Scottish holiday homes leave owners feeling like they can’t catch a break. A new licensing regime and a possible loss of mortgage interest deductions have led to higher costs for everyone – and tourism is suffering as a result.
Those businesses that survived the pandemic were rewarded with an influx of visitors when restrictions were lifted. However, the impact of higher interest rates and inflation on household purchasing power has meant numbers are starting to shrink.
Spending related to short-term rentals was worth £3.8 billion to the Scottish economy in 2021 and supported 65,000 jobs, according to Oxford Economics research commissioned by Sykes Holiday Cottages.
It is a time when many expect governments – both at Holyrood and Westminster – to look at what they can do to help.
However, the many regulations make it more difficult for holiday home owners to make a profit.
Last year the Scottish government introduced a licensing regime for the sector.
From October 2023, all short-term rental properties, including self-catering accommodation and B&Bs, must be licensed to take bookings and receive guests. These are granted by the local government, which is allowed to set its own prices for the allowances.
The average application fee for a three-year license ranges from around £260 for a double room to £520 for a short-term rental home with a maximum occupancy of 10 people, according to official government figures.
This equates to an annual average of $90 to $170 for this type of short-term rental. However, these vary depending on location.
In addition, municipalities have been given the authority to designate ‘control areas’ where there is a particularly high concentration of rental properties. If a property falls within a control area, you will need planning permission from the council to change its use.
This means that property owners could be deterred from expanding or starting a holiday rental business if the council believes there are already too many in the area.
Edinburgh became the first designated short-term rental control area in Scotland in September 2022.
The total number of license applications is around 26,000 according to a Freedom of Information request made by the Association of Scotland’s Self-Caterers in January.
It is below the 32,000 previously estimated by the Scottish Government.
Furthermore, according to the Scottish Assessors Association, the number of self-contained units across Scotland at foreign rates has fallen to just over 17,000 by April 2024. In Edinburgh, the number has fallen by 16% in the last eleven months.
Fiona Campbell, chief executive of the Association of Scotland’s Self-Caterers, said: “The fact that so few permits have been granted shows how overstretched local authorities are and they are calling on local authorities to make planning considerations. It’s a total nightmare.”
Existing hosts who applied before October 1, 2023 can continue to operate while their application is processed, the Scottish Government confirmed.
Councils have up to twelve months to process these applications during the current transition phase, providing an additional three months to allow hosts to clarify their planning status if this has not already been determined.
“In Scotland we have had a whole licensing regime that has been difficult and it is a postcode lottery,” says David Smythe MBE, the owner of Cloag Farm Cottages in Perthshire.
Smythe, 66, says some holiday home owners have disappeared from the sector because it has become “too difficult”.
For those who want to move on, there is also an element of uncertainty.
Andy Fenner, chief executive of the Short Term Accommodation Association, said: “We are in a bit of a holding pattern at the moment because we are in a situation where people have applied for the licenses and have the 12 month period to see whether they have them or not. .”
Fenner agrees that business owners will leave the sector as a result of the change and that the regulations are misleading.
“We’re talking about a couple down the street who have a house that they’ve been renting out for years and it’s now called Airbnb. The costs are passed on to consumers and families who want to go on holiday.”
The feeling in the sector, he says, is that tourism from abroad is slowing due to increased costs.
Now owners are facing even more restrictions on their businesses.
In the Budget, Chancellor Jeremy Hunt announced the abolition of preferential treatment for furnished holiday lets (FHLs).
Currently, FHL owners enjoy a more favorable tax regime than owners of long-term rental properties, including mortgage interest deductions that allow borrowers to offset their interest payments against their profits. Landlords enjoyed the same relief, but can now only claim up to 20%.
Income from holiday rentals is classified as relevant net income for pension purposes, allowing you to pay tax-efficient pension contributions.
However, these allowances will be withdrawn, leaving short-term rental owners £1,693 worse off on average, according to Quilter figures based on the average house price in Scotland and a rental income of £13,500.
Smythe says that for people with mortgages, this will impact the investments they can make in their properties. While it won’t in itself cause owners to sell their homes, it will make it harder to make ends meet.
The government’s explanation is that the changes will increase the housing supply of long-term rental properties, reducing prices for tenants and reducing pressure on the system.
However, Campbell says this is not the case and the policy instead risks creating more second home owners who do not bring the same tourism and income to local areas.
“If you have a second home, it is socially responsible to rent it out when you are not using it.
“But they discourage people from doing that because of all the changes. We will have many more second homes that really erode communities.
“These are the lights that do not come on in winter, while they do in self-catering accommodations. This will close viable businesses and destroy people’s pensions.”
It will not only be business owners who will suffer, but also those who rely on tourism to provide their own income, such as pub owners, gardeners and cleaners, Campbell says.
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While higher taxes on second homes are intended to discourage owners, Campbell argues that many will simply pay them and leave their properties empty.
“These regulations fail every part of our communities and benefit no one. It is time for a rethink and for industry and government to work together to adapt the regulatory framework for the benefit of all stakeholders,” said Campbell.
Furthermore, in an effort to limit the number of second homes, the government has announced the introduction of a register of short-term rentals and a building permit requirement for any property rented for 90 days or more per year.
However, critics say this will only act as a loophole allowing homeowners to rent out their properties during peak times while leaving them vacant when there is a lull.
“This time it’s time to book for the summer holidays and we have to start shouting that Scotland is open,” says Fenner.
“Tourism spreads wealth across rural areas and stimulates jobs and investment. Platforms such as Booking.com, Airbnb and Sykes Cottages should be welcomed with open arms by the Scottish government.”
A Scottish Government spokesperson said: “The introduction of licensing safeguards the important role that short-term rentals play in our economy by providing guests with assurances about safety and quality, such as compliance with gas certificates and suitability of electrical equipment.
“Licensing authorities work with relevant bodies, such as planning authorities, to ensure that landlords/operators comply with the relevant legal requirements and to ensure that the accommodation can be used for short-term rentals.
“The separate legal requirement for planning permission to be granted for material changes of use is not new, it has been the legal position for decades and predates the granting of planning permission.”
