As the on-going reduction in mortgage interest relief bites further into the net income received by the nation’s army of buy-to-let investors, Quay Holidays has witnessed a growing realization amongst savvy investors that holiday letting could be the way to go. Faced with a dwindling net income, and the up-coming ban on residential tenant fees, the benefits of holiday letting are encouraging many owners to make the switch.
Residential investment is just that – an investment, but since furnished holiday letting (FHL) is more intensive it is classed as a trade for tax purposes, and that has significant advantages. By 2020, buy-to-let investors with large loans are likely to find that the absence of tax relief on interest means their ‘investment’ will actually be losing them money. By contrast, FHL investors are unaffected, as the withdrawal of tax relief on mortgage interest doesn’t apply to holiday letting. Owners can also benefit from a range of valuable allowances and reliefs and use the property themselves, although it won’t count towards the occupation requirements.
To qualify as a Furnished Holiday Letting (FHL), a property must be;
- Available and furnished for holiday letting with a view to making a profit for at least 210 days in every 12 months.
- Actually let for 105 days, for durations not exceeding 31 days.
What are the benefits?
- Mortgage interest charges can be fully off-set against income.
- Profits from a FHL count towards your relevant earnings for pension contributions.
- You can claim 100% Capital Allowances against a range of expenditures, including fixtures and fittings, white goods and furniture.
- Capital Gains Tax on subsequent sale could be eligible for Entrepreneurs’ Relief, meaning you pay only 10% tax on your gain. Alternatively, if you invest in a further, higher value FHL you could defer the chargeable gain through roll-over relief.
- Being a trade, FHL’s are usually eligible for business rates, rather than council tax, and small business reliefs could reduce your outgoing to zero.
- There may well be Business Property Relief on Inheritance Tax, provided HMRC is satisfied that you are (or were!) operating a
- Losses in any one year can be set off against a FHL profit in a subsequent year, although not against other types of profits.
What are the pitfalls?
- Record keeping is important – if HMRC come knocking, you will need to prove that your FHL is a genuine business, and that you have adhered to the timescales.
- Income is variable – it may take a while to build the business, and peak summer will yield bigger profits than the low and shoulder seasons, so cash flow needs to cover the leaner periods.
- Some leasehold properties, and many mortgage providers, may not permit holiday lettings in the property. Always check first. There are a growing number of holiday mortgage providers, but if your lease forbids it, holiday letting may not be possible.
- Income is substantially higher, but so are the costs. It really is a business – and somebody has to do the marketing, booking, cleaning, and provisioning, but that’s where Quay Holidays comes in!
- If the owner of the property is VAT-registered, they will have to charge VAT to holiday guests, which may place them at a competitive disadvantage.
Thirteen Years in Furnished Holiday Letting
Established in Poole for 13 years, Quay Holidays’ knowledge and experience in holiday letting gives clients a huge advantage. Quay maintains a directly-employed team of cleaners, maintenance staff and managers. “Many of our team have been with us for years – they know how we operate, and the standards we expect. They have tremendous dedication to the job, and that is reflected in the many glowing testimonials from repeat guests,” says senior partner, Helen Challis.
Income and occupancy
Holiday letting typically delivers peak season income up to four times higher than a long-term residential letting but there are higher costs, too. A FHL landlord will be responsible for all the regular bills, plus the charges for welcome packs, linen hire, cleaning and letting fees. But Quay Holidays’ portfolio regularly achieves annual occupancy levels of up to 70%, which surprises owners more used to the 40-50% achieved by holiday properties in rural locations. As Helen points out, “Poole and Bournemouth are popular year-round. We’re just two hours from London, and we offer flexible breaks from just 2 nights. We have stunning countryside on our doorstep, a beautiful harbour – and some excellent bars and restaurants! Quay also has strong links with local big businesses and many of their visitors prefer the space and facilities of a comprehensively-equipped apartment over a small hotel room.
Available for your personal use
Don’t forget that running a FHL does not preclude owners from using the property themselves for up to 155 days a year – so you can enjoy your property when you’re here, and enjoy the income when you’re not. Many owners find this an effective solution to off-set the costs of maintaining a holiday home on the coast, and some expats also find it an excellent way to maintain a UK-base.
No obligation advice and appraisal
If you are an existing buy-to-let investor worried by the tax changes, or a second home owner who wants to make their holiday home earn its keep, Helen Challis is happy to discuss the options with you. She can even furnish and equip a property to an agreed budget, if you lack the time to do it yourself. “With the tax changes now biting there is no time to lose, and with Brexit-induced uncertainty spurring interest in staycations, this summer looks set to be another bumper year.
Helen and her team can be contacted 7-days a week on 01202 683333 or by email to email@example.com