holiday homes

Short-term lets – and specifically furnished holiday lets – are now generating greater profits for owners than the traditional long-term buy-to-let model, but there are downsides.

In the aftermath of the pandemic, short-term lets surged in popularity, when staycations became the only way – or the preferred way – to take a holiday compared with overseas travel. Even after Covid restrictions were largely lifted, more people still opted to holiday in the UK than pre-pandemic.

But the property type had already been rising through the ranks as a property investment option for a number of reasons, including recent buy-to-let tax changes that meant some landlords paid lower levels of tax on holiday lets than buy-to-lets.

Some recent research conducted by Hamptons, using official data from HM Revenue and Customs, has revealed that in the 2020-21 tax year, income for short-term lets in the UK hit £15,600, while traditional buy-to-let income generated £13,400. This is the first time income has been higher for holiday lets.

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Long-term landlords moving to short-term lets?

However, while there have been many reports over the past three years indicating that some landlords have ditched the long-term for the short-term rental option, the data reveals that in fact only 1.5% of all landlords are holiday let owners.

Therefore, the vast majority of landlords still see the highest value from their long-term rentals, putting paid to rumours of large numbers of landlords ditching the traditional buy-to-let model.

When looking at how the furnished holiday let industry has grown over the years, the study showed that 63,000 people made an income from 65,000 lets in 2020/21, up from 46,000 individuals who owned 50,000 holiday lets in 2011/12.

The report notes that there are two main reasons that the short-term lets sector has grown so much, the first being that the majority of such properties are used for both personal and commercial purposes. The commercial side in particular has grown in recent years, adding to the figures.

The other reason, as touched upon earlier, is the ‘staycation boom’ that boosted demand in the sector to a significant level, leading to more landlords and homeowners taking the opportunity to let out suitable properties to fill the need.

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More income, same profit

Interestingly, while the report demonstrates the overall increase in income generated from short-term holiday lets, it also notes that due to rising running costs, owners of both property types end up with “a similar amount of cash in their pocket”.

According to Hamptons, running costs for a holiday let consume around 43% of the total income, while costs for a buy-to-let are around 31% of the total rental income, not taking financing costs into account. Furthermore, incomes are also currently forecast to fall back to pre-pandemic levels.

The maintenance costs that come with a furnished holiday let can include regular cleaning services, more frequent replacement of equipment and appliances due to the higher number of different guests, and more general wear and tear to carpets, fixtures and fittings.

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Often, landlords with holiday lets will employ an agency to deal with the general management of the property, including listings and comings and goings, which further adds to the costs of short-term lets.

On the plus side, aside from the higher income you could receive – particularly for a well-located, well-turned out property – you could also benefit from its use as a holiday home. The property must be furnished and available for at least 210 days per year to legally count as a holiday let, but the rest of the time you could you it yourself.

From a tax perspective, there can also be certain benefits to short-term lets, which you can read more about here. This article will also tell you more about the rules and regulations that apply to running a short-term let.

By Eleanor Harvey

Source: Buy Association

Landlords diversifying into holiday lets could see renewed demand, as the cost of living crisis limits some people’s ability to holiday abroad.

When mortgage interest tax relief began to be withdrawn back in April 2017, landlords wanting to make smart decisions to maintain profits started to look around for solutions. For some, investing in limited company buy to lets presented a more tax efficient solution.

Holiday lets too offer tax benefits, as they are automatically classified as a business. As such, this niche within the buy to let sector has seen significant growth. Not least as a result of soaring demand, when the Covid-19 pandemic fueled huge interest in holidaying at home.

Reports in the media since suggest that the demand for holidaying in the UK has not dwindled. Whilst UK weather is not what you would call reliable, there is great appeal in avoiding the slog of an aeroplane journey at either end of your getaway.

What’s more, holidays in the UK are very flexible, and so the cost can be more easily controlled. So for those wanting a holiday but are strapped for cash, there is no need to finance a full 7 or 14 days more typically associated with going abroad. Holiday lets in the UK can easily be booked for 5, 10 or however many days make it affordable.

Not only this, but with no need to fly, the travel time cuts into your holiday far less, meaning a holiday at home for the same number of days can feel longer to one abroad, as you don’t necessarily lose the best part of two days getting to and from your house.

