Will holiday lets remain a popular after the Renters’ Rights Act?

Sweeping reforms are about to reshape the private rented sector (PRS). Landlords will be looking again at short-term letting as an alternative to regular long-term lets which face greater restrictions. Meanwhile, existing holiday let owners will be digesting the new regime they will operate in.

For many landlords, particularly those already under pressure from taxation, regulation and rising costs, the question is obvious: will a switch to the holiday let market offer a viable alternative? Or is the door on that business closing as well?

The answer is not straightforward. Holiday lets will not disappear, but they are unlikely to remain the flexible, semi-informal niche in the market that many landlords have relied on, or switched into, in recent years. Instead, they are evolving, just like the main letting market, with new rules taking them into something far more complex.

This article applies primarily to England and is not a full interpretation of holiday let and HMRC rules. Always seek professional advice before making or not making decisions. Use this guide as the starting point for your research, not an endpoint.

The economics

Despite the glossy marketing on online platforms, the financial reality of holiday letting is often less lucrative than many assume. Typical gross annual incomes range from around £10,000 for smaller units up to £30,000 for larger or more heavily let properties. 

But these figures are quickly eroded when you account for costs. Cleaning, laundry, maintenance, gardening and management fees, not to mention your own time, can easily consume around 40 to 50 per cent of this gross income. Besides these costs, landlords remain responsible for all utilities, council tax, (or business rates) insurance and ongoing compliance charges.

Unlike traditional lettings, where most costs are passed on to tenants, holiday let operators carry the full operational cost burden. That’s a trade-off for running an operational business as opposed to an investment business, which HMRC views differently. Holiday let landlords are in the hospitality business. 

Seasonality adds another layer of complexity. In many parts of the UK, for example the South West or Wales, most income comes in between May and September. That leaves a long off-season period where properties generate little or no revenue.

A lifestyle choice? 

Not all holiday let businesses are motivated by absolute profit. Many landlords enter the sector for very different reasons. There is a significant proportion of owners whose holiday let is not just an investment but something for personal use as well. 

The ability to retain personal use of the property, for regular holidays for friends and family or even as a future retirement home, can be a strong motivating factor. In some cases, the rental income received is viewed as a means of covering running costs throughout the year, and providing “free holidays”, rather than a profit-making exercise.

It gives a hybrid nature to many buy-to-let businesses and sets them apart from normal long-term traditional buy-to-let businesses. It also means that some of the recent government policy changes can have unintended consequences when applied to holiday lets.

The Renters’ Rights Act 

The Renters’ Rights Act has the potential to collide with the traditional holiday let model. Like student lets, holiday letting needs certainty. Specifically, they need the ability to guarantee vacant possession at key points in the month and year. Summer bookings are often committed months in advance. Uncertainty around availability creates a financial and physical headache for holiday let landlords. 

The new regime it would appear moves in the wrong direction for holiday letting. By strengthening tenant security of tenure and removing the administrative only “no-fault” eviction, it reduces landlords’ flexibility and the certainty to recover possession.  

The existing provision of Ground 3 for holiday accommodation (enabling mandatory possession of a property used as a holiday let of less than 8 months) is to be repealed. There is considerable uncertainty over how this will operate in practice, particularly as notice periods are extended.

Equally significant is the removal of many of the informal mechanisms that landlords have historically relied on to manage short-term occupancy. Rolling short agreements and flexible tenancy structures are gone, as are contractual deterrents for overstaying. 

Coping strategies

True holiday lets (where the booking is for a holiday, not a main residence or extended short stay) are like a hotel booking. They should fall outside the scope of a tenancy and come under a "licence to occupy". Providing the conditions for a licence are met, they should be exempt from the Renters' Rights Act.

A licence implies a certain amount of landlord control. For example, the right to always enter the property (the guest cannot exclude the landlord), perhaps for cleaning and maintenance, as well as the provision of services such as bed linen and other items for living.  

Landlords will be well advised to ensure they have robust licence agreements highlighting that the let is purely for a holiday, with clear start and end dates. This is vital to avoid the creation of an assured tenancy (AT).

With extended short stays and long lets, which many holiday let landlords rely on in the off-season, the position is less clear. Landlords should seek legal advice once the Renters’ Rights Act provisions start on 1 May 2026 and as the position on these becomes clearer.

As things stand, for those who currently mix short-term and long lets, or switch between them, the new Section 8 Grounds may be their only fallback option:

Ground 1 is for owner occupation if the landlord or a family member wants to move into the property but is subject to 4 months’ notice and cannot be used within the first 12 months of occupancy. Ground 1A is for the sale of the property but again cannot be used within the first 12 months of occupancy and must be a genuine sale.

