Buying a holiday let can be a tax-efficient and satisfying way to invest

says property journalist Sharon Dale.

Thanks to the Brexit vote, which has brought fluctuating exchange rates and economic uncertainty, a growing number of Brits are opting for staycations.
 
This trend is just one of the reasons why investors are turning their attention to holiday lets.
 
The other motivation is that holiday homes are now more tax-efficient than properties rented out on a conventional short-term tenancy. Recent HMRC rules have brought restrictions on the level of mortgage costs that can be set against rental income for tax purposes on conventional buy-to-lets.
 
This does not apply to holiday properties, which are classed as business assets. This means that when you sell, the property qualifies for business asset taper relief on any capital gain. As long as you have owned your holiday let for two or more years, you will only pay a quarter of the normal capital gains tax. The majority of taxpayers will pay 10 per cent instead of 40 per cent on any gains over their annual exemption amount.
 
There are also inheritance tax advantages. To qualify, your property must be available for let at least 210 days of the year and has to be rented out for at least 105 days.
 
If you buy right in an area that has year-round appeal, then a holiday let can earn three times more than a conventional rental.
 
A two-bedroom cottage in Whitby being advertised with Yorkshire Coastal Cottages generates between £495 and £665 a week, whereas a similar property on the traditional rental market brings in just £600 a month.
 
If you are thinking of investing, then buy somewhere you know and love and don’t expect your holiday let to be booked 52 weeks a year as this is rare.

To get an idea of the average number of weeks you can expect, ask lettings specialists and holiday home owners in the area and then do your sums.

If you want to use the property yourself, this may reduce expenses claimed against tax. Lettings agents will advise on alleviating the loss as there are “ways and means”.
 
You’ll also have to factor in the extra costs and work involved with a holiday let. This is why it pays to get a good agency to manage it for you. They will sort maintenance issues, handovers and make sure the property is spotless, which is vitally important in getting good feedback.
 
However, they may charge 20 to 30 per cent plus VAT on each holiday rental for full management. The standard cost for tenanted property is 12 per cent.
 
Most holiday home investors are cash buyers but there are specialist mortgages available if you have a deposit of at least 25 per cent. Don’t be tempted to subvert the system by using a buy-to-let or second residential mortgage, which don’t usually allow holiday letting. This can invalidate your home insurance.
 
Here are some more holiday letting tips:
 
Do your research and look at the luxury holiday lettings sites, such as Sawdays.co.uk and gorgeouscottages.com,  to see what the best properties offer.
 
Location is key but you will pay more for holiday hotspots. If you long to be by the sea, you’ll find that the most popular places are very expensive. So look at villages that are slightly inland within easy travelling distance of the shore.
 
Consider buying new as there will be few maintenance issues, a major consideration when you are likely to be a largely absent landlord.
 
Your chances of letting a property rise significantly if the interiors are beautiful and comfortable. Buy the best sofas, chairs and mattresses and seek advice from an interior designer if you don’t have the skill to deliver real “wow” factor.
 
Holidaymakers will pay a premium for fabulous sea and rural views.
 
Private parking is very useful and many holidaymakers look for it. Wi-fi is a must.
 
Hot tubs are increasingly popular but make sure the water is changed with each visit.
 
There is a growing market for properties that sleep six or more as families who live far apart meet up to spend “quality time” together.
 
Finally, when you have furnished your let, test it out yourself and invite friends to stay and give feedback. There’s nothing more annoying than finding something missing, like a corkscrew, can opener or magnifying mirror.
 

Publish date: 05/06/2017