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.

873-Cornwall-634

Furnished holiday lets offer a number of tax breaks to owners

RolfSt

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.

Recommended

Cladding crisis: what new proposals for mean for housebuilders and leaseholders
Property

Cladding crisis: what new proposals for mean for housebuilders and leaseholders

The government is seeking an extra £4bn from house developers to fix the UK’s cladding crisis. Saloni Sardana explains how the new proposals affect bo…
17 Jan 2022
What does 2022 hold for UK house prices?
House prices

What does 2022 hold for UK house prices?

UK house prices are rising at their fastest rate since the financial crash of 2008. John Stepek looks at where they might go in the coming year.
7 Jan 2022
Evergrande has finally officially defaulted – what does that mean for your money?
Corporate bonds

Evergrande has finally officially defaulted – what does that mean for your money?

Evergrande, the Chinese property giant, has defaulted on its debts. John Stepek asks if it is just the first in a long line of Chinese property compan…
10 Dec 2021
Regional Reit: office rents provide a steady growth in income and dividends
Investment trusts

Regional Reit: office rents provide a steady growth in income and dividends

Open-ended funds struggle when it comes to illiquid assets such as property, but things are looking good for this real-estate investment trust.
7 Dec 2021

Most Popular

Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022
Three innovative Asian stocks to buy now
Share tips

Three innovative Asian stocks to buy now

Professional investor Fay Ren of the Cerno Pacific Fund highlights three of her favourite Asian stocks to buy now
24 Jan 2022
Ask for a pay rise – everyone else is
Inflation

Ask for a pay rise – everyone else is

As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why yo…
17 Jan 2022