Earlier this year, the UK Government announced plans to end the currently favourable furnished holiday lettings (FHLs) tax regime. Should these proposals remain intact after this summer’s general election, they will present a serious threat to tourism, farming and the route to wider economic growth.

Under the plans, the Treasury would, from April 2025, remove a range of reliefs and benefits for landlords running an FHL business. This includes an end to mortgage interest deductions against taxable rental income, the ending of capital gains tax reliefs on the sale of FHLs, and no further right to claim capital allowances on fixtures and fittings. Removing these exemptions will wipe out any tax incentive for providing short-term holiday accommodation, putting it on the same level as property used for a long-term letting.

While these proposals could benefit local communities where housing stock is limited, they also have real potential to do economic damage.

They would firstly adversely impact Scotland’s tourism industry, which currently accounts for around 230,000 jobs across the nation. After an understandable stutter during Covid, tourism has made a strong recovery and is now contributing around £4.5bn in Gross Value Added (GVA) to Scotland’s economy every year, with FHLs contributing £700m to the Scottish economy and 24,000 jobs.

A strong supply of quality holiday accommodation is key in growing or even simply maintaining this positive economic impact, yet the Treasury plans to end supportive tax incentives would create a significant growth barrier.

The Professional Association of Self-Caterers has estimated that the tax changes could result in a loss of £1.9bn GVA and 46,000 jobs across the UK. I am already aware of clients in Scotland who are looking at selling off existing FHL properties and others who are holding off on investing in new developments, using a short window in which the properties can be sold for potentially favourable tax treatment.

This includes farmers and other agriculture business operators who have built holiday accommodation as a means of diversifying incomes. Removing incentives to retain and/or invest in FHLs could threaten the financial viability of some of these rural businesses and hurt Scottish farms, which increasingly rely on a variety of income streams during a sustained period of declining margins in food production.

To avoid the potential economic fallout from this change in policy, both the UK Treasury and Scottish Government could consider some flexibility in the FHL tax and regulatory regime. As well as looking at decreasing the regulatory burdens, retaining some of the tax benefits for properties that cannot be used for residential purposes could alleviate some of the potential harm. Regardless of which party forms the next UK Government after July 4, ministers who want to maximise the growth potential of the tourism industry and safeguard farming and food production security must review these proposals or consider how to best offset the wider implications of ending FHL tax regime policy. Failure to do so has the potential to be economically damaging to Scotland and the rest of the UK.

Joshua Williams, personal tax specialist at accountants CT

Agenda is a column for outside contributors. Contact: agenda@theherald.co.uk