Signature Financial Services Limited

Holiday let appeal grows as BTL changes hit

Written by somarketing

Borrowers are starting to consider investing in holiday lets as an alternative to buy-to-let properties, but brokers say they need to do their homework before making the leap.

There are more than 5.3 million privately rented properties in the UK – a figure which has more than doubled in the past two decades.

But changes to the taxation of buy-to-let homes, including additional stamp duty and the scrapping of mortgage tax relief, mean many landlords are starting to consider the alternatives. Those who are willing to put the work in may find holiday lets can reap rewards.

To be eligible as a holiday home a property must be available as accommodation for at least 210 days a year. It should be rented for a minimum of 105 of those days. Stays of more than 31 days don’t count and nor do visits from friends or family.

Crucially, a holiday let property is deemed to be a trading asset, as opposed to a buy-to-let which is considered an investment, and that brings tax advantages.

Being a trade asset means any mortgage interest on a holiday home can be offset against the income it generates. It’s an important benefit which has been removed from buy-to-let.

Holiday home owners may also qualify for entrepreneurs’ relief which can reduce their capital gains tax rate to 10 per cent.

It is worth noting, however, that the two types of let are treated the same for investment tax purposes. And, just as with any other second home, a holiday property will still be subject to the additional stamp duty levy.

But for every perk of these properties, there is a pitfall.

House and Holiday Home Mortgages director Mark Stallard says: “Like anything in life, if you get a better return it is going to be harder work. Buy-to-lets and holiday lets are very different – it’s not a straight swap – but if you put the work in it’s a very viable option.”

While a desirable buy-to-let may be a family home in commuter land, a holiday let needs to be in an attractive, popular location with lots of amenities.

Once a tenant is in place, a buy-to-let landlord only needs to arrange the occasional property inspection and respond to problems, whereas a holiday let needs to be managed and cleaned most likely on a weekly basis.

There will be void periods too – while the summer months could bring high yields, the off-season could see income dry up entirely.

London Money director Martin Stewart says: “It’s one of those things that sounds great when you see it on TV but the reality is hard work. There are costs and hassle to consider. I think we’re a long way from seeing a stampede in this area.”

The product options are also far more limited than for buy-to-let, say advisers. Just a handful of providers will lend on these properties.

London and Country director David Hollingworth says: “Typically a buy-to-let lender will want a tenancy agreement of at least six months in place as a guarantee of regular income. But a holiday let is a series of short-term lets.”

Even the few lenders which are in this space will veto certain types of property. Accommodation on designated holiday sites which are closed for part of the year are likely to be rejected because it limits the potential for income.

Hollingworth adds: “For advisers, it’s important to have an awareness of which providers will consider holiday lets and what their criteria are. It’s a niche area, but if there’s an uptick in interest it can help to have a knowledge of the market.”

As well as the logistical considerations, Stallard says the fact the Government could easily change the rules on holiday lets as it did for BTL is off-putting too.

He says: “I think demand will increase as savvy investors realise the potential but you need to do your homework and consider all of the potential issues. You don’t want to be driving around the M5 on a Friday night because your cleaner didn’t turn up.”

Back to Blog