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By Paul Windmill
Director
Posted on: 23 April 2018

Are holiday homes becoming the new buy-to-let?

You could be forgiven for wanting to sell your property due to the seemingly aggressive stance that the government has taken towards buy-to-let investment. However, if possible, letting your property out to holiday makers could be an alternative. This option allows you to benefit from the associated tax breaks, whilst you still can!

The perks

Although falling prey to recent stamp duty rules, furnished holiday lets (FHLs) have managed to avoid the variety of inflicting measures enforced by the government on buy-to-let properties. From April 2017, the amount of mortgage interest that buy-to-let landlords can claim back started to reduce, however, those who own holiday homes can still claim the full amount.

Furthermore, as of April 2017, rather than removing 10% of rental income for ‘wear and tear’, buy-to-let landlords can only deduct the cost of actual repairs to furnishings from their profits. By contrast, holiday home owners can renovate their properties to a high standard, with the cost being offset against rental income.

A further perk is the tax benefits. This is due to the profits from FHLs being classed as ‘relevant earnings’ by the government. Therefore, putting them into your pension will reap the tax benefits. Moreover, capital-gains tax relief can be obtained on the sale of an FHL – a perk usually only available to businesses. Finally, if your FHL is let for more than 140 days per year, and is located in the UK or EEA, it should be subject to business rates in comparison to council tax. If your property then has a rateable value of less than £12,000, as a result you may be able to claim 100% relief on business rates.

Does my property qualify?

If you own a property and it is decided that you would like to go down the route of letting the property out, then there is a variety of things you must check first.

The first thing to do is to ensure your mortgage terms will allow you to rent on a short term holiday basis. However, be aware that it is unlikely that you are able to gain consent from your buy-to-let lender for a switch to short letting. It is suggested that the majority of individuals wanting to do this will need to re-mortgage to a lender that is willing to do this. These lenders are often smaller building societies.

It is imperative that you let the property commercially for a minimum of 105 days over the year. This does not include the days the property is let out to friends and family at a reduced rate. Further to this, the property can only be let for stays longer than 31 days if the total number of those days does not go over 155.

However, a vital part is ensuring your property fully qualifies as an FHL. For it to be eligible, the property needs to be available to holiday makers for at least 210 days in the year, excluding any days in which you stay in the property yourself.

It is also vital that a budget has been taken into consideration for letting out a holiday home. This is imperative as the majority of these services are expected by visitors. For example, Wi-Fi, TV packages, utility bills and a cleaner for in-between visits.

Finally keep in mind the tax breaks! These may not be in place forever, as future governments may decide owners of FHLs are unfairly favoured by the tax system. Further to this, certain local councils are cracking down on second home ownership, with them not allowing individuals to occupy a new build property, unless occupying the property full time.

 

 

Paul Windmill
Director

Paul has over 25 years’ experience working with a wide portfolio of clients, both very large and small across the South East. Paul advises on corporation tax planning and remuneration planning for company directors and senior management, as well