The top 10 holiday let hotspots as tax perks end in April

Another perk of property investing is set to disappear next month when the furnished holiday lets (FHL) tax regime is scrapped.

From April 2025, furnished holiday lets - short-term rentals for under 31 continuous days - will be treated like other forms of buy-to-let investing.

Mortgage interest relief will be restricted to the basic rate of income tax and rather than being able to claim capital allowances for spending on the property, holiday home owners will be restricted to claiming tax relief.

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It is another blow for landlords who have already been hit with higher stamp duty rates and restrictions on mortgage interest relief for buy-to-let, while many local authorities are also hiking council tax for second homes.

Research by Prime Accountants Group suggests furnished holiday lets changes would cost holiday home owners around £1,400 per year, based on a higher rate taxpayer generating gross rents of £25,000 on their property and paying expenses of £8,700.

That makes maximising the income from renting out a holiday home even more important.

What are the furnished holiday lettings changes?

The FHL tax regime has been around since the 1980s and was becoming a viable alternative to buy-to-let.

Landlords or second home owners could put their property on rental platforms such as Airbnb and claim full mortgage interest relief, unlike in the private residential sector.

Investors were also entitled to capital allowances for furniture and capital gains tax was reduced to 10% when the property is sold.

Any income and gains earned from a holiday let will form part of the person’s UK or overseas property business and will be treated in line with all other property income and gains.

These perks will be removed from April and any income and gains earned from a holiday let will form part of the person’s UK or overseas property business and will be treated in line with all other property income and gains.

This means a higher or additional-rate taxpayer would have to pay 24% capital gains tax on profits from the sale of a holiday let above £3,000, rather than 10% currently.

There are some transitional rules including allowing investors to carry forward losses from previous years up to April 2025 but anything after that is treated as part of an overall property portfolio.

How much can you make from holiday lets?

Despite the challenges, holiday homes rental platform Sykes Holiday Cottages says holiday let businesses can still make a decent sum.

Its latest Holiday Letting Outlook Report shows the average owner generated an income of £24,700 last year – slightly up on 2023 when it was £24,500, despite tougher economic conditions.

Holiday let hotspots

Sykes Holiday Cottages analysed bookings and revenue data for 22,500 UK short-term rentals through its platform.

The Lake District village of Grasmere tops the overall location rankings, with holiday let business earning £43,200 on average last year.

Meanwhile, two popular destinations in the Cotswolds, Bourton-on-the-Water and Stow-on-the-Wold, make up the top three, with owners in these villages generating an average of £40,400 and £40,000, respectively.

Other Lake District holiday destinations such as Coniston and Bowness-on-Windermere, and Burford in the Cotswolds were among the most profitable places to own a holiday let.

Meanwhile, Southwold in Suffolk and Castleton in Derbyshire are new additions to this year’s top 10, ranking sixth and eighth and with an average annual gross revenue last year in excess of £34,000.

James Shaw, managing director of Sykes Holiday Cottages, said: “Staycation bookings are strong – particularly to regions like the Lake District and the Cotswolds that are appealing for short breaks all year round, which translates into higher earnings for owners.

“Location is obviously incredibly important in the earning-potential of holiday lets, but other small investments and decisions can drive additional income too, including accepting short mid-week stays, adding a hot tub and allowing pets – these are all things we advise our owners on.

“Despite significant change in the industry, the findings throughout our report show the resilience of the holiday let market, with average incomes up last year. The owners we speak to are feeling good about the future and their prospects within the sector, but many say they have already been affected by new rules and regulations introduced.”