Holiday lets as farm diversification 

One area that is easily overlooked in this debate is the role holiday lets play within agricultural businesses. For many farmers, these are not speculative investments or opportunistic Airbnb conversions, they are a core part of their long-term business diversification.

Over the past couple of decades, and particularly since Brexit, farm incomes have come under sustained pressure. Volatile and lower commodity prices, subsidy reforms and rising inputs such as fuel and fertilizer costs mean that agriculture alone is no longer sufficient to stay solvent for many farms. 

In response to this, some farmers lucky enough to be in tourist locations have turned to alternative holiday lets as new revenue streams. Holiday accommodation created through the conversion of redundant barns or outbuildings has emerged as a vital part of farm incomes. 

Business rates or council tax?

This is a key but often poorly misunderstood issue. The distinction between business rates and council tax is important for profitability.

Holiday lets that meet certain occupancy criteria - typically being made available for at least 140 days a year and actually let for at least 70 of these - are treated as commercial (business) premises and assessed for business rates. 

When the rateable value of these holidays let premises is below a certain value Small Business Rate Relief can reduce this liability to nil.

Small Business Rate Relief (SBRR) in England offers up to 100 per cent off business rates for single-property with a rateable value of £12,000 or less, with tapered relief (100 per cent to 0 per cent) for properties valued between £12,001 and £15,000. 

For farmers running one or more holiday lets, this rate relief can make the difference between a viable diversification exercise and an uneconomic one. However, when the thresholds are not met, the property will revert to council tax, and often, under some councils, a second home premium is applied. This can mean the doubling of a normal council tax bill.

The result is a cliff edge for these businesses. Just a marginal drop-off in occupancy rates can turn a zero-rated business into a heavily taxed liability. 

Tax changes

Historically, Furnished Holiday Let (FHL) status provided distinct advantages for owners. They had access to capital allowances and favourable tax treatment of losses. For farmers and holiday property owners investing significant sums in property conversions, these reliefs were an integral part of their business case.

With the planned abolition of the FHL regime, holiday lets will increasingly be treated in line with standard let property income. While they will still typically be taxed as part of a trading business integrated into farm operations, the loss of these specific reliefs reduces the overall attractiveness of the business model.

Where a farm business is VAT registered, VAT adds a further layer of complexity. Holiday lets are standard-rated supplies. This means that while VAT can be reclaimed on development and other operating costs, it must also be charged on lettings. For some operations, particularly in price-sensitive markets, this could make them uncompetitive. 

Inheritance tax

For family farms, inheritance tax treatment is now a critical consideration, particularly since the changes in recent Budgets. Properties used for holiday accommodation will generally fall outside the scope of Agricultural Property Relief (APR). Instead, Business Property Relief (BPR) would be the only option, but only when it is a genuine trading operation.

However, this entitlement is by no means automatic as far as HMRC is concerned. The agency increasingly scrutinises such claims. It will focus on the level of services provided and the extent to which the activity is a genuine hospitality business, as opposed to passive property letting.

So, like the requirements for a genuine licence situation, as opposed to a tenancy, HMRC wants to see a well-run holiday let business offering services, hands on management including cleaning, linen services and constant support for guests, to qualify.

New regulations and registration

The proposed introduction of a national register for holiday lets, the government argues, will improve transparency and standards. For professionally run holiday let businesses, including many farm-based businesses, this may help to legitimise the sector. It could reduce unfair competition from non-compliant operators so may be welcomed in some circles.

But, and there is usually a but, it also introduces additional compliance requirements and therefore more cost. Plus, it opens the door to greater local authority interference and control, particularly in areas where there is concentrated holiday let provision. 

In some rural and tourist-heavy regions, this could lead to restrictions on new holiday let developments, planning constraints or change-of-use requirements and limits being set on the number of holiday properties.

For farmers and those owners who have already invested capital into holiday premises and services, this creates another worry.

Still a viable occupation

As with buy-to-let long term lets, the Renters’ Rights Act was not designed to kill off holiday lets, though its unintended consequences will undoubtedly create difficulties. Despite these added pressures, holiday lets will remain a viable occupation for those who intend to operate on a professional level. 

Holiday lets make productive use of personal year-round vacant holiday homes and otherwise redundant farm buildings; they generate employment and provide a resilient UK home-based tourism market, helping local communities.

The model is changing, which means success will increasingly depend on consistently meeting occupancy levels, delivering a professional service-based business and managing compliance standards within the taxation, planning and regulatory rules.