that the Professional Association of Self-Caterers—PASC—kindly provided to me to make that point.

Jim Shannon (Strangford) (DUP)

I congratulate the hon. Member on bringing the debate forward. I suspect that I might be about to add a controversial opinion, but we will see how it goes. As a representative of what I believe to be the most beautiful constituency in the United Kingdom, Strangford, it is my desire to attract more bed nights to the area, and the Airbnb-type scenario was one way in which we felt that could be done. Does the hon. Member agree that the removal of the tax incentive may prohibit people from doing up the old granny flat in the garden, and so prevent the local economy from benefiting from bed nights? I see the benefits of the incentive, and I think it could be to our advantage.

Peter Aldous

I thank the hon. Gentleman for that intervention. In certain parts of the country, the incentive’s removal might well have benefits, but I argue that it is a rather blunt instrument, which could have unintended consequences in other areas.

Mr Alistair Carmichael (Orkney and Shetland) (LD)

I understand the concerns about housing shortages, which I have in my constituency. The answer to the shortage of housing, however, is to build more houses; it is not to punish what is a very important part of the local economy, including in parts of the country like mine. The advantage of such a tax provision is that it allows for the improvement and professionalisation of the sector, which at the end of the day can only improve the visitor offering.

Peter Aldous

I agree with the right hon. Member on both counts. There are other measures being introduced, such as the register, that I believe will help bring professionalism into the sector. In fact, I know from the constituents I have spoken to and the businesses that operate this type of furnished holiday accommodation that they are incredibly professional businesses.

Simon Jupp (East Devon) (Con)

Several owners and operators in East Devon have been in touch with me about the changes, about which there is widespread concern. Does my hon. Friend agree that the Minister should hold a public consultation about the changes—my hon. Friend might be intending to say that—and consider a list of exemptions, for example if a property cannot be a permanent residence because it is on a working farm?

Peter Aldous

I agree with my hon. Friend wholeheartedly, and I intend to develop some of those points.

Anne Marie Morris (Newton Abbot) (Con)

Will my hon. Friend give way?

Peter Aldous

I will give way one more time at this stage, after which I will have to make some progress.

Anne Marie Morris

On the basis of the contributions that have been made, does it not seem obvious that what we need is a proper impact assessment of the reform? We need to look at the impact on the economy, the impact on housing and the impact on the tourism sector. I am sure my hon. Friend will also come to the expected impacts on gross value added and on jobs.

Peter Aldous

I agree wholeheartedly. I had planned to raise a lot of the points that have been made; let me now get on to back them up with the evidence.

Since the Budget, I have been contacted by many constituents highlighting their concerns. I am grateful to them for their feedback, as well as to PASC, the Short Term Accommodation Association and the National Farmers Union for all their briefings and advice.

In some ways, I have a sense of déjà vu, in that the proposal mirrors in many ways those put forward in the 2012 Budget to tax Cornish pasties and static caravans. In his Budget speech, my right hon. Friend the Chancellor stated that he had concerns that the current tax regime for FHLs is distorting the market and that there are not enough properties available for long-term rental by local people. Therefore, to make the tax system work better for local communities, he plans to abolish the FHL regime. In the accompanying Red Book, the proposals are described as having the advantages of tax simplification, creating a level playing field and supporting people to live in their own areas. I have concerns that the proposals will not fulfil those objectives, and I hope I can illustrate why.

The Office for Budget Responsibility has calculated that the measure, along with the abolition of the multiple dwellings relief, will raise £0.6 billion of additional receipts by 2028-29. That figure pales into insignificance compared with the potential loss of value added and local jobs, which I shall outline shortly.

Angus Brendan MacNeil (Na h-Eileanan an Iar) (Ind)

I am grateful to the hon. Member for giving way and for securing the debate. In a response that I had from the Chancellor last week on this very issue, he talked about housing and the distortion for local people, but there is no evidence that if these houses went on sale they would become affordable houses by any manner of means. To echo the point made by the right hon. Member for Orkney and Shetland (Mr Carmichael), it is many years since the housing charity Shelter told me that there were more second homes in Norway than in Scotland, but there were more first homes in Norway as well. The point is, let us have more first homes, but let us not be damaging the very weak economy of many of Scotland’s islands by doing that.

Peter Aldous

I thank the hon. Gentleman for that point, which he made particularly well. Hopefully, it will also come out as I move forward in my speech.

