If you’re a buy to let landlord you could be forgiven for thinking that the government has had it in for you in recent years.
I guess if you are going to raise some tax revenue then landlords are a group that you can bash without losing a lot of votes and they have certainly been bashed lately.
It’s long been an investment model to push borrowing to get a second, third or fourth rental property. The objective is capital gain and the eventual reward comes from selling after taking a ride on the property market. Capital gains tax was reduced from April 2016 to 10% for basic rate tax payers and 20% for higher rate taxpayers but the boot was thoroughly put in to landlords by making the rates 18% & 28% for residential property.
Then came the restriction on buy to let mortgage interest relief. Throughout the years that I worked in the finance industry there was a simple answer for clients bemoaning a large tax bill- if you owe the tax you must have earned the money. This is now not true for buy to let landlords. Although lending rules have tightened it’s still pretty common for a buy to let owner to have a property that only breaks even after costs or even loses a little each year.
Traditionally many landlords have been fairly relaxed about this sort of situation thinking that it’s a long term investment and the property is going up in value. Between now and April 2020 a landlord will face an increasing tax charge on money they haven’t made. If you are a higher rate taxpayer- you owe the tax even though you didn’t make the money.
So why the rush to holiday letting?
The furnished holiday let tax regime remains a very favourable one and although the yield after expenses may be lower than 12 months of unbroken tenancy the other benefits can significantly outweigh this.
Mortgage Interest Relief. The new rules restricting tax relief on interest payments do not apply to holiday lets.
Capital Allowances Expenditure on capital items can be written down completely in the first year. This can lead to a significant ‘tax free’ rental period.
Capital Gains Tax Furnished Holiday Lets qualify for entrepreneurs relief giving a flat rate of 10% on disposal compared to a minimum of 18% and typically 28% on buy to lets.
Rollover Relief. When you sell a furnished holiday let and buy another the gain can be ‘rolled over’ into the new property so the tax is not payable at that point provided the new property is of equal or greater value. Note that capital gains tax does not apply after death so if you never sell the property you never pay the tax.
Retrospective Benefit. Are You Sitting On A Gain? This is a really big one – in certain circumstances operating as a holiday let for at least a full tax year the entire gain may qualify for entrepreneurs relief even if the place has been a buy to let for a long period.
What do I need to do to qualify as a FHL (Furnished Holiday Let)?
You have to make the property available for holidays for most of the year and you can’t do a 6 month winter let. On the practical side you need to furnish the place and if you don’t want to create a lot of work for yourself you’ll need to employ an agent offering full service including cleaning, linen and callout service for guests.
Holiday letting is certainly a different experience but there are some great practical advantages.
Empty weeks to use yourself – you’re probably going to have 20+ weeks unoccupied in the property which you can use yourself or give away – stay there after a night out, put up friends & family who are visiting or impress somebody coming to a business meeting.
Regular maintenance – the property is cleaned every week and things are dealt with straight away so it’s always in tip top condition.
Maintaining income when selling – there’s no need to stop letting if you want to sell the place, you can do viewings on changeovers, block some weeks out and market in the winter period, there may even be a premium for the benefit of future bookings.
A lot less hassle with tenants. You can get an awkward guest but your agent will deal with them and they’ll be gone at the end of the week. There’s never occupancy without payment or eviction to deal with.
Contact Simon on:
t. 01202 707 357
a. 2 Banks Road, Sandbanks, Poole, Dorset BH13 7QD
Simon Tolson owns Rumsey Holiday Homes in Sandbanks and a portfolio of holiday cottage agencies in Cornwall.