Investors in the buy-to-let (BTL) market have recently faced significant challenges, primarily increased taxes on capital gains, and the restriction of tax relief on interest paid to the basic tax rate. 

Serial investors, with little gearing, have probably not had to make changes to their portfolios to accommodate this, while those with high borrowing costs will have looked at the benefits of incorporation, eliminating any restriction on interest paid as a deduction against tax.

Meanwhile, those with one or two properties seeking additional pension fund planning have been rewarded by the market over recent years. They have had significant capital growth while the cost of borrowing has been at an all-time low, making the yields significantly better than many forms of investment.

Now things are changing, it’s time for investors to decide what, if anything, can be done… 

According to recent research by the National Landlords Association, the number of landlords planning to reduce their property portfolios has hit a 10-year high. 

Certainly, one can understand a reduction in the size of a property portfolio if this either reduces or eliminates borrowing costs, albeit Capital Gains Tax at 28% is a likely consequence.

However, investors shouldn’t rush to shrink their property portfolios, but consider alternative options such as using their properties to provide furnished holiday lettings (FHL), which don’t fall under the same tax rules as residential properties.

Many investors consider holiday letting as something that can only be successful in a designated holiday region such as the Cotswolds or the Lake District. However, Airbnb has demonstrated that short term accommodation in major cities is also in high demand. Good transport links can override any location impediment. 

FHL can enable landlords to maintain their property investments while benefitting from tax advantages, with the added bonus of potential revenue. There are numerous benefits including:

• No disposal costs or tax payable; 

• No restriction on interest relief for mortgages or other loans; 

• 100% management by a third party is an acceptable tax deduction;

• Once the property is functioning as an FHL, investors can sell the property and roll the gain into another which might be more suitable for holiday lettings;

• As a qualifying business, the value of the business, with planning, may become exempt from Inheritance tax;

• Entrepreneurial Relief would apply on closure of a FHL business resulting in a 10% tax charge on the gain arising on disposal of the properties (against 28% on buy to let);

• Capital allowances are available for fitting out the property with furniture and other portable items; 

• The earnings made from letting the property are pensionable.

As always there are regulations that need to be met but, with a good agent, these are manageable. 

The properties must be available (not let) for at least 210 days in a tax year, and let for 105 days in a tax year on a commercial basis – this does not include friends or family. 

Additionally, the property must not be let for longer than 31 days to one individual and private use will need to be pro-rata for the deduction of expenses against income. 

Landlords must also consider whether income generated from letting the property exceeds the VAT threshold of £85,000; if it does, the owner must register their letting business for VAT. 

Some may view switching from BTL to FHL as similar to asking a horse to move from hurdles to flat racing. However, with some adaption the strategy is workable and may improve the tax payable on disposal. 

*Brendan Sharkey is head of construction and real estate at MHA MacIntyre Hudson