Why not just say that you wanted to stay in the cottage as booked? Looking at it from the owner's perspective he has had somebody staying in the cottage for 8 weeks and who is presumably wanting to say for a further month. They would probably prefer not to have to move out for the week you are there, they have asked did they could stay and he has said that it is up to you.

By saying 'No pressure' I would interpret that as him saying that if you don't want to swap then you don't have to. So if that is the case, you are probably not entitled to get your deposit back because you could still stay in the cottage you wanted. Deciding that you feel slighted by being asked is probably not a good enough reason for not wanting to stay after all. The landlord might still give it you back because he's not losing money - this other customer is paying him more than you have paid in 7 years.

If it was me, I would stay calm and make it clear that I didn't blame him for asking but after thinking about it I wanted to stay in the cottage I'd originally booked. At this short notice you are unlikely to find a decent cottage available in Devon for the 1st full week of the holidays and it is clearly a cottage that you like but if you get in strop about this with him there's a good chance that you won't be able to book it in again in future years. Don't cut off your nose to spite your face unless you are absolutely sure that you want the hassle of finding somewhere else at short notice for this year and for any future holidays.

He has given you the option to stay where you booked - I would take it if it was me but keep it polite.

SM

Thank you SM for your reply and I can see where you are coming from but you have not seen the
alternative that is being offered we do not like it, the cottage we booked back in January is far
superior it's a case of a double booking but I have lost out. And there is pressure we have to make a decision
that we do not want too The owner replied that she wish she had not asked if that was the case she
should not of asked and this couple who are in the cottage are friends of the owner and will not be paying the full premium while they are house hunting and if this other cottage they offered us was employ why not put them in that in the first place this has brought a bitter taste in our mouth and their is no way of repairing the damage done

Where is the pressure? If you don't like the alternative just politely say you want to stay with what you originally booked. I really can't see why you have lost out. The owner has asked a question, that's all. The other guests are long term, so they will get a cheaper rate as it's a guaranteed income. No harm in asking you would you move. Just decline, and the other guests will move out for a week.

I really think you are massively overreacting to a simple question.

same here. Just politely say "we have considered your request but would like to stay in the cottage we have booked thanks".
If the landord then says "you can't have the cottage" then it is a very different matter