The Prudential Regulation Authority’s (PRA) supervisory statement on underwriting standards in buy to let states that an agreement to dwell in a property for less than one month is not occupation on the basis of a rental agreement, and so any lending to fund a holiday let is not restricted by the same rules that govern buy to let.
Running a holiday let also has different tax considerations to buy to let as it is treated as a trading business by HMRC. As with buy to let, it is important for your clients to seek professional tax advice about their investment, but there are some basic guidelines to be aware of.
Qualifying as a holiday let
In order for a property to qualify as a holiday let the property must be available for at least 210 days per year, it has to be actually let for at least 105 days and there can’t be any periods of longer-term accommodation (31 days at a time) that add up to more than 155 days.
Like buy to let, holiday lets will carry a 3% surcharge on Stamp Duty Land Tax, but yields on successful holiday let investments are generally higher than buy to let.
For example, a two-bedroom terraced cottage on the outskirts of Newquay can be purchased for £170,000 and demand a monthly rental income of £700, which is the equivalent to a 4.94% annual yield before costs. As a holiday let, this type of property charges an average of £105 a night, according to the website Owners Direct, which equates to £735 a week. Another website, Promotemyplace.com, says that the average UK holiday let is occupied 28 weeks a year and, on this basis, the annual yield before costs would be 12.11%.
It is important to note that this figure is before costs and that the costs of running a holiday let are considerably higher than a standard buy to let as the relentless turnover of occupants means, among other things, big cleaning, maintenance and marketing costs.
Finance for holiday lets
Some smaller building societies are prepared to lend on holiday lets, but there are limited options among larger lenders and in the specialist market. Even where products are available, they may carry restrictions. For example, some holiday-let mortgages do not allow owners to stay in the property and some lenders take a dim view of marketing the property through Airbnb. Looking for a lender which takes a commercial view of buy-to-let is recommended.