Furnished Holiday Lettings

Investors in the Buy to Let (BTL) market have recently had significant challenges placed upon them primarily with increased tax costs (tax relief on interest paid restricted to basic rate tax).

Serial investors, with little gearing, have probably not had to make changes. Those with high borrowing costs will have looked at the benefits of incorporation, thereby eliminating any restriction on interest paid as a deduction against tax.

For those with one or two properties seeking additional pension fund planning, the market over recent years has been good to them. They have had significant capital growth whilst the cost of borrowing  has been at an all time low, making the yields significantly better than many forms of investment.

Now things are changing, the issue is to decide as an investor what is to be done, if anything.

According to recent research by the National Landlords Association, the number of landlords planning to reduce their property portfolios has hit 10 a year high. Certainly, one can understand a reduction in the size of a property portfolio if this either reduces or
eliminates borrowing costs, albeit Capital Gains Tax at 28% is a likely consequence.

Is There an Alternative?

Why not use the same property to provide Furnished Holiday Lettings (FHL)?

Many consider holiday letting as being in a designated holiday region e.g. Cotswolds. However, Airbnb have demonstrated that short term accommodation in major centres, is very much in demand. If you have good transport links it can override any location impediment.

What are the attractions?

  • No disposal costs or tax payable.
  • Full deduction for interest paid.
  • 100% management by third party is an acceptable tax deduction.
  • Can sell existing assets (once brought into use as FHL) and roll the gain into another property which may be more suitable for holiday lettings.
  • As a qualifying business – the value of the business, with planning, may well become exempt from IHT.
  • Entrepreneurial Relief would apply on closure of a FHL business, resulting in a 10% tax charge on the gain arising on the disposal of the properties (as against 28%).
  • Capital allowances are available for fitting out.
  • The earnings are pensionable.

As always there are regulations that need to be met, but with a good agent they are manageable. The properties must be:

  • Available (not let) for at least 210 days in a tax year.
  • Let for 105 days in a tax year on a commercial basis (no friends!).
  • No continuous lets of more than 31 days to one individual.
  • Private use will need to be pro rata for the deduction of expenses against income.
  • Need to consider VAT threshold.

Some may consider switching from BTL to FHL as like asking a horse to move from hurdles to flat racing. However, with some adaption, the strategy is potentially workable and if nothing else, it may improve the tax payable on disposal.

If you have any questions or would like to discuss your property portfolio with us in more detail, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with a member of our Construction and Real Estate team.

This article originally appeared on the blog of our member firm, MHA MacIntyre Hudson.