How to invest in a holiday home

In this article you are going to learn about investing in a Furnished Holiday Letting

The staycation trend has prompted huge interest in buying a holiday cottage in England and Wales, and the high prices achieved for holiday rentals in UK holiday hotspots has led to many second homeowners `flipping’ their property into becoming a holiday let and capitalising on the tax reliefs. With demand for holiday cottages to let soaring, there has been a sharp rise in the number of holiday-let companies setting up in 2021; over 11,000 second homeowners in England have flipped their properties to become holiday lets since the start of the pandemic.

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When buying a holiday cottage aimed at the self-catering market, Jonathan Davis, Director of Jonathan Davis Wealth and Later Life Finance Advisers, said:

“Aim for excellence: the holiday lettings market is hugely competitive and the higher-end paying guests expect quality in the marketing, the photos and descriptions. They will instantly (online) reject less than excellent offerings.

“It is important to buy where the tourists go and be prepared to invest in the décor and furnishings and reinvest, so as not to let things start to look dull.

“Have efficient cleaning staff, as you will sometimes have guests leaving in the morning and new ones arriving from 2pm and consider current Covid-19 rules. As a business, owners can charge expenses to income (which reduces tax), for example, utility bills or refuse collection, interest on loans associated with the property, advertising or letting agency fees, products bought for the property such as cleaning products and welcome packs, as well as maintenance and cleaning costs.”

However, he warned: “Be careful as regards personal use of the property. Owners will need to calculate the percentage that was commercial and what was private usage.”

Mr Davis noted that VAT is chargeable above £85,000 per year income and added that if in a year, the holiday home makes a loss, that can be charged against a future profitable year.

“In England, holiday lets that are available to let for 40 or more days in a year will be valued for Holiday Let Business Rates as they are classed as self-catering,” he added.

“Whilst a self-catering property will be subject to Business Rate Property tax, an owner may be able to claim Small Business Rate Relief, which will reduce the amount of council tax they will have to pay. In England, you are eligible for Small Business Rate Relief if your property’s rateable value is less than £15,000.”

Mr Davis commented that house prices are likely to grow by official inflation for the rest of this decade i.e., 4-8% per year, compound.

The financial implications of letting self-catering holiday cottages

Real estate advisors the Altus Group analysed government figures and found that the number of holiday homes trading as businesses increased by over 20% as a result of the pandemic. The figures show that 67,578 homes classified as holiday homes have been flipped to become commercial premises, compared to 56,102 properties in March 2020. The summer of 2021 saw record numbers of tourists holidaying in Devon and Cornwall and almost 4,000 homes have been flipped in the south west alone during the pandemic. The south east has seen a 27% rise in the number of new holiday lets (1,458 properties).

A Treasury press release on March 23rd 2021 stated: “of the over 60,000 holiday lets currently on the business rates list, around 96% have a rateable value which would likely qualify them for Small Business Rates relief and as a result pay no business rates at all.”

The government is planning to legislate to tighten tax rules for second property owners in England. The Ministry of Housing, Communities and Local Government (MHCLG) issued a consultation paper [] on this subject in November 2020. In March 2021, the Treasury confirmed that the MHCLG would shortly issue a response and confirmed that “The government will legislate to change the criteria determining whether a holiday let is valued for business rates to account for actual days the property was rented.”

Tax advantages

James Lindley, director of Castell Wealth Management, commented that one of the major advantages of furnished holiday lets (FHL) compared to a standard buy-to-let property is that owners will often avoid many of the punitive measures imposed by the government. He said:

“Because they are classed as a business rather than investment, owners are still entitled to many of the tax advantages buy-to-let landlords no longer qualify for. Holiday lets are subject to business rates rather than council tax. There’s also the possibility of claiming 100% relief on business rates if the property has a rateable value of less than £12,000. At present, 96% of homes qualify for this.

“Currently, holiday lets are considered to be ‘business properties’, and therefore, for the purpose of Inheritance Tax, they are exempt. It should be noted however that HMRC are currently challenging this point, so there may be an alteration to this in future. Owners will be able to offset some of the equipment and furnishing costs against the rental income and can also deduct expenses such as council tax, utilities, maintenance, cleaning, property management costs and advertising.

“Subject to meeting the FHL criteria, holiday lets are eligible for full mortgage interest tax relief. HMRC classes holiday lets as businesses, and currently, there’s no limit on the mortgage interest amount incurred that an owner is able to offset against their profits. Taxpayers on a higher rate might find that their income tax bill is reduced by a notable amount.”

