Lettings live on despite the war on buy-to-let: The tax-efficient ways to profit from your holiday home
04-11-2016
- You still can set your full mortgage interest repayments against tax on properties bought for holiday lets
- You can also continue to claim full capital allowances
- Tax on furnished holiday lettings is levied at only 10%
By Ross Clark for the Daily Mail
The Chancellor George Osborne stands accused of declaring war on buy-to-let investors. After years of easy profits, these investors face an increasingly hostile tax regime, not least because from the start of this month an extra 3 per cent stamp duty has been introduced for property purchases.
And from next April, there will be restrictions on the level of mortgage costs that can be set against rental income for tax purposes.
No longer will buy-to-letters be able to claim a 10 per cent allowance for ‘wear and tear’ - only what they actually spend on maintenance and repairs.
We do like to be beside the seaside: Cornwall has more than 10,000 holiday homes and Porthleven on the west coast is a popular spot
But there is one small corner of the buy-to-let market where the Chancellor has been more lenient: holiday lets. ‘The changes announced in the summer Budget to tax relief for interest do not affect the furnished holiday lettings tax rules,’ says an HMRC spokesman.
David Cameron, who spent Easter in Lanzarote, might not have followed his own advice about Britons helping flood-torn areas by shunning overseas holidays for the Lake District. But the Government is certainly doing what it can to encourage people to invest in holiday lets.
If you buy a property and let it out for holiday use, you will still be able to set your full mortgage interest repayments against tax.
RELATED ARTICLES
Previous
1
Next
New build homes aren't the answer to rising property costs -...
Housing generation gap laid bare: Number of households...
Keys To Making Savings.jpg
How landlords are using companies to dodge the stamp duty...
Estate agent to let signs. A shortage of properties available to let continued to push rents higher during the second quarter of the year, research indicated today. The ongoing problems in the mortgage market, combined with concerns that house prices are falling again, have led to increased numbers of people looking to rent a home, the Royal Institution of Chartered Surveyors (RICS) said. But despite interest rates being at a record low, making investing in property attractive, landlords are continuing to face problems getting a buy-to-let mortgage. File photo dated 25/12/2008. See PA story MONEY Let. PRESS ASSOCIATION Photo. Issue date: Friday August 27, 2010. Photo credit should read: Paul Faith/PA Wire
Buy-to-let boom threatens the economy, says Bank official,...
Share this article
Share
11 shares
Moreover, you can continue to claim full capital allowances - something that ordinary buy-to-let owners are not able to do.
This means that if you renovate a property for holiday use or buy new furniture, you can deduct the full cost from your rental income.
There is another benefit. Furnished holiday lettings are classified as business assets for capital gains tax purposes, which means the tax is levied at only 10 per cent. Osborne cut CGT in the Budget, but ordinary buy-to-let investors, who fall into the 40 per cent rate for income tax, will still have to pay 20 per cent CGT when they sell their properties.
On the market in New Forest: On the edge of Ringwood market, Grade II-listed Yew Tree Cottage has four bedrooms and spacious gardens. A rural retreat for families, it has good links to Bournemouth, Southampton and Salisbury town. fox-and-sons.co.uk - £625,000
So, is now the time to leave mainstream buy-to-let behind and look at holiday lettings instead?
Certainly the holiday market for cottages, apartments and lodges is growing at the expense of caravans and camping.
Carol Peett rents out a three- bedroom seafront cottage in Saundersfoot, South Wales. She says you have to work hard to attain an average occupancy of 30 weeks of the year.
‘Social media is an important marketing tool for getting your properties let. Take to Twitter, Instagram and Facebook, with updates on the weather and events taking place in the area, and you will find bookings soar.’
Between 2011 and 2014, the number of nights booked in self-catering accommodation, according to Visit England, grew from 6.68 million to 6.72 million - while the number of nights spent in caravans or on camping sites fell from 12.96 million to 10.79 million.
If you do want to invest, it might be best to avoid honeypot areas, which already have a huge amount of holiday accommodation, and look to the slightly more obscure but growing holiday destinations where there is a shortage of lettings.
On the market in Pembrokeshire: Earn £3,400 to £3,850 in peak season with this Grade II-listed property in Tenby. The five to six-bedroom home has steps down from the garden to the beach and views across to Caldey Island and Devon. fred-rees-and-son.co.uk - £935,000
According to the website TripAdvisor, demand is highest relative to supply in Batheaston, a village just outside Bath.
Other places you can expect to achieve high levels of occupancy are Winchcombe, Gloucestershire, which is handy for the Cotswolds as well as the Cheltenham Gold Cup; Blair Atholl, one of the more accessible locations in the Highlands; and Aberdovey, on the West Wales coast.
It also pays to think of the type of property that might let most easily. One of the growth areas, says a spokesman for West Wales Property Finders, is for lets that are large enough for several families to stay together. Properties sleeping 12 to 16 people can generate as much as £4,000 a week in high season.
If you do want to enjoy the more favourable tax regime, you must fulfil HMRC’s strict rules for furnished holiday lets. But you can’t just buy a second home or an ordinary buy-to-let and pretend it is a holiday let.
‘Your property must be available at least 210 days of the year and it has be let for at least 105 days. Lettings that last more than 31 days must not account for more than 155 days of the year.
The good news is there’s nothing to stop you using the property — though your tax allowances will be reduced proportionally.
Stay at the property for one month of the year, for example, and the expenses you can claim against tax are reduced by a 12th.
There is one snag with owning a holiday let: rental income is seasonal. This can make life difficult if you have a mortgage to pay, which is one reason why many lenders refuse loans on holiday lets.
Over the past couple of years, there has been some easing in the mortgage market. The Leeds and the Cumberland Building Societies have dedicated holiday let loans.
The latter requires letting income to exceed 125 per cent of the loan value — and the loan must not exceed 75 per cent of the property value. Using a property as a holiday let will not necessarily make you popular in some parts of the country where locals feel pushed out of the market.
You can overcome any qualms by buying a property on a dedicated holiday home development — where units cannot be lived in full-time.
On the market in Morayshire: With its bay views and period features, five-bedroom Findhorn House in Forres, 30 miles from Inverness, has plenty of selling points. Local attractions include the Malt Whisky Trail, boating and game shooting. struttandparker.com - £498,000
On the market in Morayshire: With its bay views and period features, five-bedroom Findhorn House in Forres, 30 miles from Inverness, has plenty of selling points. Local attractions include the Malt Whisky Trail, boating and game shooting. struttandparker.com - £498,000
However, there is a hefty price to be paid buying this kind of property new: it is liable to VAT at 20 per cent.
‘The market for properties that have a restriction against being used as a main home is really tough,’ says Christopher Bailey, of Knight Frank.
‘They tend to sell for a 30 per cent discount. The market for waterfront properties in the South-West is getting better and better.
‘But a lot of people buy properties they can let out with a view to using them in retirement. If you can’t live full-time in a property, it’s no use to that market.’
If your aim is income, however, such properties can make an attractive second-hand buy. The property will no longer be liable for VAT. Moreover, rental values on dedicated holiday home developments where there are other facilities on offer can be high — making for a high yield.
And the advantage of owning a holiday let in Cornwall or the Lake District over a city centre buy-to-let is that you might want to spend time there. With properties costing more than £1,000 in peak season, it’s a significant boost to your return.