Holiday homes’ tax relief in outlined in the July Budget could lead to additional investment in this sector
The July Budget affected every landlord in the UK. The tax changes on buy-to-let landlords reduced tax relief on mortgage interest payments. However, experts have shown that there are ways around this. Firstly, landlords can invest through a limited company. Secondly, which will be the focus of the article, landlords can receive tax relief via investments in ‘Furnished Holiday Lettings.’
These ‘Furnished Holiday Lettings’ allow all expenses to be offset as capital allowances. The government state that in order to qualify as an FHL, the property ‘must be in the UK or European Economic area and commercially let. There does not have to be a formal lease.’ The property must therefore exist with the intention to make a profit; lettings to friends or relatives at zero or nominal rates do not count as commercial. Perhaps this is why the government included the clause ‘that the property must not be occupied by the same individual for more than 31 consecutive days during at least 7 months of the year.’
In addition, the property must be classed as ‘furnished’, whereby the visitor can have use of furniture within the property. It must also be available for letting for 210 days a year and actually let for 105 days. If more than one property is held, then property owners can average the occupancy. This enables less popular holiday lets to essentially be subsidised by more popular lettings.
If the holiday home investment has sound research, then the benefits can be twofold: an additional rental income and a form of tax relief.
Holiday Homes are risky investments. Make sure to understand the market and acknowledge it is different from the traditional rental market
Whilst the yields can be high on holiday homes in coastal areas or remote cottages, they can be extremely risky. Fortunately, if losses are made, they can be offset against other income for additional tax relief. Estate agents, such as Savills, have been known to reject selling purpose-built holiday homes due to the difficulties of finding buyers. Large lenders can shy away from these projects, so it can be worth finding smaller lenders to raise a mortgage. Notably, Leeds Building Society is one of a few lenders with specific mortgage plans dedicated to holiday-homes. As such, mortgages can be found, but the property has to be shown to be able to produce definitive rental income.
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