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Beat the new mortgage interest rules with holiday lets

3 March 2016

Holiday lets offering generous tax breaks could take over from buy to let as the next property bonanza.

Self-catering furnished holiday lets are popular for city breaks as well as time out in the country or beside the beach.

With more than 150,000 landlords facing take hikes when they lose mortgage interest relief, switching from buy to let to holiday lets could make financial sense.

A holiday letting business has pros and cons for investors.

They are definitely more hands-on and require more time, administration, regular cleaning and maintenance than buy to lets.

Mortgage finance is also harder to raise for holiday lets than buy to lets.

The upside is holiday lets are outside the new mortgage interest rules, so higher rate taxpayers will see no change in their tax relief, plus they also attract enhanced capital gains tax relief.

Called entrepreneur’s relief, CGT is paid at 10% instead of the top rate of 28%.

The returns are good as well – depending on location, many holiday lets can earn r=the same in a week at high season as a buy to let generates in a month.

A buy to let can only become a furnished holiday let if some special tax tests set by HM Revenue & Customs (HMRC) are passed:

• Furnished test - The property must be fully furnished so a guest can move in with just their personal belongings

• Availability test – The holiday let must be available for letting at a commercial rate for no less than 210 days in any tax year. This means no freebies for friends or family and no personal use. Proof generally includes advertising online or in brochures and switching from paying council tax to business rates

• Occupancy test – Paying guests must rent the holiday let at a commercial rate for at least 105 days in any tax year

• Long term let test –
No one can stay at the property for more than 31 days in a row and any long term lets cannot add up to more than 155 days in a tax year

If the holiday let fails any of these tests, tax treatment reverts to that of a buy to let, so mortgage interest relief rules and the higher rates of CGT apply.

Landlords with several holiday lets can average occupancy across their portfolio so one property with fewer bookings can still pass the test.

Find out more about the tax treatment of holiday lets on the HMRC web site