In the first instance, it is necessary for me to set out what I would describe as a few home truths and to set the record straight. First, it is important to point out that the FHL regime is not a tax loophole; it was introduced in 1984 specifically to cater for the fact that a holiday let business is very different from a private rental business. Forty years on, that remains the case, and it should be pointed out that strict criteria are in place if people wish to move into the regime.

Secondly, it should be emphasised that furnished holiday lettings are a long-standing economic lifeline for many coastal and rural areas.

Christine Jardine (Edinburgh West) (LD)

The hon. Member is making a lot of very good points, specifically about these lets being a lifeline for areas. I was recently visited by representatives of the furnished holiday lets association in Scotland, who feel that they have been hit by a double whammy: this legislation and the short-term let licensing legislation in Scotland. Should there not have been a joined-up approach? Would it not have been better for the Government to speak to the devolved Administration and find a way forward for the whole industry, rather than hamper one of Scotland’s biggest and most profitable sectors?

Peter Aldous

I think the hon. Lady has hit on the way forward. The solution to this problem—if indeed there is a problem—needs to be sorted out locally, in consultation with the devolved Assemblies in Scotland, Wales and Northern Ireland, and with local authorities elsewhere in the UK.

Dr James Davies (Vale of Clwyd) (Con)

My hon. Friend is being very generous in giving way. In April last year, the Welsh Government increased to 182 days a year the occupancy threshold that allows holiday lets to qualify for business rates. They have also allowed local authorities to increase council tax premiums to up to 300% in cases where that threshold is not met. Does my hon. Friend agree that that Welsh Government policy is destroying legitimate business among holiday let operations, and damaging the local economy?

Peter Aldous

I do agree, and that point illustrates that this is a multifaceted problem or issue. A whole host of organisations need to sit around the table and come up with solutions that are bespoke and right for their councils or counties, or indeed for their devolved nations.

Angus Brendan MacNeil

The hon. Gentleman is bang on. He is essentially saying that one size does not fit all and that we should find the right solution for every place, because the current provision is a very blunt instrument.

Peter Aldous

I thank the hon. Gentleman for that further observation; he is right.

As I was saying, my second point is that it should be emphasised that furnished holiday lets are a long-standing economic lifeline for many coastal and rural areas. The regime supports micro and small businesses that are the cornerstone of many visitor economies. Abolishing it would hurt those businesses—including farmers who have diversified into tourism, as well as other businesses such as pubs, which rely on the lets for trade—and PASC estimates that even a modest 20% reduction in furnished holiday lets could result in the loss of £1.9 billion GVA and 46,000 jobs. The former figure is considerably higher than the Office for Budget Responsibility’s assessment of the additional tax that will be generated.

Thirdly, furnished holiday lets are not the cause of the housing crisis, as I think colleagues have mentioned. PASC estimates that a total of 197,000 properties in the UK fall within the FHL regime. Due to planning restrictions, 39% of those holiday let properties can only be used for holiday purposes. That means that 76,000 furnished holiday lets could not be used as residential dwellings, and only 121,000 furnished holiday lets have planning permission to be used as residential dwellings. The context is important: those 121,000 dwellings without planning restrictions have been established not in the past three or four years but over many decades; however, they represent 0.4% of the 30.1 million total UK housing stock and just 40% of the annual house building target of 300,000 new homes. Although there might be anecdotal evidence to suggest that private rental landlords are moving into the short-term let sector, PASC can find no quantitative data to support that conclusion. Indeed, less than 2% of traditional short-term let businesses had previously rented their properties out as a long-term let.

Anne Marie Morris

Is it not also clear, following the Renters (Reform) Bill, that there has been a haemorrhaging of landlords who do not wish to be in the private rented sector? As a consequence, they used to go to holiday lets, so holiday let individuals are hardly going to be going back to the private rented sector, which they wanted to leave and are leaving in droves.

Peter Aldous

My hon. Friend makes a good point that reinforces my arguments about the unintended consequences of this proposal.

My fourth point is that there is no statistical evidence to suggest that furnished holiday lets have a disproportionate impact on house prices. As part of the consultation on the proposed introduction of the new planning use class for short-term lets in England, the Great British Holiday campaign commissioned an economic impact study by Frontier Economics on the size, growth and economic importance of traditional holiday lets in rural and coastal communities—unfortunately just in England, but I am sure that is equally relevant to Scotland and Wales. Frontier Economics found that there was no relationship between popular holiday let areas and the growth rate of real house prices between 2015 and 2022.

