How Do I Invest in UK Holiday Lets

Is it sensible to invest in holiday lettings?
The growth in UK second homes has meant that owners of property which is let for holiday purposes have also seen good price growth.
However, there are still many cheap and attractive pockets rural and coastal areas, so if you can spot an attractive area that has so far been overlooked by second home owners and which could be easily let to holidaymakers, then you could do quite well, not least because the tax breaks on holiday lets are very good.
HMRC classifies holiday lettings as a business, (not as unearned or investment income which is the way it treats longer term lets) but the rules are quite strict about what qualifies as a holiday let.
In order to be a holiday let, the property has to be furnished to a level suitable for normal occupation and available to be let to the public for at least 140 days of each year. In addition, it also must be actually let for 70 days and not let to the same person for more than 31 consecutive days in a seven month period.
The lets themselves must be real rents, so you have to charge market holiday let rates, even if you let to friends!
With a holiday let you don’t have option of going for a wear and tear allowance, as you would with normal buy to let (longer term lets), but you are able to claim all repairs, agency and advertising fees, cleaning costs, heating and lighting costs, insurance and the costs of decoration and interest on any loan.
Capital allowances on the costs of furnishings, fixtures and fitting can be claimed too.
If the holiday let makes a loss you can offset that against your other income. (With longer term buy to lets you can only carry forward and set off against future rental profits)
However, the really neat thing about holiday lets is that capital gains tax is much gentler than with longer term lets. Since holiday lets are treated as a business, the taper relief used is the Business Asset Taper Relief Rate. (Long term residential lets have to use the less advantageous non Business Asset Taper Relief)
Business Asset Taper Relief is nil for properties held for less than a year, but then 50% if held for between one and two years and 75% if held for two or more years.
This means if you make a £100,000 gain, once taper relief is applied, only £25,000 is taxable. Once a couple applies their annual CGT allowances of £17,600 (£8,800 each) the CGT would only be paid on £7,400.
Compare this with Non Business Asset Taper Relief on normal buy to lets where the maximum taper relief is 40% - and then only after 10 years!
Also, just as with most business type capital gains, with a holiday let you can roll over all the capital gains onto another UK holiday let property as long as the full amount of the sale proceeds are rolled over onto the next property. (However, you must do this either less than one year before or three years after the sale of the first property.)
A standard buy to let loan will not be suitable because they the lender will require the property is let to tenants.
Looking around, the number of players in the holiday let mortgage market is quite limited.
The Scarborough Building Society is one of few with a product.
Brokers are the best bet for arranging holiday home insurance cover. The internet has a long list of brokers specialising in this area.
To achieve success in this market, you have to buy in the right area. English Country Cottages says their average occupancy rate is about 22 weeks a year, so you have to make your money in a short season.
Also, the Chancellor did not give those juicy business tax breaks for nothing. This is a really hard business and the workload is high.
Guests will expect a high standard of cleanliness and service. And things must be fixed promptly, so if you are not there to do it, someone else must be.
If someone else does all this for you, expect to see 20-35% disappear in agency and admin fees.
In addition marketing costs will be high, at least at first, before you can rely on word of mouth and repeat visits.
You will have to join a good website and pay to get in the latest guides. Budget to spend from £500 per annum for effective marketing.
To find out more about investing in property check out the UK’s leading property investment advice consultancy Letting Focus.com The founder is the the author of “Successful Property Letting – How to Make Money in Buy to Let” the UK’s top selling buy to let book and Amazon.co.uk’s top selling property title for the last 6 months. Our investment property seminar programmes are at our website http://www.lettingfocus.com/ which also has lots leading buy to let coaching tips This blog is at http://www.lettingfocus.com/blog/blog.html and the material herein and on the main site is copyright David Lawrenson 2007. If you wish to reproduce it, please contact the site owner.