Ever since the Chancellor announced last year that he would be reducing tax relief for landlords, starting from April 2017, many of us have been thinking of ways to lessen the impact on our finances.One such possibility is to switch from long-term rentals to holiday lets.
There are several advantages to this, but it won’t work for everyone.
One of the pros of offering holiday lets is that you’ll still be able to claim full tax relief on your mortgage interest payments after April 2017. If you have a large mortgage and you’re a higher rate taxpayer, this could equal a significant saving on your tax bill, especially from 2020 when the tax relief available to landlords will be cut to the basic rate of tax.
Another advantage is that if you make a loss on your holiday let, you can deduct this from any other income you have to reduce your tax bill. This isn’t the case with long-term lets.
You could also see a boost to your income as the weekly rate for holiday lets is usually three or four times higher than for rentals of six months or more.
Offering holiday lets will also give you the option of using staying in the property yourself occasionally, or using it to accommodate friends or family, although don’t forget that if you do you won’t get tax relief for any period of personal use.
However, there are several drawbacks to offering holiday lets.
There might not be enough demand to keep your property filled 365 days of the year and you should expect much more frequent and longer voids. Even in towns popular with holidaymakers, demand will be very seasonal and there could be long periods of the year when you won’t get any guests at all.
In cities with a high tourist population, such as London, the demand might be more evenly spread throughout the year, but you’re still likely to experience quite a few voids.
Your income might be higher but your costs will be higher too. You’ll have to cover the council tax and water rates, plus the energy bills. The property will have to be fully furnished to a good standard and kept well maintained and spotlessly clean.
You’ll have to pay to market your property 24/7, 365 days of the year and you should expect to spend at least 10% of your income on advertising.
Bear in mind too that you’ll have a high turnover of guests and unless you want to deal with all the weekly or fortnightly changeovers yourself you’ll need to pay a third party to handle them for you.
Still tempted to make the switch?
Before you take the plunge, check if there are any restrictions that apply to your property. If you have a buy-to-let mortgage, check with your lender as some insist that the property is let on a standard AST. You should also make sure you have specific insurance for holiday lets.
Owners of leasehold properties will need to check there are no rules against short-term or holiday lets in their lease agreement.
You might also need planning permission if your local council considers that the switch to holiday lets is a material change of use of your particular property.
In some London boroughs, you must apply for planning permission if you intend to offer short term lets for anything more than 90 days of the year.
Note also that if you need planning permission and this is granted, it might mean the property can’t be sold later as a residential dwelling, which might affect its value.As you can see there’s a lot to consider but if you’re not sure what’s best for you, you could always dip your toe in the water and try offering a short term let next time you’re between tenancies and see how it goes.