Are holiday homes the new buy-to-let?
Letting out your home to holidaymakers could offer you a better deal than buy-to-let. Sarah Moore explains.
Given how aggressively the government has targeted buy-to-let investment in recent years, you could be forgiven for wanting to turn your back on the whole thing and simply sell up. One alternative is to let your property out to holidaymakers instead, and benefit from the associated tax breaks while you still can.
In general, "furnished holiday lets", or FHLs, have managed to escape many of the punitive measures imposed by the government on buy-to-let properties (although they obviously still fall prey to the new stamp duty rules). For example, while from April this year the amount of mortgage interest that buy-to-let landlords can claim back has started to taper down to nothing, those who own holiday homes can still claim the full amount.
Also, as of last April, buy-to-let landlords can only deduct the cost of actual repairs to furnishings from their profits, rather than automatically taking off 10% of rental income for "wear and tear", as they could before. By contrast, owners of holiday homes can refurbish their properties to a high standard and offset the cost of all of this against rental income.
Another perk of the sector is that profits from FHLs are actually considered to be "relevant earnings" by the government, so if you put them into your pension you will benefit from tax relief. Moreover, if you sell an FHL, you get capital-gains tax relief on the sale, a perk usually only available to businesses. And finally, if your holiday home is in England and is let for more than 140 days per year, it should be subject to business rates rather than council tax. As a result, if your property then has a rateable value of less than £12,000, you might be able to claim 100% relief on business rates.
If you're interested in going down this route, and you already own the property that you want to let out, then the first thing to do is to check that your mortgage terms will allow you to rent it out on a short-term holiday basis. Be aware that "you are unlikely to get consent from your buy-to-let lender for a switch to short letting", Ray Boulger of mortgage broker John Charcol told The Times last month.
"Most people will need to remortgage" to a lender that's happy to do this often smaller building societies such as Harpenden, Leeds and Principality, says Charcol. But before you immediately turf out your buy-to-let tenants, read up on the conditions first.
To qualify as an FHL, your property needs to be available to holidaymakers for at least 210 days in the year, not including any days in which you stay in the property yourself. You then need to let the property commercially (which means that the days when you let your friends stay on the cheap don't count) for at least 105 days over the year. Finally, you can only let the property for stays of longer than 31 days if the total number of those days doesn't go over 155 days. (For more detail on this, and exceptions, see HMRC's guidance on FHLs).
At peak season, a holiday let can earn you as much in a week as you would in a month through buy-to-let, as broker L&C Mortgages pointed out in The Times in August. However, it's also vital to budget for the expenses that come with letting out a holiday home. These include paying for services expected by most visitors, such as Wi-Fi and a digital TV package, on top of general utility bills, and potentially for a cleaner in between visits, if you'd rather not do this yourself.
Finally, keep in mind that the tax breaks afforded to FHLs might not be in place forever. It's entirely possible that future governments will decide that owners of FHLs are unfairly favoured by the tax system. Some local councils are also cracking down on second-home ownership, with St Ives banning people from buying new-build homes unless they live there full-time.