My final home truth is that there would be unintended consequences of a change to this taxation regime.

Angus Brendan MacNeil

While listening to the hon. Gentleman, it occurred to me that extended family or community members who come back home to an island often use such holiday lets—I could give personal examples from the past year of people returning from New Zealand, Canada and even mainland Scotland. Such properties have a community health aspect to them, over and above the money that they are raising in the economy.

Peter Aldous

I thank the hon. Gentleman for that intervention. He is correct.

The unintended consequences of this taxation regime are that there would be thousands of job losses; a proliferation of empty properties, which could not be used for long-term lets for planning reasons; and a loss of billions of pounds to coastal and rural areas. According to PASC, of its members whose businesses would become non-viable and would have to be sold, 39% believed that the most likely buyer would be a second-home owner; 37% that the property would be bought by another holiday operator; and 16% that the purchaser would come from outside the area. In short, the policy would provide very limited assistance to the group that it is seeking to support: local people looking to rent a local home.

I will finish quickly and not take any more interventions to give the Minister an opportunity to respond. I have nine questions for him. First, what is the Treasury’s evidence to suggest that abolishing the holiday letting regime will encourage a significant number of businesses to convert from furnished holiday lets to the private rented sector, so as to justify the harm that it will cause to tens of thousands of small and microbusinesses? Secondly, why was there no consultation prior to the proposal, and will the Treasury now commit to a full public consultation due to the significant number of businesses that expressed concerns subsequently? Thirdly, has the Treasury considered the potential unintended consequences of abolishing the FHL regime, including the risk that it will lead to more empty second homes in rural and coastal areas? Fourthly, if the abolition of the FHL regime results in a reduction of furnished holiday lets, what evidence does the Treasury have to suggest that this vital bedstock of many rural and coastal economies will be sustained by other visitor accommodation?

Fifthly, will the Treasury consider the recommendations of the Institute for Fiscal Studies and reverse the mortgage interest relief restrictions that have stifled the supply of the homes that renters desperately need? Sixthly, why does the Treasury consider that a bespoke tailor-designed scheme for holiday lets that has operated successfully for 40 years should now be abolished if there is scant evidence to suggest that different tax regimes have resulted in private rental landlords switching to furnished holiday lets? Seventhly, will the Treasury ensure that the abolition of the FHL regime will not result in a group of people who are essentially entrepreneurs being retrospectively taxed at a rate that is 4% higher than the top rate of capital gains tax that applies to a passive investor of listed shares?

Eighthly, does the Treasury consider that the 5,000 new furnished holiday let properties in the UK that PASC guesses may have been created annually since 2016—so 40,000 properties—have had a significant impact on the current housing crisis when compared with the 30.1 million UK homes, 1.5 million empty or vacant homes and the commitment to build 300,000 new homes each year? Finally, will the Treasury align the VAT treatment of holiday lets with that of long-term lets if the policy intention is to align the tax treatment of furnished holiday lets and the private rented sector, or will actively managed FHLs now face a more punitive tax regime than a passive private rental investor?

In conclusion, the proposal does not create a level playing field. If it is to be equitable, it will be necessary to complicate the tax system, not simplify it, and it will have a very marginal impact, if any, on enabling local people to rent homes in their local area. The industry is asking that the Treasury undertakes a full public consultation of any legislation, which I personally think is being remarkably polite.

I cannot see a case for changing the current regime. There should be no future finance Bill to legislate for these changes, and like the proposed taxes on Cornish pasties and static caravans, the proposals should be shelved. Instead, a consultation should take place so that a more targeted localised approach, as opposed to this rather blunt instrument, can be worked up by Government, the devolved Assemblies and local government. That way, more focused and localised solutions can be put in place where they are needed, so as to ensure that more properties are available for long-term rent by local people.

16:23:00

The Financial Secretary to the Treasury (Nigel Huddleston)

It is a pleasure to serve under your chairmanship, Dame Siobhain. I thank my hon. Friend the Member for Waveney (Peter Aldous) for raising this issue today. It is a topic that I have discussed previously with him and with many hon. Members who have participated in the debate, and I am happy to continue to discuss it. I should say up front that there are no plans for a consultation, but that does not mean that hon. Members cannot engage with me.

