Furnished Holiday Lets offer a rival to Buy-to-Let, but how do they compare?
With interest rates on savings at rock bottom levels, some investors have eyed Buy-to-Let (BTL) or Furnished Holiday Let (FHL) properties as a potential opportunity for chasing income.
The number of privately rented properties in the UK has more than doubled over the past two decades, from around two million to more than 5.3 million, representing some 19% of UK households.
But despite this rising demand for rental properties in Britain, changes by the Government to both stamp duty and other tax changes in recent years have made BTL property a much less appealing prospect for investors.
Meanwhile, the rise of websites such as Airbnb have made it easier to offer furnished holiday accommodation as an extra source of income. Britons seem more willing to use them as an alternative to going abroad; according to the Association of British Travel Agents, the number of domestic holidays increased to 71% in 2016, up from 64% in 2015.
However, both investments come with an array of responsibilities, considerations and additional costs, be it stamp duty, legal fees or the additional expenses of wear and tear. It’s vital to understand the difference between BTL and FHL before trying to work out if either would be suitable for you.
What’s the difference?
BTL properties are aimed at more long-term rental periods and are typically available all year. Having a BTL property could mean there is little contact with the tenant, therefore the workload and maintenance on the property could be minimal.
FHL is for shorter visits and could provide owners with the opportunity to not only make money from the property but also allow themselves, family and friends to enjoy staying there. To qualify as an FHL, the property has to be in the UK or the European Economic Area, be available for letting for at least 210 days a year, and be rented for at least 105 days in the year on a commercial basis.
Rentals of more than 31 days won’t count towards the FHL total, nor will days when friends or relatives use the property at a reduced rate or no charge because this isn’t seen as commercial. Workload on an FHL is far more intensive as it will involve regular cleaning and maintenance of the property. There is also the added burden of finding holiday makers on a regular basis.
What are the tax differences?
The tax implications of each type of property are also different, which can dramatically affect your return. Paul Clarke, chartered ﬁnancial planner at NFU Mutual, explains: “Running an FHL is deemed to be a trade, so it offers a number of Income Tax and Capital Gains Tax (CGT) advantages over BTL, which is considered to be an investment. Although confusingly FHLs are not normally deemed to be a trade for IHT purposes.”
The two main types of tax to consider on both are Income Tax and CGT. Income Tax is paid on the income you earn from the property, while CGT is not paid until you sell it or give it away.
This is paid on rental income from the BTL property, although allowable expenses such as buildings and contents insurance, lettings agents’ fees and council tax may be deducted. With an FHL, capital allowances may be claimed on furniture and furnishings in the property. If you have a mortgage on the property, the interest can be offset in full against the income you earn on an FHL. From April 2017, higher / additional rate tax relief on mortgage interest is being phased out for BTL properties. By 2020, landlords will be able to offset mortgage interest only at the basic rate of tax (20%).
Capital Gains Tax
If you make a gain when you come to sell your property you may have to pay CGT. In the current tax year, individuals have an annual allowance of £11,300 before they have to pay CGT.
CGT is charged at the higher rate of 18% or 28% for residential property, though those who make a gain on an FHL may qualify for entrepreneurs’ relief, which can reduce the tax rate to 10%. Getting the correct financial advice before you sell is important. It may be possible to defer the tax due by rolling over the sale proceeds into the purchase of another ‘qualifying trading asset’, such as another FHL. You could also defer paying CGT through hold over relief, if you give the property away. BTL properties are not eligible for either roll over or hold over relief.
Clarke adds, “Trading assets can normally qualify for Business Property Relief. This can reduce or eliminate any IHT due on the value, provided they satisfy the criteria. However, it is extremely difﬁcult to secure relief on furnished holiday lets, HMRC will look at the level of ‘services’ provided to the people who stay in the FHL – it is highly likely that most will be classed as ‘investment’ and so as with BTL, you won’t get any Business Property relief.”
YOU NEED TO KNOW
Tax can be complex and depends on your individual circumstances, and may change in the future.
GET IN TOUCH
NFU Mutual does not offer advice on Buy-to-Let or Furnished Holiday Let investments or mortgages. However, we would be happy to discuss other areas of financial planning such as pension options, and investments. Speak to your local NFU Mutual Agent or phone or phone 0800 056 0142 (select option 3) and we will put you in touch with your personal Financial Adviser.
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