Guiding clients through the changing climate of holiday BTLs

First came the second property Stamp Duty increase with all second properties being charged an extra 3% Stamp Duty.

At the same time, wear and tear allowance for furnished property was abolished. Prior to April 2016 a landlord could elect to deduct 10% of the rent before paying tax against wear and tear, they will now only be able to claim the actual costs spent in repairs or replacements.

A supervisory statement from the Prudential Regulation Authority (PRA) was issued in September bringing in new rules around rental calculations and BTL affordability from January 2017 and minimum underwriting standards from 30 September 2017.

And last, but by no means least, the loss of higher rate tax relief against mortgage interest costs has been phased in from April 2017.

Exploring opportunities

Clearly the changes create opportunities as more BTL clients than ever need their broker’s guidance, but there are also other opportunities to be explored.

A professional landlord is likely to consider alternatives that will allow them to continue to expand their portfolio and maximise profits going forward such as increasing rent, limited company structures, couples tax planning, selling and remortgaging.

Many landlords are also looking to alternative property types that are exempt from some of these changes. These include commercial property, land and development and also holiday lets.

Two exceptions

A furnished property that is let on a short-term holiday let basis and meets the relevant criteria benefits offers two exceptions to the BTL changes.

The first is the exception to the PRA changes to BTL affordability and underwriting. According to the aforementioned supervisory statement issued in September, properties which are let for less than one month are not treated as BTL properties for the purpose of the guidance, giving lenders greater freedom when underwriting these types of lettings.

Second, subject to qualifying as a Furnished Holiday Let (FHL), HM Revenue and Customs’ guidance on the recent tax changes specifically excludes these types of properties. This means that 100% of the mortgage interest costs can continue to be offset in full against the profits before tax is calculated, regardless whether the property is held in an individual or company name.

There are some specific rules outlined by HMRC that need to be met for the property to qualify as an FHL. These are:

• The property must be in the UK or in the European Economic Area (EEA)
• The property must be furnished – there must be sufficient furniture provided for normal occupation and visitors must be entitled to use the furniture
• The property must be commercially let with the intent to make a profit
• The property must be available for let for at least 210 days of the year and actually let for at least 105 days of the year
• If the property is let for more than 31 days for one let, there are additional rules that should be considered.

In addition to benefitting from the ability to continue to offset all finance costs, there are some other tax benefits around Capital Gains Tax and capital losses, making holiday let property an increasingly attractive proposition for landlords looking to alternatives to maximise profits.

Finding finance

While the mortgage market for holiday let property is not as strongly catered for as other types of lettings such as houses of multiple occupancy property, there are some key players who can consider loans to finance these types of purchases.

These include mainstream players such as Leeds, smaller building societies such as Furness and Bath and many commercial lenders such as Shawbrook and Interbay. These lenders will happily consider the proposition, but criteria varies greatly, for example some will consider the projected holiday let income and some will base affordability on assumed longer term rents.

As competition continues to increase and lenders look to niches in criteria to win business, it will be interesting to see how many of them recognise the potential opportunity of this market.