#homes to let
Why holiday homes will be the next buy-to-let boom
The new tax applying to buy-to-let doesn t touch holidays homes and the returns can be far higher
7:55AM GMT 08 Nov 2015
Renting out a two-bedroomed cottage to holidaymakers can produce an eye-catching income of between £12,000 and £15,000 a year, according to letting agents. Larger properties can average up to £30,000 a year gross.
Desirable tax breaks add to the appeal of holiday-home ownership at a time when the Government is slashing tax reliefs associated with other property investments, such as buy-to-let.
So could the buy-to-let boom shift into holiday lets? One of the factors that could prevent this is the difficulty owners have in finding mortgages.
Jonathan Cunliffe, a director at property group Savills, said: It is very difficult, if not impossible, to get a mortgage on a property you want to use as a holiday let.
Michael Kleinman, an agent with PRH, Penzance, agreed: We sell cottages in some of the most popular and desirable Cornish villages, but I have just lost three sales, because the finance fell through at the last moment. Mortgages were approved, but then withdrawn. Everyone working in the West Country will tell you the same story.
Mortgage brokers say demand for holiday homes is growing.
David Hollingworth, a mortgage broker at London Country, said: People know they will need to provide their own pension in the future, and this can be one option for delivering that income while also providing holidays for the family.
Income from cottage or coastal lets can be significantly higher than returns from other property investments.
But potential investors trying to exploit these opportunities are being thwarted. Holiday-home loans are problematic, and some properties, which were easy to finance a few years ago, are now completely unmortgageable.
Mr Cunliffe said: The worst hit are purpose-built holiday homes. We were recently asked to sell a new holiday development, but I turned it down. You cannot sell those properties, because buyers cannot raise finance, whereas they would have been able to a few years ago.
But Telegraph Money has found that a number of smaller building societies are eager to lend. They tend to underwrite customers on an individual basis, so a good mortgage broker, with national reach, can help pinpoint the right deal.
If you operate under the furnished holiday letting rules, you can offset all expenses including full mortgage interest against the rental income. This compares with the scaling back of tax relief on buy-to-let from 2017.
So, for example, if you were buying a cottage for £350,000 with a 75pc mortgage fixed for two years at 2.85pc, a landlord in the 40pc tax bracket could claim £2,992.50 in tax relief, while from 2017 a buy-to-let landlord s tax relief will be capped at £1,496.25 a difference of nearly £1,500.
Running a holiday let is treated by HM Revenue Customs (HMRC) in the same way as any trading business, so losses can be carried forward and offset against future profits.
Nigel Neville, a technical director at RSM Tax and Accounting, said: A holiday let is a trading business. It is hard to see how tax relief could be cut back in isolation from other trading activities.
Furnished holiday lets also qualify for entrepreneurs relief, cutting any potential capital gains tax take to 10pc. Otherwise any taxable gain will be hit by an 18pc deduction below the higher rate threshold or 28pc above.
Finally, if you have been actively involved in the business by, for example, providing a laundry service or breakfast, it may be possible to get business property inheritance tax relief on death.
Neville added: This is a tricky area. But if you can show you have been actively engaged in the business by providing services and dealing directly with the holidaymakers, then it should be possible to claim business property relief.
To qualify for furnished holiday-let tax treatment, the property must be available for letting for 210 days a year and actually let for 105 days. If you have more than one property, occupancy can be averaged to qualify.
How to raise finance
The Leeds Building Society is one of a few lenders with a dedicated range of holiday-home mortgages. You can currently fix for two years at 2.59pc with a 40pc deposit, or 3.14pc with a 30pc deposit, if you pay £999 to arrange. For a lower £199 arrangement fee, these two loans will cost 2.99pc or 3.54pc respectively.
If a property has an established history of holiday rentals, it will base the size of the mortgage on the expected rental yield.
The Newbury will lend up to 75pc of the value of the property, but unlike the Leeds does not take rental income into consideration. It credit scores using salary and will offer maximum loans of four times joint earnings. Other smaller societies prepared to lend include Harpenden, Cumberland, Market Harborough and Penrith.
Larger lenders are likely to be less sympathetic. Some, like Virgin Money, are happy to help you buy a second home, but stipulate it must never be rented out.
It is always possible to raise finance without mortgaging the holiday cottage itself. You can take out a mortgage on your primary residence, if that is debt free. Or you can ask for a further advance.
Andrea and Mark Harrington knew they would still need some form of regular income when they retired early after selling their health-food business and restaurant.
So when they bought their home, Gable House, in Parbrook, near Glastonbury, they decided to restore a derelict outbuilding in the garden to use for a holiday let.
Andrea, aged 50, said: It has been brilliant. We can t believe how successful it has been. Bookings have flooded in, and we have rarely had an empty week since we started.
The renovations cost around £30,000. But from January to October this year alone, the Harringtons have already enjoyed gross income of more than £14,000. Expenses are low as they do all the work themselves, including cleaning and even offer guests the option of an evening meal, as Mark, 56, used to be the chef at their restaurant.
Their experience is mirrored by another couple, Barry Smith and his wife, Ros, who have enjoyed a gross income of up to £30,000 annually for the past six years after buying two barns near their home, close to the Mendip Hills. Mr Smith said: It has been a phenomenal success. Over the last six years, we have a track record of 80pc occupancy which has taken me by surprise, as we are not in what you would normally consider a holiday location.