WHICH IS BETTER HOLIDAY LET OR BUY TO LET?

If you happen to be in the fortunate position of being able to invest in a second home, should you capitalise on the staycation boom and buy a holiday home that you can let out short-term when you’re not enjoying it yourself – or a buy-to-let property that you can rent out on a long-term basis?

Over the last few years, things have changed quite a bit. Increasing numbers of landlords are fleeing the buy-to-let market after their profits were hit by stringent new tax rules.

That said, both routes can prove to be worthwhile investments, but there is lots to consider. From potential rental yields, tax benefits, potential hassle and what you want to achieve.

If you are thinking about investing in a second property, you may face the interesting decision between choosing a buy-to-let property versus a holiday let property. Both can be brilliant business investments with the potential to generate a great overall return, but you have to choose which is the best option for you. From tax breaks to rental yields, here, we discuss key points that you should consider before making that decision.

What is the difference between a holiday let and a long-term let?

Generally, a short-term holiday let is a property that is let out to holidaymakers for short periods, usually from 3 nights, a few weeks or up to 31 days.

To qualify as a furnished holiday let (FHL) for tax purposes, your property must be available to let for at least 210 days a year and be let commercially to the public for at least 105 days in the year. This doesn’t include days you’re staying there or days that your property is let out to family and friends for free or at reduced rates.

A long-term let (also known as buy-to-lets) is typically a property that is let out for 6 to 12 months at a time.

HOLIDAY LET

Return in Investment - PROS

1. Holiday lets located in beautiful, rural areas or near popular tourist destinations in the UK tend to deliver high rental yields over a year.

2. The pandemic has led to an increase in remote working and an emerging trend for  ‘workcations’ where guests stay for longer periods. This growing market can mean less changeover and admin expenses for owners.

3. Potential for capital appreciation in the long term if you buy a run-down property to develop or in an area that becomes popular.

Tax - PROS

1. You’ll be able to offset some of the equipment and furnishing costs against rental income. You can also deduct expenses such as council tax, utilities, maintenance, cleaning, property management costs and advertising.

2. Holiday lets are subject to business rates rather than council tax. There’s also the possibility that you’ll be able to claim 100% relief on business rates if your property has a rateable value of less than £12,000.

Tax - CONS

Your property will only be eligible for the tax benefits mentioned above if it is classified by HM Revenue & Customs as a furnished holiday let. To qualify for the tax relief, your property must be available to let by paying holidaymakers for at least 210 days a year and you have to let it out for a minimum of 105 days each year. Also, you can’t include any lets over 31 days.

BUY-TO-LET

 

Return In Investment - PROS

1. Properties in popular towns and cities tend to have the potential to produce consistent, high returns all year round, perhaps with only one or two tenants over 12-months. Or if you are lucky, several years.

2. This type of property investment is considered to be quite stable and predictable when it comes to making a return, because you have a consistent monthly rental income that you can rely on for a determined period with predictable expenses.

3. Rents have risen over the last year due to a lack of property stock and tenants’ willingness to pay for more space.

Return In Investment - CONS

1. Buy-to-lets rely on single tenancy contracts. These agreements are not ‘forever’ and tenants can give notice to leave, fail to pay rent, or worse still, cause a lot of damage and trouble for the landlord whilst they’re living there. Thus, leaving you to incur large costs when they do eventually vacate the property.

2. Compared to holidaymakers, tenants spend more time in and around the property which causes more wear and tear, requiring more replacements and maintenance when they leave.

3. Restrictions on short-term letting in some urban areas has seen landlords shift properties to traditional long term lets as the tourist market contracts – meaning more competition.

Tax - PROS

Some property investors are transferring properties into a limited company to benefit from tax breaks, stamp duty, capital gains tax or inheritance tax liability.