Investors are braced for another clampdown on property investing after chancellor Jeremy Hunt announced plans to abolish the furnished holiday lets (FHL) tax regime, but which areas could be most affected?
Renting a holiday home previously provided a viable alternative to buy-to-let as investors had special perks letting them continue to claim mortgage interest relief, expenses for property costs and pay 10% capital gains tax when selling.
But Hunt used his Spring Budget to announce that the FHL tax regime will be abolished from April 2025, which he said would help free up property stock and fund the national insurance cuts.
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Researchers at Howden Insurance used Office for National Statistics data to find the areas of England and Wales with the highest density of holiday homes.
This could be an opportunity for buyers trying to spot an area where more properties could come up for sale if holiday homeowners exit, or landlords could see it as an opportunity to add to their portfolio.
The areas with the highest density of holiday homes
Unsurprisingly, the most popular areas for holiday homes are on the coast.
The Isles of Scilly, an archipelago off the coast of Cornwall, claims the title of England and Wales’ holiday home hotspot with 65 holiday lets compared with a total of 1,300 residential homes.
That is 5% of the area's residential properties.
It is followed by South Hams in Devon, which has 2,050 holiday homes to 46,525 total residential properties - resulting in an overall percentage of 4.4%.
Gwynedd, a county in northwest Wales is the area with the third most holiday homes, with a total of 2,590 to 63,220 total residences - equating to 4.1%.
Other popular areas include seaside spots such as Scarborough and the Isle of Wight.
| Area Name | Holiday Homes | Total Residences | Percentage of Holiday Homes |
|---|---|---|---|
| Isles of Scilly | 65 | 1,300 | 5% |
| South Hams | 2,050 | 46,525 | 4.4% |
| Gwynedd | 2,590 | 63,220 | 4.1% |
| North Norfolk | 2,195 | 56,680 | 3.9% |
| Isle of Anglesey | 1,190 | 35,215 | 3.3% |
| South Lakeland | 1,745 | 55,855 | 3.1% |
| Scarborough | 1,710 | 59,345 | 2.9% |
| Pembrokeshire | 1,800 | 64,400 | 2.8% |
| Isle of Wight | 1,750 | 73,475 | 2.4% |
| King’s Lynn and West Norfolk | 1,660 | 74,780 | 2.2% |
How to prepare for the FHL tax clampdown
The changes to FHL tax won’t come in until the next tax year in April 2025.
That gives holiday homeowners plenty of time to prepare. This could include increase fees to offset higher taxes or selling your property.
Tax advisory firm Zeal suggests holiday let owners could lose an average of £1,890 a year in tax relief, based on an average mortgage balance in the UK of £189,000, and assuming they are a higher-rate taxpayer.
The tax relief changes will only affect you if you have a mortgage on your property but reduced capital allowances and potentially higher capital gains tax could hit those trying to sell.
Sellers are being warned that buyers may be in a strong negotiating position though.
“Selling your portfolio of furnished holiday lets be prepared for a price chip from the buyer,” says Elizabeth Small, a tax partner at law firm Forsters.
“From April 2025, if you let properties that would currently now qualify as FHLs, you will no longer be able to claim capital gains tax reliefs for traders, you will not be entitled to plant and machinery capital allowances for items such as furniture, equipment and fixtures and the profits will not count as earnings for pension purposes
“This means that the buyer is likely to want to pay less for a FHL portfolio as his post tax return will be diminished.”
Sellers of holiday homes - as well as other additional property – will at least benefit from the higher rate of capital gains tax on residential property falling from 28% to 24%.
The lower rate will remain at 18%, but the CGT annual allowance has also reduced from £6,000 to £3,000.
“Whether these changes are sufficient to encourage FHL owners to exit the short term letting sector and either sell to home owners or to move to long term letting is yet to be seen, "adds Small.
"But it could end up with owners simply not bothering to rent out and using the property for a couple of weeks a year, meaning pubs, restaurants and shops in holiday hotspots having fewer visitors.”
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