Chancellor George Osborne’s decision last year to slash tax relief on mortgage payments on buy-to-let properties and place a 3% surcharge on stamp duty for buy-to-lets (and second homes) was designed to pour cold water on what was seen as a hot market. It is having the desired effect. With buy-to-let becoming less and less appealing, landlords are hunting around for other options – such as holiday lets.
There are several tax benefits associated with owning what is technically classified as a furnished holiday let, or FHL. First, you can offset all expenses against your rental income. This means you can get tax relief on the general upkeep of the building, as well as – critically – mortgage interest relief. In addition, profits from FHLs are considered “relevant earnings” by the government, which means you’ll get tax relief on your pension contributions. Finally, if you own an FHL and decide to sell, you can get capital gains tax relief, which is usually only available to businesses.
But holiday lets are not to be taken on lightly. Unless you’re going to employ someone to manage the process – which is expensive – it can be a big commitment. Many pretty seaside towns have almost been taken over by holiday properties – the competition has made potential customers increasingly demanding. And as well as the various costs involved, there is the “sheer slog that never appears on a balance sheet”, warns Cally Law in The Sunday Times. You’ll be expected to provide a spotless and cheery house stocked with “thoughtful additions”, such as homemade biscuits and fresh juices. Allowing people to bring dogs will also apparently help make the sale – though it might add to your cleaning bills.
Getting a mortgage can be tough. “Essentially, lenders don’t like any holiday lets, purpose-built or otherwise, preferring the safer assured short-hold tenancy agreements unless a prospective borrower has previous experience,” says Law. Nor are holiday lets immune to being targeted in a similar way to buy-to-let properties. For example, second-home owners in Pembrokeshire will have to pay a 50% council tax premium next year, following a decision made by the county council this month, reports the Western Telegraph. The more popular the area, the greater the risk – in Tenby, nearly half of homes are second homes.
All in all, there’s a fair amount to think about before you plough on with plans to let out a property to holidaymakers. And if you don’t buy your FHL before 1 April this year, then you will be liable to the chancellor’s 3% surcharge to stamp duty on second homes. That said, popping into a property every few weeks for certain periods over the year is likely to be no more stressful than dealing with the tenants of a buy-to-let property – so if you were already keen to try your hand as a landlord, these aspects of holiday letting are unlikely to put you off.
The first thing you need to know is what qualifies. According to the government, to qualify for the tax breaks your property must be in the UK or the European Economic Area, and must be furnished for “normal” occupation. It must also be “commercially let” with a view to making a profit – though there’s no need for a formal lease. The property will also need to be available for letting 210 days a year, and fully let to the public for 105 of those days.
If you decided to take the plunge, Leeds Building Society offers mortgages specifically aimed at holiday-let buyers. Two-year fixed rates start from 2.59% for those with a 40% deposit, although there’s an arrangement fee of £999. The Cumberland Building Society offers a three-year variable rate, which tracks at 1.54% below the building society’s main rate, which is currently 4.99%. The arrangement fee is £1,000.