As of April 2017, landlords can only offset 75% of their mortgage interest (deducting mortgage expenses from the rental income to reduce your tax bill), and this will further drop to 50% from April 2018.
It’s inevitable that this will leave some landlords facing a loss. Thankfully, there may be an alternative way to capitalise and an opportunity in holiday homes becoming the new buy-to-let. After all, the British holiday season is fast approaching and holiday homes are still growing in demand from holiday seekers.
If you are considering buying a property in 2018, remember the perfect holiday home has great potential. But how do you make the most of your money depending on the type of holiday home you choose?
A Freehold House
First of all, if you are thinking of purchasing a freehold house, you will need to meet the requirements for your property to be a ‘furnished holiday let’ (FHL). This includes:
The property must be located within the UK or European Economic Area (EEA)
Let on a commercial basis (intent to making a profit)
The property is available to let 210 days (30 weeks) and let commercially for at least 105 (15 weeks)
Should you be letting to the same individual for more than 31 days, letting for long periods of time cannot add up to more than 155 days in total (in 12 months)
You can find more information on FHL on www.gov.uk including advice on tax requirements and capital gains tax.
If you are buying to maximise rental income, location is everything. Remember, buying a house is usually a long investment, so buying a ‘bargain property’ that nobody wants to stay in (including you) will simply be a waste of time and money. Fully booked holiday homes are usually located in desired and sought out areas, with plenty of things to do and attractions to see.
This time last year (first four months of 2017), the locations in the UK where holiday rental increased the fastest included South of England (+17.3%), Cornwall (+14.5%) and Devon (+8.9%).
You can use property search sites such as Zoopla to review areas and look at previous sold prices for properties similar to the ones you are interested in. This may allow you to negotiate prices; especially if the house you’re looking at has been reduced or has been on the market for a long time. Getting in contact with an estate agent in the local area will give you a better understanding of the demand for holiday lets in that location.
A freehold house will require upkeep and regular maintenance. Keep in mind the costs to maintain the holiday home to a high standard all year round when viewing any properties. You may find the profit you attain may need to be reinvested back into the house – upgrading white and electrical goods or freshening up decorations.
Flats & Apartments
As per the above FHL requirements, location and maintenance are all key when it comes to holiday flats and apartments. However, there are other factors you’ll need to consider.
You may find the perfect flat in the perfect location that could be ideal as a holiday let, however, with the majority of flats in the UK as leaseholds, it’s important to understand the possible restrictions that many lease properties have. A long leasehold may contain a covenant that the flat can only be used as private residence, therefore letting out the property for commercial use will be in breach of the covenant. You will need to check if the lease contains a provision that restricts subletting prior to proceeding further.
If you are able to let a leasehold flat or apartment, you should be aware of some additional costs. Owning the leasehold means that, whilst the flat is yours, the grounds and the communal area belongs to the freeholder. You will be required to pay ground rent and a service charge yearly to the freeholder for maintaining the upkeep of these areas.
As there is a lease on the property and the holiday let is a long term asset, you’ll need to be aware that when the lease is up, the ownership of the property transfers back to the freeholder. Prior to this occurring, the leaseholder may wish to extend the lease to maintain ownership, as well as for the purpose of the mortgage lender. This will come at a cost, so it’s important to identify the number of years remaining on the lease before you make your purchase.
A Caravan Holiday Home
With staycations on the rise in the UK, static-home parks could offer the perfect family getaway.
Owning a caravan holiday home is normally intended for personal use with occasional sub-letting to cover the cost of site fees. Some owners do choose to sub-let for the full season and can make a return on their investment.
Often caravan holiday parks are in stunning, specially chosen locations which are easily accessible to local attractions. With this in mind, you will own the caravan itself but not the ground (pitch) it is located on. You will pay a pitch fee for the occupation of the plot and may be charged separately for water, gas and electricity which the site owner may supply directly to your home. Keep in mind with many holiday parks the season lengths last 10 months of the year, this means council tax payment is not applicable, given a second address is provided for your residential home.
This could be the most affordable option, particularly if you’re thinking of static holiday caravans for sale. The starting price for a caravan holiday home could be as little as £10,000 depending on the location. With a good budget you would have plenty of choice, in comparison to the cost of buying a freehold house, allowing you more options to find the perfect holiday home.