Landlords turn to holiday lets

Letting property out as a holiday home has tax advantages, but do your research thoroughly, says Emma Lunn.

Holiday lets needn't be in glamorous locations to make money


Letting property out as a holiday home has tax advantages, but do your research thoroughly.

Beleaguered property investors are turning their attention from buy-to-let to holiday lets, in a bid to escape the regulatory and taxation changes in the private rented sector. It's easy to see why. The tapering down of mortgage interest relief, the second-home stamp-duty surcharge and more stringent affordability checks for mortgages mean long-term rental properties are no longer the money-spinner they used to be.

Advertisement - Article continues below

Furnished holiday lets (FHL) offer many advantages for potential investors. HM Revenue & Customs (HMRC) views holiday homes as businesses, so they are exempt from the mortgage tax-relief changes, and you can put relevant earnings into a pension, allowing you to benefit from tax relief. Owners can also claim capital allowances rather than the wear-and-tear allowance residential landlords receive, as well as capital-gains tax relief.

However, it's worth being aware that a property must meet certain criteria to qualify as a FHL: it must be furnished; commercially let with a view to making a profit; be available for letting for at least 210 days a year; and let for at least 105 days (you can't count any days you stay there yourself).

Advertisement - Article continues below

Assuming your property meets HMRC's criteria, there's money to be made. UK holiday lets generate an average net yield of 6.1%, compared with residential buy-to-lets at 5%, according to property fund Second Estates. And the average weekly income for a holiday let is £563, nearly three times the typical weekly buy-to-let rent of £191, says the fund.

Advertisement - Article continues below

The major downside to investing in a holiday let is that it's a lot more hands-on than buy-to-let. The property will need to be cleaned, and the linen changed, in between lets. Obviously you could do this yourself if you live near the property, but otherwise you'll need to hire a local cleaner. The same goes for checking in guests and handing over keys hiring a local agent cuts down your workload but will eat into your profit. Any void periods will reduce your income too, so you'll need a pricing strategy that maximises weekly rental rates during peak periods to offset less lucrative periods and when the property is empty.

However, before you rush out and buy a property to operate as a holiday let, bear in mind that you won't be able to finance this on a residential mortgage or a normal buy-to-let mortgage. Many lenders steer clear of holiday lets, as they don't offer a guaranteed income, though a handful of lenders including Leeds, Cumberland, Furness and Principality building societies offer specialised holiday-let mortgages. If you want to turn a property you already own into a holiday let, check the terms and conditions of your mortgage, as you might have to switch to a new one.

You'll need a deposit of at least 25% for a holiday-let mortgage, although a 40% deposit will give you access to more competitive rates. You'll also need to meet strict lending criteria. Principality Building Society's criteria are fairly typical it requests a local holiday-letting agency letter confirming the weekly letting rates for the property for the low, mid- and high seasons, and will then take an annual average.

Your annual rental income will need to be at least 145% of your mortgage payments, assuming a rate of 5.5%. Note also that the building society will only allow one holiday let per portfolio, and the property cannot be in a holiday park or have any restrictions on occupancy.



Investment strategy

How the fear of death affects our investment processes

Many of our investment decisions are driven by one simple fact: the knowledge that, one day, we will be dead. Here, in an extract from his new book, J…
2 Jan 2020

The good investments of the 2010s – and the bad

John Stepek takes a look back on which investments did well and which did badly in the decade that’s about to come to an end.
26 Dec 2019

Can the UK housing market escape a slump?

The Bank of England is predicting a 16% slump in house prices.
29 May 2020
Buy to let

The death of buy-to-let property is a useful cautionary tale for all investors

Investing in buy-to-let property was once a perfectly valid thing to do. But the government killed the market. John Stepek explains what investors sho…
29 May 2020

Most Popular

UK Economy

What bounce back loans can tell us about how we’ll pay for all this

The government will guarantee emergency "bounce back loans" for small businesses hit by Covid-19. Inevitably, many businesses will default. And there'…
1 Jun 2020

This looks like the biggest opportunity in today’s markets

With low interest rates and constant money-printing, most assets have become expensive. But one major asset class hasn’t. John Stepek explains why com…
2 Jun 2020

These seven charts show exactly why you must own gold today

Covid-19 is accelerating many trends that were already in existence. The rising gold price is one such trend. These seven charts, says Dominic Frisby,…
3 Jun 2020