Will the crackdown on holiday lettings wreck your returns?

For years, holiday lets were a lucrative investment – often more profitable than traditional buy-to-let properties. And they offer landlords somewhere to go on holiday in between rentals.

Popularity has soared with 2,500 limited companies established to hold holiday lets last year, compared with 1,323 in 2019, according to estate agency Hamptons. Owners have profited from rising demand for UK staycations since the pandemic.

But, the Government is seeking to restrict holiday lets amid concerns local residents are struggling to afford a home in popular tourist hotspots. So are they still worth investing in?

Great for mini-breaks … as well as tax breaks

A holiday let is a property that you own in addition to your own home, which you rent out to short-term tenants.

They are taxed as a business, unlike buy-to-let property, which is treated by Revenue & Customs as an investment.

That means owners enjoy far greater tax benefits than buy-to-let landlords. They can deduct more costs, including full mortgage interest, the cost of replacing fixtures and furnishings and ongoing expenses such as cleaning costs and utility bills.

Holiday lets are also subject to business rates rather than council tax, which can work out cheaper. However, business rates only apply to properties let for a minimum of 140 days a year.

Wales recently increased the holiday let occupancy rate from 70 days to 182 days, which means holiday home owners face higher tax bills if they can’t meet the minimum occupancy rate.

Owners also face a lower tax burden when they sell a holiday home. They pay just 10 per cent on any profits made on the sale, under the Business Asset Disposal Relief. Buy-to-let landlords pay capital gains tax at 18 or 28 per cent, depending on whether they are a basic or higher-rate taxpayer.

Furthermore, income made from a holiday let can be paid into a pension, which helps owners save for retirement and reduce tax bills.

So how do the numbers stack up?

Holiday let owners turned over £24,000 last year on average, according to holiday rental agency Sykes Cottages. This is a 59 per cent increase in just two years.

However, costs will significantly eat into those returns. Average overheads are £7,400 a year, including cleaning, bills, maintenance, tax and marketing.

Sharon Olivero-Chapman, 46, used to be a buy-to-let landlord. But after she had a few bad experiences with tenants and spent thousands restoring properties that had been damaged, she switched to holiday lets. Since then, her rental income has ballooned. ‘I would get around £700-£750 a month if I was renting a one-bedroom flat to a long-term tenant,’ she says.

‘But I get around £2,500 by having it as a holiday let. Obviously I have to pay the bills out of that, but even so the income is phenomenal. You hear horror stories of party animals and guests who trash a place, but I’m really careful about who I let in.’

Sharon owns 17 holiday lets in West Yorkshire and Cambridgeshire and also advises other landlords through her management company, SD Property Group.

Income: Sharon Olivero-Chapman owns a total of 17 holiday lets

Around 20 per cent of guests are tourists. The others are people looking for short-term lets while they wait for a house purchase to complete, or contractors working in the area for a few weeks.

You have to work for the money

Holiday lets are not easy money. They require a higher level of management and maintenance than long-term rentals. Properties must be cleaned between visits and bookings need to be arranged. Income is also far from secure. You may have peak periods in the summer, but struggle to attract visitors in the winter. A spate of negative reviews could sabotage bookings. Victoria Paterson, 48, bought a cottage in South Ayrshire, Scotland, two years ago. Although she earns a good rental income, she has found managing the property a challenge.

‘It’s been harder work than my husband and I expected but overall it’s been a positive experience,’ she says. ‘It’s a seven-hour drive from us in Lincolnshire and we can’t just nip up if something goes wrong. You need a good network of people close to the property.’

Paterson, a soft tissue therapist, lets the cottage through Airbnb and Booking.com. She charges £85 to £120 a night and it has an occupancy rate of around 75 per cent.

Paterson bought the property for £185,000 with an interest-only holiday let mortgage, which is fixed at 6 per cent and costs her £643 a month.

Where is the best place for a bolthole?

Ideally you want a place popular with tourists. Then compare the cost of a property with the potential rental yield. The top earning region is Cumbria and the Lake District, according to Sykes Cottages.

A two-bedroom home in the region will take income of £22,000 a year, while a four-bedroom home will take £44,000. Other high-income regions are the Cotswolds, the Peak District, Cornwall and Dorset.