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The recent rise in staycations is good news for those with a second property who are considering turning it into a holiday home. You can make some extra cash and benefit from tax breaks, but watch out for the pitfalls.
In this article, we explain:
- How the tax perks work
- Help you find the right insurance
- Give you tips for furnishing
- How to check that guests will have everything they need
1. Grab the tax breaks
There are lots of tax breaks to be enjoyed if you own a “furnished holiday let” (FHL). This is taxman speak for a house or flat that has:
- Furniture
- White goods
- Basically everything a holidaymaker might need
- It must be rented out short term with the aim of making a profit, and be available to rent for at least 210 days a year.
Due to Covid-19, many second home property owners won’t be able to meet this occupancy threshold this year, so the government has granted a “period of grace election”, which essentially means that you can qualify for the “furnished holiday let” status as long as you meet it next year.
Be aware: property owners have to apply for it through their self-assessment tax forms.
So what are these breaks?
Tax deductible expenses
You can claim tax deductible expense, including:
- mortgage interest
- anything you pay out for your holiday home, such as:
- a new fridge
- refurbishments
- utilities
- insurance.
So you can decorate your holiday cottage and deduct the expense of doing so from your pre-tax profits.
The cost of setting up your holiday rental can be set against tax, which is not the case for normal buy to lets.
Let’s say you:
- Make £15,000 in holiday rental income this year
- Your spend on tax deductible expenses:
- £800 on insurance
- £1,500 fixing the roof
- £500 on a new washing machine
- £1,200 on mortgage interest
- You can deduct £4,000 from your £15,000 holiday rental income
- You’ll be taxed on the £11,000
A basic-rate taxpayer – 20% tax on the £11,000 – that’s £2,200. Without the benefit of tax deductible expenses, the tax bill would be £3,000
A higher-rate taxpayer – 40% income tax on £11,000 – that’s £4,400. Which would have been £6,000.
If you make a loss in your first year, perhaps due to the cost of setting up a holiday let, this loss can be carried into the second year for tax purposes.
Wear and tear allowance
This is an allowance that landlords can claim to offset the cost of replacing things such as beds, carpets, crockery and other assets that have come to the end of their useful life.
You are able to claim tax relief on the amount that you spend on replacing what the government deems as a ‘domestic item.’ This is not the case for new items, only when you are replacing them.
Dividing rental income
If you share the ownership of your holiday cottage with your husband, wife or civil partner, holiday rental income can be flexibly split between you both for tax purposes.
If you had a long-term property as a holiday rental it is a different ball game – income is distributed either 50:50 or according to the official ownership split.
With a holiday cottage you can portion it however you decide. It normally makes sense for the lower earner to receive the income, which in turn can reduce the amount of tax that needs to be paid. For the particulars on this tax perk, have a look at the official advice from HMRC.
Council tax exemption
Third, you can say goodbye to council tax. A holiday let is instead subject to business rate property tax.
Depending on where your holiday home is located, you may be able to claim small business rate relief, which could reduce your tax bill to zero.
Pension perks
Your profits count as earnings for pension purposes. In contrast, income from normal buy-to-lets don’t. This means you can make tax-happy pension contributions with this money.
Remember our example where a holiday cottage brings in £15,000 and has £4,000 of deductible expenses, leaving a £11,000 profit? Well, that cash can be put straight into a pension pot if you so wish – and you won’t pay tax on the holiday rental income as it has gone straight into your nest egg.
So, if you’re a basic rate tax payer, £2,200 that would have gone to HMRC is now in your pension pot, or £4,400 if you fall into the higher rate band. That’s free cash from the government.
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Capital gains tax
The fifth tax perk appears when you sell your property. You may be able to claim certain capital gains tax reliefs such as entrepreneur’s relief, rollover relief or hold-over relief to lower your tax bill.
2. Save on energy bills
Remember to shop around for the cheapest energy rate. You may do this already for your own home, but remember to do it for your holiday home too.
We’ve outlined some tips here:
- If you’re on a fixed-rate tariff, put the end date in your diary or Google Calendar
- When the time comes, use a comparison website to find the cheapest deal and then switch to it. Your new supplier will deal with everything. Just check if there are any cancellation fees before you go ahead
- Don’t assume dual fuel is always cost effective: compare suppliers’ providing individual gas and electricity, as well as dual fuel packages
- Don’t forget to shop around for the best wifi and TV package too
Obviously you can’t dictate how much energy your potential guests use when they stay. But you can make the property management as energy efficient as possible to try and keep bills down – and do your bit for the planet.
Some things to do include:
- Draught-proofing windows and doors can save you £25 a year on energy costs
- Put a lagging jacket on your hot water tank
- Switch to energy saving bulbs
- Upgrade your boiler
- If you want to go all out, 3kW solar panels for the average household cost between £4,000 and £6,000 and require 20 square metres of roof space. You probably need to think about how they will affect the visual appeal of your property: solar panels are not every tourist’s cup of tea.
3. Get the right insurance
Holiday lets are not covered by standard home insurance because of the extra risks associated with them, such as the length of time they stand empty, making burglary a risk.
Specialist holiday home insurance or holiday let insurance is normally more expensive than standard cover. Use a comparison website to shop around for competitive offers, and remember to check carefully what the policy does and doesn’t cover.
Some tips for choosing insurance:
- The cheapest one isn’t always the best
- Think about choosing a higher excess, if you can, to reduce the premium.
- It’s possible that separate policies for buildings and contents from different insurers could work out cheaper than sticking with a single provider.
Find out which is the best home insurance provider.
You will also need public liability insurance for the health and safety of your potential guests. This covers the cost of legal action and compensation claims if anyone gets injured while staying in your holiday home.
4. Furnish with care
It’s really important to rein in your own personal taste when it comes to decorating a holiday let. Think what your potential guests would like.
- Aim for a neutral and simple style and you can’t go far wrong. Neutral colours have the broadest appeal, so always stick to light and clean colours for your walls.
- Washable paints for walls and solid floors are a good plan too. It all saves you time and money in the long run.
- Go for quality when it comes to furniture. Your potential guests want something extra when looking for a holiday home so don’t scrimp.
- Ensure there’s enough seating for everyone too.
- Zip and link beds are helpful, as you can change the configuration of a room easily from a double into a twin, allowing you to cater to more needs.
- King-size beds make a great selling point
- Wifi is a must
It’s worth thinking about whether to invest in any extras. Properties with hot tubs earn 54% more in rent than those that don’t, according to Sykes Holiday Cottages, while pet-friendly lets boost returns by up to 11% a year.
If you’re particularly confident in your interior design, set up an Instagram account. You can share arty shots of your property and suggest to potential guests that they also post their own pics when they stay.
It’s free and it doesn’t take much time. Having a presence on social media can create a buzz and help secure more bookings.
5. Stay there yourself once a year
Spot-checks are all well and good, but you need to stay there yourself for a night or two to get a proper feel of what it’s like to be a guest there. It might help you gauge whether anything needs changing or a bit of work.
There are many things you may only notice after staying there for a little while. This will give you the peace of mind that you know exactly what sort of experience your potential guests will get in your holiday property.
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