Mr Lindley added that the downsides of buying a holiday cottage include the fact that it will only be eligible for the tax benefits mentioned above if it is classified by HM Revenue & Customs as a furnished holiday let. To qualify for the tax relief, the property must be available to let by paying holidaymakers for at least 210 days a year; it must be let out for a minimum of 105 days each year and lets over 31 days cannot be included.

It is also important to remember that if another property is owned, any second home purchase (whether a holiday let or a buy-to-let) will be subject to an additional 3% stamp duty charge. Certain Capital Gains Tax reliefs are also available on sale.

Holiday home mortgages

A specialist mortgage is needed to purchase a holiday cottage which is to be rented out; buy-to-let mortgages are not suitable as they apply to assured short hold tenancies for a minimum six months. The number of holiday let mortgages on the market has more than doubled in a year according to financial data provider Moneyfacts. Interest rates are higher than with buy-to-let mortgages and a higher deposit is needed – possibly 25% of the property value. The amount that can be borrowed depends on the projected annual net rental income or the actual income if a home is already owned. An applicant will also need a separate income of between 20k and 40k a year as evidence that the mortgage repayments can be made when the property is unoccupied.

How to get the most from your holiday home investment

  • Buy a holiday cottage in a popular destination or beautiful location to ensure high numbers of people seeking self-catering accommodation. Independent cottages in areas of outstanding beauty such as the Lake District and the south west are always in demand. Proximity to facilities such as a pub just a short stroll away is advantageous. 
  • Friendly cottages are sought after with features such as exposed beams adding to the character. Tailoring any holiday cottage to the expected tenant profile, such as family groups and walkers, is important and bear in mind that dog friendly holiday cottages are increasingly popular.
  • Buy good quality furniture and fittings; high standards are important to most people seeking self-catering accommodation.
  • Cottage owners should extend the renting season to maximise income, for instance by adding features such as a wood burning stove, outdoor pool, hot tub or firepit to make a property attractive in the colder months.
  • Clarify contact details and ensure that customers can book with confidence by making the online process simple. Adjust booking fees for different times of the year, offer fee free changes and consider highlighting unique offers and short break deals.
  • Regarding Covid-19, make extra cleaning considerations and offer financial protection for cancelled bookings including full refunds.

Downsides of letting out self-catering holiday cottages

  • Seasonality – the peak times will be summer, Christmas and New Year; there will be weeks when the property is empty.
  • Unpredictable income – cash flow will vary according to the rate of bookings.
  • Workload – holiday lets require management, however, maintenance issues such as weekly cleaning and bed-changing can be outsourced.
  • Competition – there is a huge range of holiday cottages to let; to make self-catering holiday cottages stand out in the marketplace, the offer needs to be constantly improved. Owners need to offer holiday inspiration, listen to guests’ feedback and aim for positive reviews.

Target clients carefully

It is important to pitch a holiday cottage at the intended client-base, offering holiday inspiration to make it the `perfect cottage.’ If the aim is to appeal to families it is sensible to have nearby attractions, like a theme park, and highlight popular destinations such as areas of outstanding beauty, beaches, sea views, historical sights and even the sun duration in the garden. If a high-end property let is envisaged, focusing on luxury items may pay dividends, for example hot tubs and games rooms; these will also make the property attractive all year round.

Dog-friendly houses attract higher levels of bookings especially since Covid-19, so catering to this market will attract a wider range of clients and lead to year-round bookings. Consider installing outside dog washing facilities, create a dedicated dog sleeping space and ensure gardens are safe and enclosed. Charging a small fee per dog will cover any additional cleaning required.

Pricing structure

Having a detailed understanding of customers’ booking habits is vital to maximise rental rates and enable visitors to book with confidence. The accommodation price needs to be tailored for each week of the year to suit visitor demand in the local area, and prices need to be competitive. Consider special rates off-season for Monday to Friday breaks and weekends, along with last minute deals. Find out how much you could earn through the Sykes Holiday Let Income Calculator.

Take a long-term view

While renting holiday cottages to the lucrative short-term staycation market may be appealing, it is important to consider whether the current situation will change when international air travel fully resumes. Also, remember that a holiday rental may not suit investors wanting a steady income with little effort. It may also be prudent to monitor government policy regarding the way that second homeowners are taxed in future.

What do you think?

We would be interested in hearing about readers’ experiences of investing in holiday cottages, plus their views on how they see the future for self-catering holidays in England and Wales.

If you’re truly looking to invest in holiday letting, why not check out some of the properties ready to purchase on the Sykes Holiday Homes for Sale page.

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