To own and run a UK holiday let you need to be aware of the occupancy rules and restrictions that apply to such properties. These will vary depending on the location, property type, usage and also the mortgage finance needed.
Here we run through the main areas that can apply:
- Holiday let mortgage restrictions
- Property usage restrictions
- Qualifying Furnished Holiday Let Status
Holiday let mortgage restrictions
A holiday let is a residential property that is let out to paying guests. So it would seem natural that you should borrow the money needed with a buy to let mortgage which are readily available.
Unfortunately this is not possible, for 2 main reasons.
A buy to let mortgage lender will expect the property to be let to long term tenants where the tenancy is formally established by an Assured Shorthold Tenancy (AST) Agreement, usually drawn up by the landlord or letting agent. Holiday guests are not long term tenants and so this will result in a breach of the mortgage conditions. It is also likely to invalidate the property insurance.
When applying for a buy to let mortgage the actual or potential rent (from long term tenants) is used to assess the maximum possible loan. This calculation generally does not provide the loan size most holiday let investors need as the rental income will be much lower for a buy to let.
The solution is a holiday let mortgage that is based upon the short term holiday letting income, that obviously allows paying guests to stay and will allow some personal use as well.
Property usage restrictions
This can catch a few people out!
When assessing the viability of a specific holiday let property it is wise to find out about any restrictions early on in the discussions. Restrictions can be on a per-property basis but also can apply to an area or certain class of property.
Holiday let occupancy clauses, or 106 restrictions, are placed on a property by the Local Authority Planning Dept. at the time that planning is sought/approved.
They can be worded in different ways, depending on how the Local Authority wants to control how the property can be used. For holiday lets this allows the property to be let out with tourists boosting the local economy but without overstretching local resources such as schools and hospitals etc.
Some clauses are worded in a way that allows 12 months holiday let use only, with a maximum occupancy of 30 days by one “occupant”. They can also state that the property can be let for 11 months but must remain empty for a specific month each year.
Most of these restrictions will mean that you can let your property for all or most of the year but you will be unable to claim it as your main residence. Perhaps not very helpful for your retirement planning.
How could a holiday let restriction affect you?
It will make finding a holiday rental mortgage slightly more difficult as many lenders will not want this type of restricted use property. However, as experienced brokers in this market we do have lenders that will accept them.
You could approach the Local Authority to have the restriction removed or amended but this would take some time with no certainty of outcome. If you are planning to retire to your holiday let, a restricted use property is out of the question, because it does not have full residential use.
If you are looking purely at investment return then restricted properties can outperform others. Mainly because the purchase price will be slightly lower as it is tied to a particular market use.
In London, you do not need to apply for planning permission to use an entire flat or house as a short term/holiday let if:
- you pay the Council Tax for the property
- each individual short term let is no more than 90 days
- the total number of holiday let days over the calendar year is no more than 90 days
You do need to apply for full planning permission to convert a flat or house into a short term/holiday let if:
- the total number of short term/holiday let days will be more than 90 days in a calendar year
The London 90 day rule
If you operate short term accommodation within London you should know about the 90 Day Rule.
Within London you can sub-let your home for a maximum of 90 days per calendar year. Simply put, if you live in London and put up your whole home on Airbnb, you are allowed to have guests stay for a maximum of 90 nights a year – Airbnb has a counter so that you can see how many nights you have left.
Once you have reached your limit planning permission is needed to extend the number of nights as a ‘material change of use’. That is unless of course you wait until the next calendar year and use another packet of 90 days.
Source: https://www.tpexpert.org/the-90-day-rule-further-thoughts/
Qualifying Furnished Holiday Let
It is possible to own and operate a ‘holiday let’ without adhering to the HMRC rules regarding Furnished Holiday Lettings (FHL).
For example if you own a holiday home and let it to friends and family for a few weeks each year this would not qualify.
However, FHL status gives access to many tax advantages that are unique to FHL’s and do not apply to buy to lets.
If you let properties that qualify as FHLs:
- you can claim Capital Gains Tax reliefs for traders (Business Asset Rollover Relief, Entrepreneurs’ Relief, relief for gifts of business assets and relief for loans to traders)
- you’re entitled to plant and machinery capital allowances for items such as furniture, equipment and fixtures
- the profits count as earnings for pension purposes
To benefit from these rules, you need to work out the profit or loss from your FHLs separately from any other rental business.
Accommodation that qualifies as a FHL
To qualify as a FHL your property must be:
- in the UK or in the European Economic Area (EEA) – the EEA includes Iceland, Liechtenstein and Norway
- furnished – there must be sufficient furniture provided for normal occupation and your visitors must be entitled to use the furniture
The property must be commercially let (you must intend to make a profit). If you let the property out of season to cover costs but did not make a profit, the letting will still be treated as commercial.
holiday let tax rulesholiday let mortgages
Quick Q&A
What does 12 month holiday occupancy mean?
For a holiday let this means that you are able to let to paying guests across the whole year without restriction.
You can visit and stay in the property yourself. However, you cannot live in the property permanently.
What is a 106 restriction?
A Local Authority will often use a Section 106 planning restriction when they want to control how a property can be used. These powers come from Section 106 of the Town and Country Planning Act 1990. The land itself, rather than the person or organisation that develops the land, is bound by a Section 106 Agreement, something any future owners will need to take into account.
Can I mortgage a property with a 106 restriction?
Yes this is possible. Possibly from a holiday let mortgage lender or alternatively a commercial lender depending on the property specifics.
How do I qualify my Holiday Let?
The qualifying rules for holiday lets are complex as is the taxation position once the property is successfully accepted.
We would always recommend that you seek the guidance of an accountant who is familiar with holiday lets before and during property ownership to ensure adherence to the rules and maximising the tax advantages.
Is a holiday let a residential property?
A holiday let is usually a fully furnished residential property. So this would include a kitchen, bathroom, bedroom/s, living room etc.
What type of tenancy is a holiday let?
Holiday letting agreements are excluded from the Housing Act and so guests are there temporarily with no right to remain at the property after their holiday period.
If you have a short term rental property, the law allows you to operate this without the occupiers gaining any rights to remain in the property.
How long can you stay in a holiday let?
To qualify as a FHL, guests can stay for a maximum of 31 days continuous occupation.
The providers of holiday rental mortgages will allow you to use the property from time to time. Usually with an overall maximum of 60-90 days per year.
Author: Mark Lanario & Sean Horton
