Updated 03 September 2020
Holiday homes are exempt from the new buy-to-let tax treatment, so if you have a cottage going spare then there could be sunny days ahead. Article by Nick Green.
The new tax treatment of buy-to-let property has hit many landlords hard. Under the old rules, landlords could claim tax relief on their mortgage payments at their marginal rate – so higher-rate earners could claim 40 per cent. The change to a flat rate of 20 per cent means that many landlords have seen their profits slashed.
However, one kind of buy-to-let property is exempt from this change: holiday homes. You can still obtain higher and top-rate tax relief on mortgage interest repayments, and the returns from holiday letting can be impressive: between £12,000 and £15,000 a year for the average two-bedroomed cottage in the UK.
Here are some tips for getting started as a holiday landlord or landlady.
Know your customer and know your product – two golden rules of business which apply equally to holiday lets. Unless you’re very experienced, go with what you know and buy a property in a place where you yourself enjoy going on holiday. This will enable you to judge for yourself if it’s worth the rent you’re charging, and it also means that you can use the home yourself when it’s unoccupied.
Be warned: you will need to use a normal mortgage, not a buy-to-let or a second residential mortgage, as these usually prohibit borrowers from letting the property as a holiday home. Talk to a mortgage broker or financial adviser to find the best mortgage for your needs.
Inform HMRC that you plan to start letting out your holiday home, as tax may be due on your income from it. You need to report any rental income above £2,500 in your self-assessment tax return. If the income is less than this, you should still notify the Self-Assessment Helpline (0300 200 3310). If your company owns the property, the rental income must be declared as business income.
Letting out a holiday home counts as a trade rather than an investment, which gives you more favourable tax treatment. You may be able to claim various allowances and reliefs, including:
In order to qualify for these allowances your holiday home must meet certain criteria, including being available at least 210 days per year and let for more than 105 days a year. Also no single guest may stay for more than 31 days, and you must charge market value rent.
If you’re letting out a holiday home that you use yourself, you have an important edge over a holiday company. You know the area, you know the big attractions and how to make the most of a holiday there. You can store useful things such as beach equipment and toys for children in the property and allow their use, and leave tips for holidaymakers based on your own experience. Anything you’ve learnt, pass it on. This will help your tenants feel at home and will greatly increase the chance of recommendations and re-bookings, leading to a steady annual income.
Start slow – don’t go all-out for maximum profit right away, as that’s a sure way to cut corners and put customers off. Initially, just set out to break even on your mortgage costs, as you learn your trade. Encourage people to review and recommend you online, and when you’ve earned a reputation for providing great service, gently adjust your prices to reflect your quality and start earning in earnest.
Spot-checks are all very well, but they rarely turn up everything. Maybe the water boiler needs re-pressurising, or the dishwasher smells, or there’s a problem with a nearby property – there are many things you might only notice after living there for a while. It’s a great excuse for a peaceful long weekend away, and you can tell everyone you’re working while you have your lie-in.
Various sites exist that make it easier to let out your holiday home for short periods. As well as AirBnB, there is HomeAway, VRBO, FlipKey, Housetrip, Homestay and more. It's worth trying a few to see which one works best for you.
Your holidaymakers may want to get away from it all, but most will want easy access to social media, email and the internet to check up on local attractions. Having free wi-fi in the home will endear your to your tenants, and make it easier for them to contact you too. Other technology you could consider includes remotely controllable heating, so you can adjust it yourself during unoccupied periods. Having efficient heating (including radiator reflectors) will also increase your chances of getting bookings in the winter months.
It’s your property and your investment – you don’t want people there you might damage it. If you think you’re renting to a family of four and end up with ten drunken students sleeping on the floor and smoking indoors, you have a right to be angry and to demand compensation – but you’ll need to set this out clearly in your terms and conditions. Be tough but fair; you don’t want to make people uncomfortable, you just want all your guests to be able to enjoy the property at its best.
Talk to your financial adviser about maximising your income from a buy-to-let holiday home.
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