At the moment, there is broad recognition that the current system is contributing to some distortions. My hon. Friend mentioned having a bit of déjà vu. In my former capacity as Tourism Minister, I travelled around the country and stood in this Chamber discussing the issue. I had colleague after colleague and industry after industry making claims for and demanding the exact policy that we are introducing, so hon. Members need to recognise that there is another side to the argument.

Although my hon. Friend outlined a different pattern in his part of the country, there are parts of the country where the current regime, with beneficial rates for FHL properties, creates an incentive for a disproportionately large number of properties to be FHL—short-term rentals, rather than long-term rentals—which is causing problems. I have heard hoteliers and owners of B&Bs say that the current system is not fair and reasonable. I have heard owners of pubs, bars and restaurants complain that the large number of short-term lets and FHL properties is undermining their value proposition.

I gently say to hon. Members that we all have colleagues from different parts of the country and there is another side to the argument, although I understand the vehemence and strength of feeling in the Chamber today. I know the pattern is mixed across the country, but the problem is that we cannot do tax treatment, such as income tax relief, ward by ward or constituency by constituency. As hon. Members know, we have a whole range of other initiatives to encourage the supply of housing more broadly and limit the impact, including through local taxation and restrictions on housing.

We are proposing not to abolish FHLs, which play a vital role in our tourism ecosystem across the country, but to change their tax treatment to put them on an equal footing and create a level playing field with long-term lets. The problem is that if I were an investor thinking of buying a property in a certain area, it would make pure economic sense for me to get a short-term let rather than a long-term let. Therefore, in certain communities across the country, when a new property becomes available, there is an incentive for an investor to straightforwardly go for a short-term let rather than a long-term let because there is beneficial tax treatment. We are not eliminating the tax incentives but levelling the playing field so that the perverse incentive no longer exists.

Anne Marie Morris

If the Minister is unwilling to undertake a consultation, is he willing to look at a carve-out—an exemption—for properties that cannot be used in the private rented sector because of covenants on them? That was discussed by the Office of Tax Simplification. Will he look at that seriously?

Nigel Huddleston

I thank my hon. Friend for that point, which she has raised with me previously. I should put on the record that many hon. Members in the Chamber have raised concerns about the implementation of this proposal with me. The challenge is that one of the goals is simplification, and when we start moving into the area of carve-outs and exemptions, it opens up the system to challenges and potential abuse. I hear what my hon. Friend has to say. She will always hear from Ministers that we keep tax policy under review, but as soon as we start moving to an exemption here and an exemption there, it causes great difficulties. I also thank PASC for its constructive engagement with me on this issue and for giving me information.

I have had lots of correspondence and have engaged with colleagues, and I want to make this very clear. There is a belief that when we said we were abolishing the FHL tax regime, that meant we were abolishing FHLs. No, of course we are not. As I said, they play a vital role in the visitor economy, but we want to change the tax policy. The intention is for the tax reform to apply to all properties.

There will continue to be benefits. After the abolition of the FHL tax regime, a higher rate paying landlord with mortgage interest costs of £12,000 per year would still get up to £2,400 taken off their income tax bill through the relief. If they spend a further £8,000—for example, on insurance, letting agent fees and replacing domestic items such as sofas, fridges, washing machines—they could save a further £3,200 in income tax by using the reliefs that are available for all landlords. It is about levelling the playing field. There will still be tax incentives, but we do not want that distortion. When somebody buys a new property or an existing property, there is a false incentive that is causing some problems, because human behaviour that naturally seeks a better return on investment leads them towards short-term lets, rather than long-term lets. That is what we are trying to correct.

Mr Carmichael

On a point of order, Dame Siobhain. When I intervened, I should have pointed out that I have a declarable interest registered. I apologise to the Chamber for not doing so at the time and I hope the position is now clarified.

Dame Siobhain McDonagh (in the Chair)

Okay. That allows me to shorten what I was going to say.

Motion lapsed (Standing Order No. 10(6)).

In Summary…

The debate led by Peter Aldous MP on 1 May 2024 in regards to the potential abolishment of the FHL Regime unfortunately failed to provide any further insight into the progress of this proposal.

Whilst we agree that the FHL Regime shouldn’t be abolished, it would appear the Treasury are currently refusing to consider the objections with no plans for a consultation.

As a result, we are still awaiting further details on how this change will impact capital allowances relating to the FHL sector.