Scottish holidays leave owners feeling as if they can’t catch a break. A new licensing regime and the potential loss of mortgage interest deduction has led to higher costs for everyone, and tourism is suffering.
Businesses that survived the epidemic were rewarded with an influx of visitors after the restrictions were lifted. But the impact of high interest rates and inflation on families’ spending power means numbers are starting to decline.
Spending linked to short-term furloughs 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 at both Holyrood and Westminster to look at what they can do to help.
But numerous regulations make it difficult for vacation rental owners to make a profit.
Last year the Scottish government introduced a licensing regime for the sector.
From October 2023, all short-term rentals, including self-catering accommodation and B&Bs, will require a license to take bookings and receive guests. These are issued by the local authority, which is allowed to set its own pricing for permits.
According to official government figures, the average application fee for a three-year license ranges from around £260 for a double room to £520 for a short-term rental house with a maximum capacity of 10 people.
This averages between £90 and £170 per year for such short-term rentals. However, these vary depending on location.
In addition, municipalities were given the authority to determine “control areas”, especially in places where rental properties are concentrated. If a property falls within the control area, you will need planning permission from the council to change its use.
This means property owners could be prevented from expanding or starting a holiday letting business if the council thinks there are already too many in the local area.
Edinburgh became Scotland’s first designated short-term permit control area in September 2022.
According to a Freedom of Information request submitted by the Scottish Self-Caterers Association in January, the total number of license applications is around 26,000.
This number is below the Scottish government’s previous estimate of 32,000.
Additionally, the number of self-catering units at out-of-home prices across Scotland has fallen to just over 17,000 by April 2024, according to the Scottish Association of Assessors. In Edinburgh this number has fallen by 16 per cent in the last 11 months.
Fiona Campbell, chief executive of the Self-Caterers Association of Scotland, said: “The fact that such a small number of licenses have been issued shows how overburdened local authorities are and the need for planning from local authorities. “This is a nightmare.”
The Scottish government has confirmed that existing landlords who applied before 1 October 2023 will be able to continue operating while their application is considered.
Municipalities have up to 12 months to process these applications during the current transition phase; This provides an additional three months to allow homeowners to clarify their planning status, if not already established.
“We have had a whole licensing regime in Scotland that has become a difficult postcode lottery,” says David Smythe MBE, owner of Cloag Farm Cottages in Perthshire.
Smythe, 66, says some holidays have become “too difficult”, causing owners to disappear from the industry.
There is also an element of uncertainty for those who want to continue.
Andy Fenner, chief executive of the Short Term Accommodation Association, said: “We’re kind of in a holding pattern at the moment because we’ve got a situation where people are applying for licenses and we have a 12-month window to see if they’ve applied for licenses or not.”
Fenner agrees that business owners will leave the industry as a result of the change and that the regulation is misguided.
“We are talking about a couple who have a house that they have been renting out for years, now called Airbnb. “The cost will be passed on to the consumer and the families who want to go on holiday.”
He says the feeling across the industry is that tourism from abroad is slowing down due to rising costs.
Now business owners face even more restrictions on their business.
In the Budget, Chancellor Jeremy Hunt announced the removal of preferential treatment for furnished holiday lets (FHLs).
FHL owners currently benefit from a more favorable tax regime than owners of long-term rental properties, including mortgage interest deduction, which allows borrowers to offset interest payments against their profits. Landlords have benefited from the same relief but can now only claim up to 20 per cent.
Income from holiday leave is classified as net relevant earnings for retirement purposes and allows you to contribute to tax-advantaged retirement.
However, these allowances will be withdrawn, leaving short-term landlords £1,693 worse off on average, according to Quilter’s figures based on the average house price in Scotland and rental income of £13,500.
For those with mortgages, Smythe says this will affect the investment they can make in their property, and while it may not in itself cause owners to sell, it will make it harder to make ends meet.
The government’s statement is that the changes will increase the supply of long-term rental housing, reduce tenant prices and reduce pressure on the system.
But Campbell says this is not the case and instead the policy risks creating more second home owners who cannot bring the same tourism and income to local areas.
“If you have a second home, then what you should do in terms of social responsibility is to rent it out when you are not using it.
“But because of all the changes, they are discouraging people from doing that. We will have many more second homes, truly hollowing out communities.
“These are lights that come on in self-catering properties but don’t come on in the winter. This will close viable businesses and destroy people’s pensions.”
Campbell says it’s not just business owners who will suffer, but also those who rely on tourism to supplement their income, such as bar owners, gardeners and cleaners.
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While increased taxes on second homes are designed to deter homeowners, Campbell argues that many people will simply pay for them and leave their properties vacant.
“These regulations are failing every part of our societies and benefiting no one. It is time for a rethink and for industry and government to work together to change the regulatory framework for the benefit of all stakeholders,” Campbell added.
Additionally, in a bid to limit second homes, the Government announced the introduction of short-term rental registration and the introduction of a planning permission requirement for properties rented for 90 days or more per year.
But critics say it will act as a loophole, allowing landlords to rent out their properties during peak times and leave them vacant when there is a recession.
“This is the summer holiday booking season and we need to start shouting that Scotland is open for business,” says Fenner.
“Tourism spreads wealth to rural areas and encourages employment and investment. “Platforms such as Booking.com, Airbnb and Sykes Cottages should be welcomed with open arms by the Scottish government.”
A Scottish government spokesman said: “The introduction of licensing secures the important role short-term accommodation plays in our economy by providing guests with assurance of safety and quality, such as gas certification compliance and the suitability of electrical equipment.
“Licensing authorities work with relevant bodies, such as planning authorities, to ensure that landlords/operators comply with relevant legal requirements and that accommodation can be used as a short-term rental.
“The separate legal requirement to grant planning permission for significant changes of use is not new; it has been the legal position for decades and predates licensing.”
