Mortgage rates for holiday lets drop as tax burden is set to rise

Mortgage deals for holiday lets are getting cheaper just as it is getting harder to enter the once-thriving part of the buy-to-let sector.

Previous chancellor Jeremy Hunt announced the end of the furnished holiday lettings (FHL) tax regime before the general election and the Labour government has pressed ahead with the changes.

From April 2025, landlords will no longer be entitled to capital allowances for furniture and reduced capital gains tax on holiday lets when the property is sold.

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This is the latest clampdown on buy-to-let perks, with property investors already facing extra stamp duty on additional property purchases and restrictions on mortgage interest relief.

There are predictions that landlords will sell their holiday lets if they are no longer profitable.

But one area of the market that is looking positive for landlords sticking with the holiday lets sector is mortgage rates.

Research by Moneyfacts shows the average rate on a buy-to-let mortgage for holiday lets is now 6.2%.

That may appear high compared with a few years ago but it is down from 7.16% in August 2023 and lower than the typical rate of 6.54% available at the start of this year.

Mortgage options for borrowers looking at holiday lets have also increased to 445 options, up from 362 seen in August 2023, Moneyfacts said.

“The buy-to-let market has undergone its fair share of upheaval over the past few years, with rising interest rates and tax perks quashed," says Rachel Springall, finance expert at Moneyfacts.

"However, a small part of this market has flourished over the past couple of years, with the availability of holiday let deals rising.

“There has also been an encouraging increase in the number of lenders prepared to cater to these types of landlords. There are over 400 deals for consumers to choose from and the majority of lenders that currently operate within this space are building societies.”

What are furnished holiday lets?

FHLs were one of the remaining attractive areas of buy-to-let after tax clampdowns on property investing in recent years.

Property investors could build a portfolio of holiday lets and benefit from lower capital gains tax rates and capital allowances to reduce their tax bill.

But residents in tourist hotspots have complained that second homeowners are having a negative effect on their areas as it prices local first-time buyers out of the market.

The government wants to bring tax rules in line with other forms of property investing and hopes that the policy will help unlock supply for first-time buyers.

Is it still worth investing in holiday lettings?

From April 2025, mortgage interest relief will be restricted to the basic rate of income tax and rather than being able to claim capital allowances for spending on the property, holiday home owners will be restricted to claiming tax relief.

A higher or additional-rate taxpayer would have to pay 24% capital gains tax on profits from the sale of a holiday let above £3,000 under the new rules, rather than 10% currently.

“Holiday let owners will be facing challenges ahead, as from April 2025 there will be significant tax changes taking place which are designed to promote fairness and align tax rules for furnished holiday lettings with those for other property businesses,” adds Springall.

“To mitigate tax liabilities, it is essential consumers seek advice to go through how the abolition of the furnished holiday let tax regime will impact them.”

While these changes will come as a blow to both existing and prospective landlords, Springall suggests the demand and profitability of a holiday let could still be worth weighing up.

“It would be wise for new investors to do their research and pick a property to let with their head, not their heart, and getting advice from a listings service is also wise to explore seasonal dips.”

She highlights that holidaymakers may still struggle to save enough cash to cover the price of a holiday abroad or have been put off altogether by last-minute flight cancellations.

So a break in the UK could then be seen as a safer and more affordable alternative, making holiday lets a good option.

Ben Handley, tax partner at BDO, says landlords should consider their options.

“If you usually let out your holiday home sufficiently for it to qualify as a furnished holiday let – so 105 days out of 210 days available for letting - then there are choices to be made,” he says.

“If the current arrangements suit you, there may be no need to change but it is sensible to check how much extra tax you will pay.”

Other options include selling the property before 5 April 2025 while the capital gains rate is lower, or it might be the right time to pass on the property to your family.

“Giving an asset to a ‘connected relative’ is treated as a disposal at market value,” adds Handley.

“However, as a furnished holiday let property is a business asset, it may be possible to elect to ‘holdover’ any capital gain on disposal to relatives."

There will still be capital gains tax to pay once the property is sold, plus the gift may have inheritance tax implications.

If you want to carry on letting the property, it is also worth investigating whether incorporating it into a company structure would be beneficial. 

“While companies pay only 25% on net profits and deductions for interest on borrowings can be more cost-effective, there can be costs on setting the company up and transferring in the property and issues with lenders,” says Handley.

“Equally, if you want to withdraw profits there will effectively be two sets of taxes to pay (personal and corporate) – so incorporating a letting business needs very careful thought.”