Holiday lets – the dream solution?

Holiday lets – the dream solution?

11:17 AM, 19th July 2022, About 4 weeks ago 9

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With the Renters’ Reform white paper making residential buy-to-lets less attractive, is it time to look at snapping up a country cottage holiday let? It may be, but be careful, warns Richard Reed.

We’ve all probably dreamed of owning a cosy country cottage in an idyllic part of the country, let out for chunks of the year to bring in a nice, fat income.

With the government cracking down on residential tenancies, it may seem the time is ripe for a change.

The writing has been on the wall for the traditional buy-to-let tax (BTL) market for some time.

The ending of the 10% annual wear-and-tear allowance on furnished properties in 2016 was a sign of things to come.

But it was the phasing out of mortgage tax relief in 2017 that prompted many savvy investors to start looking elsewhere.

One obvious solution was to buy UK or European holiday lets, which enjoy a large number of tax concessions denied to traditional BTL owners.

They still incur the higher rate stamp duty, but crucially qualify for 100% mortgage tax relief, while residential lets are now reduced to a flat rate 20% tax credit on a mortgage.

Arguably the proposed Section 21 eviction ban in the Renters’ Reform Bill white paper could push many residential buy-to-let landlords to transition to holiday lets.

Attractive proposition

With no eviction issues, a 100% mortgage allowance, deductible expenses and an income north of £20,000 a year, a country cottage that you can use yourself a few weeks of the year is an attractive proposition.

But there are storm clouds on the horizon.

Residents in tourism hotspots such as Devon and Cornwall have been campaigning for a crackdown on second homes for many years, complaining that they have pushed house prices out of the reach of local buyers – and leave many small villages ‘dead’ during the winter months.

As a result of this pressure, the Levelling Up and Regeneration Bill published in May 2022 will, when drafted into law, give councils in England the power to double the council tax on empty and partially-occupied properties. That could lead to a potential council tax charge in Devon of more than £4,000 in 2022-23.

In addition, a government consultation paper published on 29 June 2022, set out plans for a possible tourist accommodation registration scheme in England.

Northern Ireland already has such a scheme, while Scotland will be imposing one this October. Wales has also announced it will be introducing a register.

Airbnb growth

The move has been largely prompted by the rapid growth in the number of both first and second homes being rented out through organisations such as Airbnb.

The most recently available Airbnb data shows a 33% increase in UK listings between 2017 and 2018, from 168,000 in 2017 to 223,000 in 2018.

There has also been a surge in second home-ownership. According to government figures, in 2018-19, 2.4 million households in England reported having at least one additional residential property. Most are standard residential rentals, but 772,000 are classified as second homes – up from 572,000 in 2008-09. Just over a third (35%) of second-home owners bought their properties for income or as a long-term investment.

The post-Covid ‘escape to the country’ phenomenon could see those figures move dramatically higher when they are released.

Health and Safety regulations

In addition to a possible compulsory registration scheme, the government consultation paper proposes ensuring that holiday rentals comply with the relevant fire, gas and health and safety regulations for commercial properties.

The paper states: “It has been argued that some short-term and holiday-let operators are not aware of and/or not abiding by these regulations, potentially resulting in the provision of unsafe guest accommodation.

“On health and safety regulations, it has been argued that some hosts and providers are not undertaking… any risk assessments of their premises before offering them to paying guests.

“If this is the case, then it could lead to increased health and safety risks for the consumer. These could vary from property to property but could include, for example, no provision of basic first aid equipment, unsafe electrical systems or the provision of deficient products to guests such as a faulty kettle, hairdryer or gym equipment.”

The paper continues: “On gas safety, homeowners offering short-term lets may not consider themselves subject to annual safety inspections because they do not consider themselves ‘landlords’. However, guidance from the Health and Safety Executive, responsible for enforcing compliance, is clear that landlord duties apply to a wide range of accommodation, including rented holiday accommodation. Non-compliance could put paying guests at risk.”

While the consultation paper will not deal directly with the impact on rural housing and communities, the government says the feedback received will inform future policy.

