Holiday homes: the best Investment of 2017?

‘If you are thinking about investing in property in 2017, you may want to consider the humble holiday home as your first point-of-call. As new changes in tax relief – courtesy of the government’s ‘2015 Summer Budget’ – begin to take place this April: there’s never been a better time.’

In 2015, it was determined that an estimated two million buy-to-let landlords will face cuts in the amount of tax relief they can claim on mortgage interest payments – courtesy of the government’s ‘2015 Summer Budget.’

Currently, individual landlords can deduct their costs – including mortgage interest – from their profits before they pay tax, giving them an ‘advantage’ over other home buyers. In fact, wealthier landlords receive tax relief at 40 or 45%. The summer budget proposed that this tax relief will be restricted to just 20% for all individuals by April 2020.

In addition, from April 2016, the ‘wear and tear allowance’, which allows landlords to reduce the tax they pay, will also be replaced by a new system that only allows them to get tax relief when they replace furnishings.

Chancellor George Osbourne went on to say that the aim of this cut was to create a “level playing field”, but the changes left many contemplating if property investment was still worthwhile.

Presently,  from the 6th April 2017, the tax changeover is due to begin. Where will this leave current landlords? They’ll be able to obtain relief as follows:

  • in 2017 to 2018 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction
  • in 2018 to 2019, 50% finance costs deduction and 50% given as a basic rate tax reduction
  • in 2019 to 2020, 25% finance costs deduction and 75% given as a basic rate tax reduction
  • from 2020 to 2021 all financing costs incurred by a landlord will be given as a basic rate tax reduction

It’s inescapable that this may leave those in the property business at a loss: consequently, it may be time to look toward an alternative way to invest and believes holiday homes may just be the answer. After all, the British holiday season is looming and the post-Brexit wave of trepidation we’re all still riding could well work in our favour.

A 10% drop in the value of the pound against the euro means that Britain’s quaint beaches and rural hotspots are expected to lure  close to 2.5 million Britons  to holiday (and save) at home this summer; yet a whole host of overseas tourists will be tempted by the favourable exchange rate post-Brexit. In fact, in the days that followed the referendum; flight searches to the UK from the US doubled, with increases in searches from China (61%), Canada (49%), Europe (31%) and Asia (20%.)

Sell House Fast  director Robby du Toit comments: “Over the past few years, the housing industry has seen a rise in holiday let interest – and alternative avenues more generally. In 2017, it could make a worthwhile investment. However, whatever your motive; it’s crucial to do in-depth research first and foremost. Focus on what works for you.”

Undoubtedly, as we enter spring – it’s time to look toward to the future. The new tax changes won’t touch holiday lets; so, the income can be far higher, and you can even go on your own luxury break occasionally, too!

The Tax Advantage

Holiday lets are viewed by HRMC as a trade, rather than an investment and tax is levied at just 10%. So not only will all mortgage interest costs remain deductible from any income, but there are generous capital allowances available too.

However, there are special tax rules for rental income from properties that qualify as Furnished Holiday Lettings (FHLs), which you must meet for your property to be treated as a holiday-let by HRMC. If said criteria isn’t met, you may have to pay tax as if your property is a standard let.

The Criteria

To meet requirements for your property to be classed as a ‘furnished holiday let’ (FHL) it must be located within the European Economic Area (EEA), it must be let on a commercial basis and it must be furnished. You will need to ensure that your property is available for at least 210 days (30 weeks) per year and let for at least 105 days (15 weeks): plus, you cannot have any periods of longer term accommodation – 31 days at a time – that add up to more than 155 days. If you let a property that qualifies as an FHL, you will be entitled to benefits such as:

  • you can claim Capital Gains Tax reliefs for traders (Business Asset Rollover Relief, Entrepreneurs’ Relief, relief for gifts of business assets and relief for loans to traders)
  • you are entitled to plant and machinery capital allowances for items such as furniture, equipment and fixtures
  • the profits count as earnings for pension purpose

Remember, if you do want to invest, it might be wise to avoid honeypot areas which already have a high amount of holiday accommodation. Try looking toward somewhere a little more obscure – but growing; destinations where there may be a shortage of lettings and opportunities.

Holiday Home Owner Case Study

Sell House Fast   decided to ask successful businesswomen and magazine editor, Amber Beard about her experience of owning and managing a holiday home; based on popular tourist destination, the Isle of Wight – and she had this to say:

What is your experience with running a holiday home?

Holiday lets are hard work and to run one you must be organised and dedicated. We bought our house as an investment rather than to make a quick buck and it pays for itself with a profit that we usually reinvest back into the house by way of upgrading white and electrical goods and a yearly upgrade of linens! At the end of the day, it is crucial to maintain high standards (we are inspected yearly by Visit England) but in terms of an investment and source of income? I’d say it’s more than worth it.

Do you have any advice for those thinking about purchasing a holiday home?

My advice? Depending on where your holiday let is – so for instance by the sea (which could add a third onto the property value), in town or country you will find that your bookings will follow a pattern – ours, being on the Isle of Wight, has a good uptake in the summer and the school holidays but is far quieter in the winter months. In my experience, you must take into consideration your locality and the types of people that are likely to want to visit (and stay) in the area. It’s worth seeing what you can get for the average UK house price to get a good idea of the size of property you can get.

Regarding the industry; we have found that using well known property websites, local services and establishing our own website to be essential in building coverage. Having a star grading is also important (ours is 4*) as well as having up-to-date, good reviews on Trip Advisor – so it’s worthwhile to build up good rapport with customers in whichever way you can.

Article written by Sell House Fast  in association with Journalistic.