Changes to tax rules for buy-to- let (BTL) investors have dented hopes of making a decent income on a second property for many, with a series of nasty surprises over recent years.
These include a 3% stamp duty surcharge on second homes, and curbing mortgage interest relief.
Meanwhile, lenders have tightened their criteria when it comes to buy-to-let mortgages, making it tougher to secure a deal.
These changes have had a major impact on the appeal of this market, with the appetite to be a landlord seeming to wane. Latest figures from the Council of Mortgage Lenders show the number of properties bought by landlords has almost halved in a year, averaging around 6,000 purchases a month over the past 12 months.
Many people hoping to secure extra income from a second property may be wondering if bricks and mortar is still a worthwhile investment. Yet while the sector may have become less appealing for big investors, there are other ways to make a second property work for you, such as holiday lettings.
Sean McCann, chartered financial planner at NFU Mutual, says: “Holiday lets have a number of tax advantages over buy to let, which makes them a popular investment, particularly given the raft of changes for the BTL market over recent years. Even so – it’s important to factor in the time you’ll need to spend and on-going costs, as with any investment decision.”
And while tax changes may increase interest in holiday lets, there is also the potential for greater profits. Karen Spencer, from advice website The Business of Holiday Rental, says: “On a week-per-week basis holiday lets can provide a higher income than buy to lets – although a successful holiday let takes time, and you have to work hard to market a property to ensure bookings.”
However, be careful what type of second property you intend to use as a holiday let. If you own a leasehold flat, your lease may prohibit any form of letting other than assured shorthold tenancies, which would prevent you from setting up a holiday let.
A retirement earner
There are plenty of reasons why you might need some extra income from a second property. Deborah and Trevor Harris (pictured left), 56 and 60 years old respectively, are using the holiday lettings market to boost their retirement income, by renovating their farmhouse in Winsham, Somerset, to create a separate holiday cottage.
“When we found Church Farmhouse in August 2014, we fell for its rustic charm and decided to buy it and the next-door barn,” says Deborah. They paid £440,000 and spent £40,000 doing up the farmhouse to let, which has four double bedrooms and sleeps up to eight people, with two bathrooms.
“The previous owners had used it as a weekend cottage, but it was tired and needed a fair amount of structural work, such as roof and floorboard replacement,” she says. “But finding ‘vintage farmhouse’ décor was so much fun and we went for quality to make sure it felt luxurious and clean, so people would want to return.”
The property and barn have been jointly valued at £650,000. “When we were house hunting, we wanted a property we could make an income from because we were teachers and took early retirement at age 55,” she says.
“Property seemed a way to generate an income and boost our pensions, and we approached it by considering where we’d like to go on holiday – we wanted somewhere in the countryside, with an outdoor area.”
They aim to make around £10,000 at least from letting the farmhouse each year. “But, generally, we’ve made a lot more than that letting it all year round, and we really enjoy it – it’s great to see people enjoying themselves on holiday,” she says.
They offset some costs, such as laundry, cleaning fees, and items they buy for the farmhouse, against tax. “We considered marketing the property ourselves, but as it’s not a well-known location we felt it best to go with a holiday lettings company, so we chose Sykes Cottages.”
How the tax advantages work
If you let a property as a furnished holiday let, there are a number of tax advantages. Holiday lets are treated as a trade by HMRC, rather than an investment, so mortgage interest costs can be offset against any income for tax purposes. Council tax, utility bills, and repair costs can also be set against income, before tax.
“Income will be treated as trading income, so capital allowances may be available for items such as furniture, equipment and fixtures,” says Jackie Hall of accountancy firm RSM UK. There’s also the opportunity to roll over capital gains, so if you sell and buy another holiday let, any gain from the first can be deferred until you sell the second. However, if you already own another property, the 3% stamp duty surcharge will apply on buying a property, whether a holiday let or a buy to let.
But there are strict criteria to have your property treated as a holiday let, and if it doesn’t meet these you’ll face paying tax as if it was a standard rental property. Tina Riches, head of national tax at Smith & Williamson, says it’s important to understand what constitutes a holiday let for tax purposes.
“There are several criteria to be a furnished holiday let,” she says. “It has to be available as a holiday let for at least 210 days of the year and you have to actually let it out for 105 days a year. Usually this refers to a tax year, except in the first year of your holiday let, when it’s the first 12 months from whenever it’s first let out. Also, for the last year, it’s the 12 months up to the last day you let it out.
“Also, you can’t include in those days any longer-term lets – so anything over 31 days. You couldn’t just let it for holidays over the summer months, and rent it out the rest of the year. It has to be predominantly a holiday let.
