Landlords facing financial hardship when new mortgage interest finance rules slash their tax relief over the next few years could find a solution by switching to holiday lets.
Self-catering holiday lets are big business – and necessarily just in picture-postcard villages and by the sea.
City breaks are just as popular, but not all buy to lets will comfortably convert to a holiday let.
Properties really need to be close to transport and tourist locations.
The benefits are holiday lets are outside of the new mortgage interest relief rules, so higher rate taxpayers will keep their 40% relief on loan finance.
They also offer a bonus – a lower rate of capital gains tax on disposal with entrepreneur’s relief, which is charged at 10% rather than the standard CGT rates of 18% or 28%.
Running holiday lets has pros and cons.
Not only is managing the property more intensive than an ordinary let, HM Revenue & Customs (HMRC) has a raft of qualifying hurdles for landlords to jump to gain the generous holiday let tax breaks.
First a furnished holiday let needs kitting out with everything a tourist needs to call the property home for their stay – and that’s everything from teaspoons to TVs.
Then, carefully consider the tax rules.
A holiday let must:
- Be available to guests paying rent at a commercial rate for at least 210 days a year – so free or discounted stays for friends, family or personal use are excluded
Available for rent means advertised online, in brochures and in a state for guests to use
- Rented by guests paying a commercial rent for at least 105 days a year
- Not be let long-term – for 31 days or more at a time – for longer than 155 days each year
A year means a tax year – from April 6 one year until April 5 the following year.
For landlords with more than one holiday let, averaging rules across the properties can share out occupancy and availability across all the properties, so one home failing a test can ‘borrow’ days that pass the test from another.
If a holiday let fails the qualifying tests, the property drops back into the owner’s buy to let business and loses mortgage finance relief and entrepreneur’s relief.