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Holiday let mortgage availability
When the Liz Truss and Kwasi Kwarteng mini-Budget became public, holiday let lenders – amongst many others – retreated into their beach huts, taking many of their products with them.

However, the good news is that with the economy settling, holiday let lenders are back, back, back.

Latest data from financial data analysts Moneyfacts shows that there are 411 holiday let mortgage products available to landlords in the UK, across 34 different brands. This is an increase of 233 holiday let products since October 2022 and an additional 8 lenders coming into the marketplace to offer lending solutions.

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New legislation from April 2023
On 14th January 2022, Michael Gove announced new legislation that cracked down on second home owners purporting to be offering property as a holiday let, but actually leaving them vacant.

The new rules come in on 1st April this year, and require holiday let properties to have been rented out for 70 days of the year in order to qualify for business rates and to avoid paying council tax. Evidence will be required in the form of website or brochure information for the premises along with letting details and receipts.

Not only will holiday let property have to be physically rented out for 70 days, but it must also be available to rent for a minimum of 140 days to qualify for the tax reliefs this sector benefits from.

The greater impact of this new legislation will be on those people with second homes who were not actually renting out their property to holidaymakers.

For most landlords looking to diversify their portfolio, these new requirements should not have significant effect, as renting out your property for as long as possible is the business objective.

Source: Commercial Trust

The short-term lettings market in Scotland is about to undergo a major change in the way it is regulated and operated. New rules, which take effect from this month for new properties entering the market and from April 2023 for existing lets, require landlords to apply for planning permission to operate a holiday let. This permission must be applied for regardless of there being any guarantee of acceptance, which means that substantial fees and legal costs could be incurred without any certainty that the planning application will be accepted.

While many understand that the short-term lettings market has been allowed too much leeway in the way it operates in terms of appropriate safety regulations and the numbers of properties operating in certain areas these changes have the potential to bring the market to a sudden, grinding halt.

In places like Edinburgh and the Highlands, which have the greatest number of holiday lettings in Scotland, the impact will be considerable, this policy could pose substantial problems for local communities.

The risk is that, while reducing the number of holiday lets may produce more long-term residential lettings properties for the community, it will have an impact on the tourism sector which provides local jobs. Reducing the number of available holiday lets also has the potential to reduce the attractiveness of the capital and the Highlands as destinations thereby potentially reducing the number of people employed in the tourism and hospitality sectors. There may be more homes available to rent but there may be fewer jobs for people to do so regulatory changes such as this need to be approached with caution. Every action has a counter action, and the general rule of unforeseen circumstances dictates that you make major changes at your peril.

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There are already signs that holiday letting landlords are selling up or shifting their properties from the short-term market to long-term. These landlords say that the requirements for planning acceptance are not transparent enough. It is not clear what planning permission is being sought and the delays in processing applications (at least nine months in the Highlands) means that the next holiday season would need to be written off. Finally, the costs of submitting an application with no guarantee that it will comply with the rules and be accepted make continuing in the market untenable for many landlords.

The result will be a loss of many thousands of holiday homes into the long-term market or for sale on the open market. This potential increase in the number of properties in the private rented sector is to be welcome, particularly in cities like Edinburgh where demand is higher than anyone has ever experienced before. But if it is accompanied by a downturn in the tourist market next year then many of those people who may have found a home may subsequently be unable to find a job.

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The issue with these changes is the vagueness of the regulation and the rapidity of its introduction. No landlord is going to be able to afford to lose an entire season of holiday lets so the delay in processing these is a key issue in forcing these properties out of the market.

Equally, a planning permission measure which restricts properties without a main door entrance is clearly targeted at Edinburgh which, like most Scottish cities, is largely comprised of tenements. Given that one of the key issues last year during the Edinburgh Festival was the cost of accommodation it is unlikely this will be improved by dramatically decreasing the stock available.

As ever with legislative and regulatory changes there will be consequences for the market, and it is unlikely that these will occur in the way which the politicians expected. The issue, as ever, is supply and demand. If you restrict supply prices will rise, if you increase supply prices will fall. We shall see what happens next summer, but I think that record prices for holiday lettings will be the order of the day in Edinburgh and elsewhere.

By David Alexander

Source: Scotsman