HM Revenue and Customs (HMRC) has dramatically increased its scrutiny on landlords who rent out their properties through Airbnb and other short-term rental platforms. This initiative highlights the government’s effort to ensure tax compliance in a rapidly growing sector.
The Daily Telegraph, after a Freedom of Information request to HMRC, revealed a stark increase in the number of investigations into these landlords. The fiscal year 2023-24 saw almost 2,000 enquiries, a significant jump from around 400 the previous year and a massive surge from just 95 in 2021-22. This escalation underscores HMRC’s commitment to cracking down on tax evasion within the holiday rental market.
Why the Sudden Increase?
HMRC has noted the burgeoning growth of the short-term property rental market, prompting them to take decisive action. A spokesperson from HMRC explained that as the market expands, it becomes imperative to ensure that all landlords pay the appropriate amount of tax, thereby maintaining a fair competitive landscape.
The agency has allocated specific resources to identify and investigate landlords who fail to declare their rental income. This move is part of a broader strategy to bring more transparency and fairness to the taxation of property income.
Changes in Tax Regulation
This crackdown coincides with significant changes announced by Chancellor Jeremy Hunt in the latest budget. Notably, the government has decided to abolish the Furnished Holiday Lettings (FHL) tax regime, effective from April 2025. This regime currently offers landlords additional tax reliefs for costs related to furnishing holiday lets—reliefs that aren’t available to those with long-term rental properties.
The rationale behind this policy shift, according to the government, is to discourage landlords from prioritising short-term holiday lets over long-term residential rentals. This change aims to address the housing shortage by incentivising landlords to offer more long-term housing options.
Impact on Landlords and the Market
Elizabeth Small, a tax partner at the law firm Forsters, provided insights into the potential impacts of these tax changes on landlords. Starting April 2025, landlords will no longer be able to claim certain tax reliefs, such as Capital Gains Tax reliefs for traders and capital allowances for items like furniture and equipment in properties that qualify as FHLs. This will likely reduce the after-tax income for landlords, impacting the value of such properties.
Despite these tax hikes, there is a silver lining for property sellers. The higher rate of capital gains tax on residential property gains will decrease from 28% to 24%, with the lower rate remaining at 18%. However, it’s important to note that the CGT annual allowance is also set to decrease.
Future Prospects
The long-term effects of these changes on the short-term rental market are still uncertain. While some landlords might shift towards long-term rentals or opt to sell their properties, others might reduce their rental activities or use the properties for personal vacations. This shift could potentially affect local economies, especially in tourist-dependent areas where businesses might see a decrease in visitors.