The number of holiday lets are on the rise, according to Bournecoast Holiday Agents and financial consultants Elite Financial.
The firms say that not only can a holiday home provide enjoyable holidays for a landlord’s family and friends, it can also offer a potentially lucrative extra income.
That’s because a Furnished Holiday Let, also known as a FHL, is a certain type of rental property classification in the UK and Ireland (as well as other European countries) – with this classification providing certain tax advantages to holiday let owners.
There are specific criteria a property needs to adhere to in order to be classed as a FHL, including its availability, actual bookings and level of furnishings.
One tax advantage is that capital allowances can be claimed on a FHL property, meaning the cost of kitting out a holiday property to a luxury standard – and, in return, increasing the potential rental income - can be deducted from pre-tax profits, an option not available for long-term rental properties.
What’s more, income generated from a FHL property is classed as ‘relevant earnings’, which means a landlord can also make tax-advantaged pension contributions. If a landlord ever comes to sell the FHL property, they could be able to claim certain Capital Gains Tax (CGT) reliefs - including Entrepreneur’s Relief, Roll-over Relief and Hold-over relief – which are also unavailable to long-term landlords.
Additionally, if a landlord shares the ownership of the FHL with their husband or wife, profits can be distributed flexibly between them both for tax purposes. With long-term rental properties, profits must be distributed according to the official ownership split – for example, if they owned 50% of the property, they would share 50% of the profits. With a FHL property, however, profit can be portioned in any suitable way.
There are certain taxes which FHLs are not excluded from, however. A self-catering property available for short-term lettings for more than 140 days in any given year is subject to Business Rate property tax. Given all FHL properties must be available to let for a minimum of 210 days, they all fall into this category.
The two firms, however, suggest this isn’t necessarily bad news as the landlord can claim Small Business Rate Relief, which could be up to 100% (dependent on the area you are in).
There are also signs that Brexit uncertainty around passports and travelling to Europe could be boosting the domestic holiday lets market, with more people choosing to spend their holidays in the UK this year.
“The holiday let market has gained considerable momentum over the past year, as evidenced by the growing number of lenders now offering mortgages suitable for this type of investment,” Des Simmons, managing director of Bournemouth-based Bournecoast Holiday Agents said.
Phil Wadham, director of Elite Financial, added that “the range of products for holiday letting is improving and more borrowers are thinking it’s a market to look at.”
Earlier this week a guest piece from holiday park operator Away Resorts analysed what impact Brexit has had on the UK holiday home market, with a rise in staycations increasing holiday home purchases.