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Are holiday homes the new buy to lets?

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While residential lets have been a popular choice for investors over recent years, the tax changes recently introduced may mean that holiday lets are worth a second look.

Though holiday lets do carry quite different commercial risks to the traditional residential property, there are tax benefits available which may make them more attractive to the potential investor, and as a bonus they can also provide a holiday getaway for the owner.

Choosing the Right Kind of Investment

Over recent years, the British government made moves to ensure that the availability of buy-to-let facilities created an easy option for those who wish to buy an investment property.

A lower cost of borrowing, and the increased accessibility of funding have provided buoyancy to a very dour property market, and a greater incentive for those who wish to participate in this type of venture.

However, the government has become wary of a potential property bubble building up within the buy-to-let market, and is now trying to create a greater focus on affordable housing for first time buyers. As a result of this tax relief on interest on loans taken to acquire residential rental properties will be restricted from 2017 and the 3% SDLT surcharge was introduced for all second homes for purchases after 1 April 2016.

Although things may seem bleak for investors, the Furnished Holiday Let (FHL) sector with tax breaks and the potential for increased holidays being taken in the UK due to the weaker pound, may provide a chink of light.

The Advantages of FHL

While a Furnished Holiday Let is considered a business, rather than a residential property, the flexibility in terms of occupation levels means there is still a large proportion of the year you can spend in your new home, and this can be done without compromising on benefits. When you are not in the home yourself the potential for high levels of rental income is certainly a draw, but the benefits do not stop there.

As the FHL is considered a business, rather than a residential property, this type of investment also benefits from a 10% rate of capital gains tax and can be passed Inheritance Tax free to a beneficiary as part of your estate. Additionally, whilst the 3% SDLT charge will apply to the purchase of an FHL, the changes to the tax relief on mortgage interest do not affect FHLs.

Whilst the rental income will be much higher per week for holiday accommodation than your long term lets, unless you are on hand to manage the changeovers and bookings, there will likely be agency fees and a certain standard of furnishings and upkeep that are also required. This can make a significant dent in the overall profitability of this option if not managed efficiently. When functioning correctly however, this type of asset can be extremely lucrative and tax efficient.

For anyone looking to buy a residential property right now, the information available is confusing at best, and understanding where to put your money can be a minefield.

Thankfully, BHP can help. With our team of expert advisors, we have the ability to carry out an in-depth analysis of your economic needs, and provide you with guidance on the ways to make the most of your money. Arrange a one-to-one interview to discuss your present situation. For many, buying a residential property can still be a good investment opportunity. You just have to know how.