The traditional BTL market is constantly changing. New taxes introduced on second homes as well as higher stamp duty and tightened criteria when it comes to buy-to-let mortgages are all reasons why investors are looking further afield to gain higher returns within the property market. These changes are making it more difficult for BTL owners to make worthwhile returns from their investments. Recent figures from the Council of Mortgage lenders show that the number of buy-to-let properties purchased have halved over the last 12 months.
So what is it about holiday homes or more professionally known as Furnished Holiday Lets (FHLs) that is so attractive to investors? Unlike traditional buy-to-let properties FHLs can command much higher rates that can fluctuate throughout the year and peak at high seasons. If we take Devon for example, during high season a 4-bedroom detached property is advertised on holidaylettings.co.uk for up to £2,700 per week. When we then look for a similar property in the same location for a long term let it is advertised on zoopla.co.uk for around £900 per month.
In the above example, the furnished holiday let is therefore generating up to 1,200% more revenue than the traditional BTL property.
As per the government’s Summer Budget plan in 2015, approximately 2 million buy-to-let landlords are estimated to suffer cuts in the amount of tax relief they are able to claim on mortgage interest payments. For example, by 2020 wealthier landlords who used to have 40% to 45% tax relief will then be subject to a reduction to 20%. However, HMRC views furnished holiday lets as trades, therefore subjecting holiday home owners to only 10% capital gains tax upon selling, and thus providing significant allowance.
Moreover, investors that purchase a holiday home in England are not only making a profitable investment considering the increase in tourists post-BREXIT (due to the drop in the value of the pound), but are also able to possibly claim up to 100% relief on the property. The criteria to be eligible for such relief is based on the property being available to the public for over 105 days per annum, therefore allowing the investment to be subject to business rates rather than council tax.
Other tax benefits include income tax relief as furnished holiday lets are considered a trading business, consequently offering holiday home owners the opportunity to claim back any capital spent on the maintenance or operation of the property such as furniture etc. With this, any profit or loss against income tax pay is also claimable, as long as the profits from the investment are within the threshold. Here are further tax advantages of holiday lets.
The residential lettings market is toughening up on flexibility for landlords. In Scotland, as of January 2017 landlords are no longer allowed to issue minimum term leases. This means that a tenant can serve a 28-day notice to end their tenancy at any point in time – on the flipside, a landlord is no longer able to have the property vacated after a fixed time either. Creating two worst case scenarios for landlords, either the tenant will leave shortly after moving in affecting the profitability of the BTL investment or the tenant will stay for an extended period of time not allowing the landlord to use the property at any point.
Holiday lets on the other hand are much more flexible, similar to hotels, a booking will have a clear and set start and end date. This means the property can be made available to the owner at any point for personal use, as stated previously the property must only be occupied for a certain amount of days per annum to receive the FHL status and linked tax benefits. For this very reason, holiday homes are a great opportunity for lifestyle investors.
There are a number of additional comparisons that can be made between these two types of property investments. To find out more about holiday home investments get in touch with HyLife! We have a number of holiday homes available to investors with high flexibility to match the characteristics of the investor or portfolio.