However, she adds that if you’re intending a property to be a holiday let, it’s relatively easy to keep within the rules. “Unless you’re struggling to let it out, which could prevent you from getting the tax advantages. Essentially, you need to weigh up the extra revenue you get from letting it out for a longer period with having it let as a holiday let.”
How to market a holiday let
You could set up your own website for a holiday let, use an agency that specialises in this market, or a platform such as Airbnb* or HomeAway.
Airbnb charges between 3% and 5% commission, while HomeAway charges 8%. Both also charge fees to guests, which may be an important consideration when you’re deciding how much to charge. With both, you fill out a description, take the pictures and set a price.
Agencies charge commission ranging from 20% to 30%, but can offer various expertise to make sure you let the property successfully and manage bookings. It may be worth doing some research on the local area, to see which agencies people who are letting holiday homes are using.
The extra money you pay to list with an agency typically gives you access to a team of holiday lettings specialists, and a consultant who knows the area and can provide advice on generating income throughout the year. Advertising and marketing is also usually included for all property owners, with professional photography.
To increase your chances of getting year-round bookings, Karen Spencer, from The Business of Holiday Rental, says: “You need to be found online. You need your own website, to be active on social media, to blog, to send regular newsletters to your email list, and to build relationships with other local businesses. These are all things owners can do, but it takes time and is often a steep learning curve, learning new skills.”
However, this may sound like a lot of work, so you could do a combination of, say, having your own website, and using another platform such as TripAdviser, to generate enquiries. This will help diversify your property’s exposure, and ensure as many different potential guests are coming across it as possible.
Whether you’re buying a holiday let or changing an existing property into one, do your homework. Check out the area, demand, and competition, and perhaps even take a short break nearby yourself, to get a feel for whether it could make a good investment.
‘It pays for mum’s care’
Retiree Miles Barton (pictured left), 55, from Enfield, north London, is funding his mother’s dementia care thanks to successfully letting his childhood home to UK holidaymakers. “In 2013, mum had been suffering from vascular dementia and became a shadow of her former self, so we moved her into a care home close to us in London,” says the former police officer.
“But I realised this would cost a fortune, so we decided to let her home to fund the cost.” The five-bedroom house, in Eskdale, Cumbria, next to the La’al Ratty railway line sleeps 10 people, and has been let to holidaymakers since July 2014.
He charges around £550 a week, and up to £1,600 over the summer months.
Miles’ mother lived in the property for almost 60 years, and it needed work before it could be advertised. “It needed to be painted and re-carpeted throughout, and I replaced some tired furniture. I had the electrics redone, and put wi-fi in, a new telly and dining suite – and a hot tub.”
He markets the property through Sykes Cottages, which typically charges 20% commission. “The aim is to make around £18,000 a year, which together with mum’s pensions just about sorts out her care costs.”
He adds: “This means mum is in the right place and she’s well cared for – which gives me peace of mind. I had a wonderful childhood at Peel Place Noddle and have spent a lot of quality time here with my own son too – it’s very special to me and great to share this with holidaymakers.”
Make your property stand out
Securing bookings can be made easier if you make sure your property will appeal to holidaymakers. Here are some tips:
- Furnishing and equipping your home may be an expensive task, but it can pay by adding to your property’s appeal and boosting how much you can charge. Avoid buying cheap items – instead, invest in quality furnishings, which should last longer too – and remember that these costs can be offset against tax.
- Redecorating the property and cleaning it makes a big difference, and will also ensure that the pictures you use to market it are showing its best side.
- You could offer a few simple touches for your guests, such as homemade bread, a hamper with wine and cheese on arrival, or miniature toiletries. This could help secure returnees, and recommendations to their friends and family.
- Leave a welcome pack, with information about the area, walks, local attractions, pubs and restaurants. Perhaps leave a box where they can leave their own favourites if they come across somewhere new.
- Photos are the first thing a holidaymaker looks at to decide if they’re interested in staying at your property. “Make sure you have at least one photo of every room in your property, carefully picking which photo will be your ‘thumbnail’ and remember to include photos of special features, such as a pool table or swimming pool,” says a spokesperson for HomeAway.
- When it comes to the description, share the property’s selling points in the first sentence. Mention any extra amenities, and highlight its particular benefits, such as nearby landmarks and attractions. Make a list of everything that might appeal to people, before you start writing – if you are doing this yourself – and place its best attributes at the top.
Harriet Meyer is a consumer finance journalist who writes for the Sun on Sunday, the Daily Telegraph and the Guardian.
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