Buy-to-Let vs. Furnished Holiday Let

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In this article we examine changes for Buy-to-let Landlords, tax advantages of investing in holiday homes and business owner John Harrison shares his experiences of running Furnished Holiday Lets; including his top tips. 

 

In April 2017 new provisions took affect which saw tax relief for finance costs on residential properties being gradually restricted over a period of three years, concluding in April of 2020. By this time all financing costs incurred by a landlord will be restricted to the basic rate of income tax.

Such finance costs include mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan.

Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs. The phased restriction has been as follows…

 

These announcements have made it harder for buy-to-let investors to keep their loan-to-value at a minimum.

Note that the restrictions do not apply to any part of the amount borrowed for the commercial letting of furnished holiday accommodation.

 

Thinking about investing in a holiday home?

Week per week a furnished holiday let (FHL)can earn up to three times as much as a buy-to-let located in the same area. This is more likely if you are in a holiday hot spot of course. 

There is precise criteria stating what constitutes as a FHL such as the property must be commercially let with a view to making a profit; it must be furnished; it must be available for letting for at least 210 days a year and actually let for at least 105 days. If you are thinking about investing in a holiday home HMRC has published Furnished Holiday Lettings Guidance (2019) that you can read on their website.

Tax advantages for furnished holiday lets include:
  • Claiming capital allowances for furniture, equipment and fittings.
  • Capital Gains Tax  Relief *
  • No limit on the amount of mortgage interest that you can offset against your profit potentially reducing your income tax bill.
  • If you own the property with your partner the 50/50 rule does not apply for FHLs and the profits can be allocated however you choose. (So, if one partner is a higher rate tax payer they can allocate all the profits to their partner.)
  • Profits count as earnings for pension purposes.
  • Business rates would apply instead of council tax. If your property is in England and has a rateable value of £15,000 or less, you would be eligible for Small Business Rate Relief. Anything with a rateable value below £12,000 does not need to pay any business rates.

 

* It should also be noted that qualifying furnished holiday lettings businesses are eligible for a number of important reliefs from capital gains tax. “Rollover” relief would apply where the proceeds of sale of a property are reinvested in another qualifying asset and it is also possible to claim holdover relief on the gift of the whole or part of property business. Note also that entrepreneurs’ relief would be available on the disposal of the furnished holiday lettings business.

Some disadvantages to investing in a holiday home (as opposed to a buy-to let) is the work involved. Cleaning and maintenance is required week in/week out or even a few times a week if you have short stays. This amount of time, effort and expense is often greater than what is required for a tenant renting a property.   

 

Aviemorehome is a group of luxury holiday cottages personally run by the owners John & Marie Harrison. John talked to us about his and Marie’s experiences letting holiday homes..

 

Our journey to investing in a holiday home began when we wanted to buy a holiday home for ourselves. We looked at some properties being built and decided to buy two with a view to letting one and using the other as a holiday home. We soon realised that as we could only use them for a few weeks per year we would let both and use them ourselves when they were empty. They let very well and so we bought others over a number of years.

Marie and I chose Aviemore because we had been on holiday there quite a few times as our sons were both keen snowboarders and it was convenient for us. We began looking at properties in 2004 during one of our trips. We could see that Aviemore offered all year-round holiday opportunities with snow in the winter and all sorts of activity holidays for the rest of the year such as walking and cycling.

The first challenges were to decorate and furnish the two new built properties as we lived in Fleetwood which is 300 miles away from Aviemore. We bought lots of small furnishings in our local area and hired a van to take them up to Aviemore. Larger items were bought in Inverness and we just left keys with the suppliers to deliver. Setting everything up for holiday lets was a challenge because of the distance to travel and we covered thousands of miles during the first few months.

Once we were ready with furnishings, we decided to contact a holiday company to do the initial holiday bookings. They came and discussed our prices and letting dates then took the initial photos for their brochure and website. We also hired a caretaker/cleaner for the cottages.

Bookings began to come in slowly but quickly began to build up. We then decided to have our own website so we could book our own holiday lets and hired a web designer. Within 2 years we were securing 85% capacity.

 

John’s Top Tips for renting out a holiday home…

  • When buying furniture and furnishings look for really durable items wherever possible as things tend to get broken.

  • Pick somewhere that you can reach fairly easily. We found it difficult to run ours from 300 miles away which is why we now live within 20 minutes of our lets.

  • Try to choose an area that has year-round facilities so you can maximise your letting season.

  • Put as many attractions in your holiday home as possible to cater for all ages; broadband, SKY TV, hot tubs, saunas, games room, comfortable king-sized beds and a good all year-round heating system.

  • Don’t forget pets. About 80 % of our visitors have one or two dogs and that is why they look for self-catering accommodation.

  • Make sure garden areas are properly fenced for pets and small children.

  • Don’t take adverse comments made on your website personally but use them as a plus point by agreeing with any sensible ones and putting on your site how you are dealing with them.

 

 

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