‘Important role in tourism economy’

Merilee Karr, chairperson of the UK Short-Term Accommodation Association (STAA), said: “Short-term and holiday rentals play an increasingly important role in the English tourism economy by contributing significant numbers of jobs in local communities and generating valuable sources of income for local homeowners and businesses.

“Any new regulatory solution should recognise this contribution and seek to support the industry as an important part of the wider UK tourism sector.

“As an industry we look forward to working with the government to ensure that a simple, cost-effective regulatory solution is found, which takes into account the needs and benefits to communities, and supports owners to rent out properties that would otherwise sit empty.

“We are glad to hear that the government is committed to a solution which gets the balance right, and we look forward to sharing our insights and thoughts on practical solutions with policymakers.”

Huge growth

Tourism minister Nigel Huddleston said: “We’ve seen huge growth in the range of holiday accommodation available over the last few years.

“We want to reap the benefits of the boom in short-term holiday lets while protecting community interests and making sure England has high-quality tourist accommodation. While no decisions have been taken, this review will help us work out the options to look at so we can protect our much-loved communities and thriving holiday industry.”

Former housing minister Stuart Andrew, who published the paper, added: “Holiday let sites like Airbnb have helped boost tourism across the country, but we need to make sure this doesn’t drive residents out of their communities.

“We are already taking action to tackle the issue of second and empty homes in some areas by empowering councils to charge up to double the rate of council tax.

“This review will give us a better understanding of how short-term lets are affecting housing supply locally to make sure the tourism sector works for both residents and visitors alike.”

The call for evidence will run for 12 weeks until 21 September – you can submit your evidence online here.

Alternatively, you can email answers to the call for evidence questions to tourism-accommodation-registration-scheme@dcms.gov.uk.

Do you have any experience, good or bad, of holiday rentals? Please post a comment in the forum and let us know.

Tax rules for holiday lets

To qualify as a furnished holiday letting (FHL) and receive the tax breaks that go with it, a property must be either in the UK or the European Economic Area, and must be furnished so that guests can use it.

It must also be available for letting for at least 210 days every year, and must be let out for at least 105 days. It must not be let continuously to one person for more than 31 days.

If your property does qualify, you can claim Capital Gains Tax reliefs for traders and you’re entitled to plant and machinery capital allowances for items such as furniture, equipment and fixtures. The profits also count as earnings for pension purposes, though you must keep the accounts for your holiday rentals business separate from any residential lettings.

For more detailed information on the accounting rules, visit the HMRC website.



Comments

Paul Essex View Profile

12:35 PM, 19th July 2022, About 4 weeks ago

"No provision of basic first aid equipment"
Any ideas what this could mean? Other than smoke detectors and perhaps a fire blanket which are not really first aid I have never seen anything else in a holiday cottage.

NewYorkie View Profile

11:53 AM, 20th July 2022, About 3 weeks ago

All these 'issues' existed when I had a holiday let 22 years ago. Social media and the likes of airbnb has made it much easier to operate holiday lets, but the attacks on residential landlords over the past 10 years has led to many landlords either selling up or moving to short term letting (I will be doing this). A lot of this is in urban areas, which are not holiday let territory, which suggests those landlords are not playing by the rules, facilitated by a lack of enforcement. There is plenty of regulation, but it's pointless if it isn't rigorously enforced. Instead, what we see are lazy, broad-brush actions aimed at increasing charges, which does nothing to improve the availability of affordable housing for the local community.

Paul

13:46 PM, 20th July 2022, About 3 weeks ago

IN WALES From 1st April 2023 (and this is no April fool)

Holiday lets (second homes) will attract a 300% council tax charge.

To avoid this Holiday lets must claim business rates status but in Wales; to qualify for business rate status IN WALES:

properties will need to be made available for at least 252 days, and actually let for 182 days which will put some people out of business.

The welsh 1st minister (Mark Drakeford) bringing in these draconian laws has a holiday home but as it is restricted by planning for only 11 months use per year so his second home council tax will not be rising AND will actually be limited to a flat rate of the normal rate.

NewYorkie View Profile

14:44 PM, 20th July 2022, About 3 weeks ago

Typical hypocrisy. 'restricted by planning for only 11 months use per year...' What does this mean, and can anyone do it?

