In recent years, new tax rules have eaten away at buy-to-let landlords’ profits. In particular, the withdrawal of mortgage interest relief and other finance costs have chipped away at margins. As a result, many landlords have considered moving their portfolio into a limited company. Others have wondered whether holiday rental properties would be more profitable. For that reason, in this post we’re going to look at this question: “Are holiday lets worth it?”
Holiday let benefits…
There are certainly many upsides to owning a holiday let property.
For starters, even though pandemic travel restrictions are easing, there’s still a boom in the ‘staycation’ market. Better still, you can charge much a much higher rent than for a normal buy-to-let property.
From a tax point of view, holiday lets are particularly attractive. You can claim full mortgage interest relief. Your property is subject to business rates rather than council tax. Plus you can offset a wide range of expenses against tax – ranging from furniture to cleaning and advertising. Furthermore, holiday lets are also exempt from Inheritance Tax, though there’s a good chance this will change in the near future.
Also on the plus side, if you own a property in an attractive location, you’ll always be able to use it for your own holidays!
While these benefits make the idea of owning a holiday let attractive, there is a flip side. Properties in desirable holiday locations tend to be more expensive than they are in less popular areas. Also, the more popular an area, the more competition you’ll face. You’ll also need to invest in keeping the property up to date so that it remains attractive to holidaymakers.
Financially speaking, holiday lets have a number of drawbacks. Unlike for traditional buy-to-let properties, you’ll need to cover utility and broadband bills, along with any digital subscriptions. Most importantly, in order to qualify for tax benefits like mortgage interest relief, your property has to be available to let for at least 210 days each year, with an occupancy rate of a minimum of 105 days. This means that, if your holiday let isn’t very popular, you not only lose out on rental income, but you can also lose substantial financial perks. Generally speaking, you’ll also find your income drops in ‘off-peak’ seasons, particularly during the winter.
Finally, it’s worth bearing in mind that having many different guests has its drawbacks. You’ll have to invest time in cleaning up the property after each guest and making it ready for the next. Managing the property is also much more time consuming than a traditional buy-to-let. You need to handle enquiries, take care of advertising and cope with the occasional cancellation. If you decide to use an agent to let your property, you also face higher fees – usually in the region of 20% to 30% of rental income.
That said, if you get a ‘nightmare tenant’, they’ll only be in your property for a short period. Evicting problem tenants from normal buy-to-let properties can be expensive, take a long time and cause you huge amounts of stress.
So, are holiday lets worth it?
As you can see, there’s no simple answer to whether holiday lets are worth it.
Certainly, there are tax advantages. Being able to claim mortgage interest relief and pay business rates instead of council tax are significant perks. That said, there’s no guarantee they will be available indefinitely.
However, as the owner of a holiday let, you are more susceptible to market fluctuations. Given that the cost of living is currently rising fast, many people will have less of a budget for holidays. You need to be confident that you can let your property for enough weeks to make sure it’s profitable – and to qualify for the all-important tax breaks.
Before investing in a holiday let, the wisest plan is to sit down and make a realistic calculation of both your income and expenditure. We can help you to do this, as well as to compare what your net income is likely to be from a traditional buy-to-let property. You may find that the latter gives you a comparable return – with a lot less administration and hassle!
Related: THP: the Accountants for Landlords
About Jon Pryse-Jones
Since joining THP in 1978, Jon Pryse-Jones has been hands on with every area of the business. Now specialising in strategy, business planning, and marketing, Jon remains at the forefront of the growth and development at THP.
An ideas man, Jon enjoys getting the most out of all situations, “I act as a catalyst for creative people and encourage them to think outside the box,” he says, “and I’m not afraid of being confrontational. It often leads to a better result for THP and its clients.”
Jon’s appreciation for THP extends to his fellow team members and the board. “They really know how to run a successful business,” he says. He’s keen on IT and systems development as critical to success, and he continues to guide THP to be at the cutting edge and effective.