We're all going on a summer holiday – dream homes to let
With the bad press (and bad returns!) the pension market has seen, investing in property has become a phenomenon of the 21st century and holiday lets, holiday homes and the holiday letting business has seen an increase. People too are worried about leaving a huge carbon footprint, the weather here is changing because of global warming and suddenly holidaying in the UK is not such a bad prospect!
From the business perspective, there are some valuable tax advantages with holiday lets over buy-to-let properties: capital gains tax on profits when you sell is lower with holiday lets and you can claim more expenses from your rent every year to reduce income tax.
You need not assume that your holiday cottage needs to be by the sea with roses round the door: many popular tourist destinations and city locations such as York, Stratford and Bath can attract rentals of up to £750 per week – and more - in high season, which goes a long way to covering mortgage costs.
City properties also offer a safer year-round bet because people will visit cities out of season, or you can use the accommodation yourself. However, there are restrictions to 'own use' in the tax rules.
Here we answer a few questions which regularly occur with regard to holiday lets
Is there such a thing as a tax incentive these days with business and property?
Holiday letting is recognised as a proper business (eg: it generates earned income) by HM Revenue & Customs, unlike other forms of property letting which HMRC class as investment income (unearned income). There are indeed some valuable tax incentives for letting your property as a holiday home, but you must follow the exacting rules laid down by HMRC. For example:
> The property must be fully furnished
> Your property must be available for letting to the public for at least 140 days of the year – and the actual letting must be at least 70 days
> Any one occupier (or group of people) cannot stay for more than 31 days in any period of seven months, but they can for the remaining five months.
> You cannot claim the tax incentives when you use the accommodation yourself, or when the property is not available for letting.
> The letting must be at full market rent, not a peppercorn rent for friends and relatives – or yourself!
Your rental income is subject to income tax, but the good news is that ALL your expenses are allowable!
What are the expenses which are allowable?
> Repairs and maintenance
> Heating and lighting
> Legal and letting agent's fees
> Management fees and cleaning costs
> Mortgage interest payments
Do I need any special insurance?
In these days of higher risk and a highly litigious public, make sure you have adequate insurance cover. Some of the types of cover you need to consider are:
> Buildings cover – your mortgage company will insist on this
> Contents cover – your own contents must be adequately insured, whilst your guests should over their own contents and accidental damage to your property
> Public liability – a must if a civil action is brought against you by a guest who may have an accident on your premises
> Employee liability – you are likely to employ casual labour – maintenance, cleaning, etc if you are running a small business, legislation decrees you must have this insurance.
> Loss of rental income cover – this can be obtained for a small percentage of the annual rental income and will provide you with peace of mind
> Cancellation insurance – in case guests let you down and you miss out on vital high season income, for example. If this happens it could ruin your business.
> Personal accident insurance – in case you are unable to work at a critical time
> Motor insurance for business use – you are likely to use your car for business in this industry
It is worth bearing in mind that your property may be empty for periods of time, and your insurers will need to know this. Speak with a reputable insurance company who understand the holiday lettings business – they can advise you on all aspects of the type of insurance you require. You may even be lucky enough to be letting that chocolate box thatched cottage dream property – and then you really will need specialist insurance for the thatch! Don't leave things to chance, take proper advice and know that you, your property, belongings and your guests are safe at all times.