Buying a house for holiday letting
If you've got the money to buy a holiday home, why have it sitting empty for much of the year? Unless you're going to be popping down to your holiday home every weekend, you could earn a sizeable income letting it out for holidaymakers to enjoy. If you want any more financial incentive then consider that a small, 2-bedroom cottage in a desirable part of the country (such as the Lake District or the West Country) can bring in an income of around Â£12-Â£15,000 a year. A larger property could make even more, pulling in a staggering Â£30,000 a year gross.
Obviously, HMRC regards this as an income, and you'll have to pay tax on it. But holiday-home lets do come with some tempting tax breaks, and it helps to know whether your property qualifies.
How to qualify as an FHL
To qualify as a Furnished Holiday Letting (or FHL), your property needs to meet the following criteria:
¥ It must be within the UK (excluding the Isle of Man or the Channel Islands) or the European Economic Area (EEA), which includes all EU member states as well as Iceland, Liechtenstein and Norway.
¥ It must have furniture for normal occupation' and your holiday tenants must be entitled to use it.
¥ The letting of the property should be carried out commercially with a view to profit.
However, it also has to meet other occupation requirements to qualify. Firstly, it must be available for commercial letting for a minimum of 210 days a year. So if you're hoping to just let it out for a couple of weeks in the summer, it won't qualify. To take advantage of any tax breaks available, the property needs to be available to let for at least 30 weeks a year.
Secondly, there is the issue of longer-term lets. To stay qualified as an FHL, you can let for 31 days in a single stretch (ideal if someone wants to take a month sabbatical in your Scottish crofter's retreat), but it cannot be let out in a single block for more than 155 days. If you let it out in a single period for longer than that, it no longer qualifies as an FHL and starts to fall into the bracket of a short-term tenancy.
Finally, your FHL must be in a reasonable condition and occupied as a furnished holiday accommodation let for at least 105 days in the year.
Bear in mind that when we talk about a year' here, for tax reasons that's a tax year which usually runs from April to April.
What kind of tax will I be paying?
If you meet all the criteria to qualify as an FHL then you'll fall into the investment income tax bracket. You'll also have to bear in mind that profits from a furnished holiday home let are classed as relevant earning for pension contributions, and that you can also claim for capital allowances on expenditure (so anything that you pay out to maintain and support your FHL business). An FHL is classed as a business asset, so you could qualify for three reliefs - entrepreneurs, rollover, and holdover.
You don't have to pay National Insurance on any income you earn from an FHL, but if you earn above the threshold for VAT then you will have to register and submit VAT returns (usually classed as standard-rated).
Is it a good investment?
With plenty of earning potential and the usual solid bricks and mortar' investment prospects, buying homes to let as holiday rentals represent a good investment. However, bear in mind that, apart from the taxation side of the business, you will still have a lot of outgoings. Not only will you need to maintain your holiday let to a very high standard to make it attractive, but you'll need to buy a property in a desirable location, which will, in turn, send the cost of purchase up. You'll also need to be fully insured, and put aside a hefty chunk of change for advertising and promoting your property.
If you have a lean year then your overheads could easily outstrip your income, sending you into the red very quickly. It's a solid investment as long as you maximise occupancy and make the most of the tax breaks on offer. But as with any business venture, go into the holiday let business with your eyes wide open, and some seriously good legal representation by your side. Talk to a property law expert before you make your final decision.