April 24th 2019 / BY: Wisteria

Should I Convert my Buy-to-Let Property to a Furnished Holiday Let?

The last few years have seen a number of controversial changes to the UK tax system, and for buy-to-let landlords, the new legislation has proved particularly costly. Cuts to tax relief and hikes in stamp duty have seen profits from residential lettings dwindle, with some BTL landlords struggling to stay afloat. In light of the recent changes, a number of private landlords have been looking to the holiday lettings market as a way to boost their rental income and circumvent some of the harsher tax measures. In this article, we’ll take a closer look at the recent changes in taxation and discover why more and more landlords have decided to convert their properties into furnished holiday lets.

Diminishing Returns

The biggest blow to UK landlords has undoubtedly been the new regulations governing tax relief. Often referred to as Section 24, the new legislation has had huge implications for the buy-to-let market, leaving thousands of BTL landlords out of pocket. Under old rules, residential landlords were able to deduct things like mortgage interest and loan fees from their rental income before calculating their tax liability, meaning they were taxed on their profits rather than their overall turnover. But things are changing, and from April next year, all finance costs will not attract direct relief and instead there will be a limited 20% credit available.  This will mean a significant increase in the tax charge for higher and additional rate landlords with mortgages. Not only will the new scheme see dwindling rental profits, these so-called “anti-landlord” tax measures will also push thousands of private landlords into the higher-rate tax bracket. Add to this rising stamp duty and cuts to lettings relief and the future looks decidedly bleak for buy-to-let landlords.

How do I Convert my Property to a Furnished Holiday Let?

Because of the recent changes, some BTL landlords are turning to the holiday lettings market to offset some of their losses. Furnished holiday lets (FHL) were entirely unaffected by Section 24 provisions, and by converting their buy-to-let properties into furnished holiday homes, a number of forward-thinking landlords have been able to effectively sidestep the new legislation. And it’s easier than you might think. For your property to qualify as an FHL, you just need to satisfy a few key requirements:

  • The property has to be based in the UK or the European Economic Area (EEA).
  • The property must be furnished and let on a commercial basis with a view to making a profit.
  • You must let the property commercially to the public as furnished holiday accommodation for at least 105 days a year.
  • During any financial year, the property must be available for commercial letting as holiday accommodation for at least 210 days.

What are the Benefits of a Furnished Holiday Let?

As we’ve seen, converting your BTL property to a furnished holiday let needn’t be a complicated process, and if your property qualifies as an FHL there are a number of lucrative incentives to be had:

  • As outlined above, there’s no tax relief restriction for finance costs, meaning you’ll be taxed on your profits rather than your overall turnover.
  • Because it’s classed as a business asset, if you sell your furnished holiday let you’ll be able to claim capital gains tax relief for traders, including entrepreneurs’ relief, rollover relief and holdover relief.
  • With an FHL property, you’ll be entitled to plant and machinery capital allowances for things like furniture, fixtures and equipment.
  • Any profits you make on your FHL property count as earnings for pension purposes.

With all the inherent benefits, it’s no surprise that thousands of private landlords have decided to convert their BTL properties into furnished holiday homes. But is the FHL market really the best solution?

Are There Any Risks Involved in Converting my BTL Property?

While the FHL market looks like the best, most lucrative option for private landlords in an increasingly unforgiving market, like any new business venture, it’s not without its risks.

For one, BTL landlords that have been used to enjoying long-term lets of 12 months or more may get a bit of a culture shock. While longer-term lets are permitted, these must not exceed 155 days. So in order to keep your property occupied and profitable all year round, you may have to revise your existing business model. Here are a few other pitfalls to consider before dipping your toe in the holiday lettings market:

  • If your annual turnover exceeds the VAT registration threshold you’ll have to charge VAT on your rents, creating extra paperwork and potentially making your property less attractive to tenants.
  • While lets of more than 31 days are permitted, they don’t count towards your annual letting condition of 105 days.
  • Any loss incurred on your FHL business cannot be offset against any other income or gains, including any rental income from non-FHL properties.
  • The majority of FHL businesses do not qualify for business property relief, meaning the entire FHL business (less any mortgage) will be included in your estate for inheritance tax purposes.

Speak to the Experts 

While converting your buy-to-let property may seem like the perfect solution to avoid the government’s new stringent tax measures, the move should not be taken lightly. In spite of the rule changes, the buy-to-let marketplace can still be extremely profitable, with many short and long-term benefits. So, before making any key decisions about the future of your business, it’s important to seek some professional advice. Here, at Wisteria, our expert property accountants can provide a full review of your existing portfolio and advise you on the pros and cons of converting your property to a furnished holiday let.