The compelling maths of holiday lets
Marcus Dussard is director of sales at Castle Trust
There are many consequences to the ongoing uncertainty caused by the continued Brexit situation – one of which is the rise of the staycation.
The current political situation has hit the value of the pound, making it increasingly expensive for holidaymakers to go abroad, which means that more people are looking to take their holidays in the UK.
Visit England says the number of people booking self-catering holidays in England increased from 6.22 million in 2015 to 7.23 million in 2017 – and the value of the pound has fallen significantly since then.
This growing demand, coupled with the popularity of sites like Airbnb, has presented an emerging opportunity for property investors who are looking at alternatives to a traditional buy-to-let investment.
A furnished holiday let is a more involved investment than a standard buy-to-let and investors should be commercially prepared for periods of no occupancy, high turnover and increased costs, all of which make holiday lets much more like a trading business.
An advantage of this, however, is that a furnished holiday let is therefore treated like a business rather than a passive investment when it comes to taxation.
For example, investors in a furnished holiday let are able to continue to claim full relief on mortgage interest payments in addition to other benefits that are not afforded to buy-to let investors.
They can also claim entrepreneur’s relief when they sell a property, for example, so could pay 10% rather than Capital Gains Tax at 28%.
The detail of these tax consideration can be complicated, so it’s important that your clients speak to a specialist tax adviser to get accurate information about their tax liabilities when they are considering an investment in a holiday let.
One area that is not complicated, however, is the potential to generate higher returns. For example, according to Rightmove, it is possible to purchase a 2-bedroom flat in good condition, overlooking the beach in Margate on the Kent coast, for £185,000.
Let to tenants on an AST, this type of property could generate around £600 in rental income each month, or £7,200 a year – that’s an annual yield before costs of 3.89%.
A similar type of property could be listed on Airbnb for around £140 per night. Let’s assume that the property is fully occupied in July and August and then let to holidaymakers a further 30 weekends throughout the year – this means that it would accommodate holiday makers for 122 nights in a year. At £140 a night, the property would therefore generate £17,080 in income, which is the equivalent yield of 9.23% before costs.
Holiday lets are not for everyone, but for the right investor, the maths can be quite compelling, particularly in the current environment that is continuing to drive an increasing number of staycation holidaymakers.