Jake@SixForward View Profile

15:10 PM, 20th July 2022, About 3 weeks ago

Just expanding on the paragraph:

If your property does qualify, you can claim Capital Gains Tax reliefs for traders and you’re entitled to plant and machinery capital allowances for items such as furniture, equipment and fixtures........
First FHL Acquisition

• Care needs to be taken where property is being acquired for the first time (perhaps within an SPV) and the FHL business has not begun.
• Entitlement to those fixtures may be lost where a significant refurbishment is required before the property/trade becomes operational.
• More positively, those new fixtures introduced by way of refurbishment may qualify.
Acquisitions within existing FHL business
• There may be scope to claim for those fixtures acquired on the basis that they are being acquired as part of an existing trade, irrespective whether they are removed before the property becomes operation.
• Averaging rules may apply - Where one falls short of meeting FHL conditions, the other may ‘bring up the average’ so both effectively achieve 105 days of letting, etc.
• Refurbishments may still qualify in the usual way – A potential ’double bubble’.

Switching Status

• The tax legislation recognises that the owner of a residential property may switch its use between FHLs and other types of property business.
• If a property switches from (say) AST to FHL usage, this gives a chance to claim allowances for fixtures in the property.
• If, however, the usage goes the other way, and the property ceases to be used for FHL purposes, a disposal value will have to be brought into account, potentially reversing all allowances claimed for fixtures in the property.
• One solution is to claim for an FHLs and then to sell the property to a third party before the change of use. In these circumstances, a fixtures election may be signed in the usual way to protect some/all of the allowances.

Other Considerations

• Pooling and fixed value requirement (s.198 Election) may still apply in the usual way where property was operated on a commercial/FHL basis by a previous owner(s).
• If the FHL business makes a tax loss, perhaps by utilising capital allowances, this loss can be offset against future profits for the same trade. You cannot set the losses of one FHL business against the profits of another business.
• Unlike trading businesses, most FHL businesses will not qualify for Business Property Relief (BPR).
A loss incurred on an FHL business in any tax year is not available for set off against any other income or gains.
The full value of the FHL, less any mortgage, will be within your estate for Inheritance Tax.

james pearce

15:22 PM, 20th July 2022, About 3 weeks ago

Personally I can’t see it being long before the ability to claim interest is removed from holiday let’s. Maybe the government just want a few more people to pile in first……..surprised it hasn’t happened before now.

Michael Johnson - Amzac Estates View Profile

15:31 PM, 20th July 2022, About 3 weeks ago

Reply to the comment left by Paul at 20/07/2022 - 13:46
I am not defending this policy but the devil is in the detail so just to clarify; To claim business rates relief a holiday let property must be available 252 days per year and be actually let for 182 days otherwise the property will be liable to council tax which may, at the local authorities discretion, be up to 300% of normal council tax . This is aimed at certain areas of Wales where holiday let properties have increased dramatically over the last 5 years. This will have the effect of actually pushing up the cost of holiday lets rather than increase the local housing supply.
On the point of the first ministers holiday chalet, I am not a defender of Drakeford , in fact I hate him with a vengeance, this is on a caravan park where no one is allowed to stay on the site for 2 months of the year as these are council tax rules and affect most caravan parks unless they are designated permanent homes. So I don't feel on this occasion this is a fair assessment of the policy.

NewYorkie View Profile

15:41 PM, 20th July 2022, About 3 weeks ago

Reply to the comment left by james pearce at 20/07/2022 - 15:22
They need people to take their holidays in the UK and boost the economy. The problem is availability and cost... for everything. Its a bit like the goose/golden egg. I guess one way of discouraging foreign holidays is to 'ignore' chaos at the airports! You can forget hotels because they are filling up with illegal migrants, and nobody will take the chance on booking, just in case.

Rennie

19:48 PM, 20th July 2022, About 3 weeks ago

Reply to the comment left by NewYorkie at 20/07/2022 - 15:41
"They" will eventually restrict people from going anywhere except within 5 miles of their home so all holiday lets will be irrelevant.

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