Holiday let investments can be extremely profitable, particularly during peak times, but there are some changes afoot that investors should be aware of.
Pre-Covid, holiday lets in the UK were already experiencing a surge in popularity as travellers increasingly looked to stay on UK shores, saving money and being more eco-friendly in the process. However, the pandemic swiftly accelerated this trend, and the market has seen a huge upsurge in investors.
Another factor behind the rise has been tax changes in the buy-to-let market – mainly linked to Section 24 mortgage interest relief which raised some investors’ tax bills – with some landlords ditching long-term lets from 2020 in favour of furnished holiday let investments.
In response, the mortgage market has seen a huge boost in the number of products on offer for holiday lets, making it easier for investors to borrow. Although rates have risen across all mortgage types, the latest data shows there are now 445 deals available for holiday let borrowing, up from 354 in August 2022.
Changes coming for holiday let investments
As mentioned above, one of the biggest draws of holiday let investment compared with long-term buy-to-lets has been the fact that holiday let owners can claim 100% of their mortgage interest payments as an expense against their tax bill.
By contrast, since 2020, residential landlords have only been able to claim a 20% tax credit towards these costs, which for high-earning landlords in particular has meant a bigger tax bill.
However, in March, the then-Chancellor announced that from April 2025, the government will eliminate this tax advantage in order to create a more level playing field between holiday lets and buy-to-lets. Again, this will mainly impact those in higher tax brackets, but could certainly take the shine off this investment type for some.
There will also be a change to the way flexible profit splitting for jointly owned furnished holiday let investments works, taking effect from April 2025. The flexibility offered means tax burdens could be reduced by distributing more income to lower-earning parties, but from April 2025 it will need to be divided strictly on ownership share.
Business asset disposal relief is also set to be abolished, which will affect holiday let investment owners wishing to sell. At the moment, there is a 10% capital gains tax rate on sales up to a lifetime limit of £1 million per person, but this will be removed from April 2025 to align it with traditional buy-to-lets.
Capital allowances are also set to be removed, which currently allow owners to claim 100% of any expenditure on items such as fixtures, fittings, white goods and integral features of the building. This could have an impact on owners when they come to refurbish their holiday let investments.
Still worth investing?
Although investors should think carefully before purchasing a furnished holiday let investment, and ensure they have weighed up the future changes set to come in, it can still be an extremely profitable investment for many.
‘Staycations’ remain an extremely popular way for Brits to go on holiday while saving money compared with travelling abroad, and holiday lets also cater to international travellers coming to the UK for a holiday or work. Therefore, a strong investment in the right location can still achieve high returns for many.
Head of Tax, Nadeem Raziq FCCA, at ATT, said: “Many will be wondering if this is the end of FHLs. I don’t believe it will be. The demand for FHL properties remains strong and the government’s adjustments to the tax regime requires us to adapt.
“Now more than ever, it’s crucial for owners to consider new strategies for managing their FHL investments effectively. The impact of tax changes will vary among owners, highlighting the importance of personalised tax planning.
“Whether it’s optimising pension contributions or addressing other tax considerations, at Provestor, we tailor our advice to each individual’s situation.”
Getting a mortgage for a holiday let investment
Discussing the mortgage market for holiday let investments, Rachel Springall, Finance Expert at Moneyfactscompare.co.uk, said: “The buy-to-let market has undergone its fair share of upheaval over the past few years, with rising interest rates and tax perks quashed.
“However, a small part of this market has flourished over the past couple of years, with the availability of holiday let deals rising. There has also been an encouraging increase in the number of lenders prepared to cater to these types of landlords. There are over 400 deals for consumers to choose from and the majority of lenders that currently operate within this space are building societies.
“Holiday let owners will be facing challenges ahead, as from April 2025 there will be significant tax changes taking place which are designed to promote fairness and align tax rules for furnished holiday lettings with those for other property businesses.
“To mitigate tax liabilities, it is essential consumers seek advice to go through how the abolition of the furnished holiday let tax regime will impact them. These changes will no doubt come as a blow to both existing and prospective landlords, but the demand and profitability of a holiday let could still be worth weighing up.
“It would be wise for new investors to do their research and pick a property to let with their head, not their heart, and getting advice from a listings service is also wise to explore seasonal dips.
“Holidaymakers may struggle to save enough cash to cover the price of a holiday abroad or have been put off altogether by last minute flight cancellations. A break away in the UK could then be a safer and more affordable alternative, so holiday lets could be a great option.
“However, costly pitfalls might also arise, so holidaymakers must take time to do their research into the location, time of year, local events and the length of the break to ensure their ideal break away stays within their budget.”