Should buy-to-let landlords switch to holiday letting?

Thousands of landlords have switched from long-term to holiday letting, but will they be better off financially?

The global pandemic has unsurprisingly led to a sharp rise in demand for UK holiday properties with many Brits planning their summer staycation as overseas travel still looks uncertain.

Combine that with the fact that the crackdown on financial breaks for traditional landlords has largely overlooked holiday lets, it's easy to see why many landlords might be looking to make the switch from traditional long-term lettings.

"Those with a second home or money to invest are increasingly viewing holiday letting as an attractive property investment to consider," Bev Dumbleton, chief operating officer at Sykes Holiday Cottages explains, adding that the average four-bed holiday cottage generates a gross annual income of £21,000.

In this article, we look at the pros and cons of holiday letting to help you decide whether it's right for you.

Read: 'we use a holiday let to top up our retirement income'

Growing popularity of holiday lets

Over the past few years, landlords have gradually lost the ability to deduct mortgage interest costs from their turnover before calculating their tax bill.

Since April 2020, they have not been able to deduct any finance costs from their property earnings and receive only Basic Rate tax relief on these costs.

The tax change, together with a number of regulatory changes in the sector, including the Tenant Fees Act, has led many landlords to consider selling their properties.

Others, however, are looking to switch strategy with holiday, or short-term, letting becoming one of the key areas of interest.

According to a report by letting agent professional body ARLA Propertymark last year, nearly 50,000 properties have been changed from long-term to short-term letting.

Its research, which was carried out by Capital Economics, found that a further 10% of landlords were considering offering short-term lets in the future.

How to become a buy-to-let landlord

What’s the appeal?

There are several reasons landlords may be thinking about holiday lets but a big one is tax.

Subject to meeting certain criteria, properties used as holiday lets are still able to deduct all of their mortgage interest and other finance costs from their turnover before calculating the tax liability, which used to be the case with buy-to-let properties.

Bev Dumbleton, chief operating officer at Sykes Holiday Cottages, revealed the holiday rental agency has seen a growing number of landlords move into holiday letting for this reason.

“Stringent tax rules on buy-to-lets, phased in from 2017, have made it increasingly difficult to turn a profit,” says Dumbleton.

“This is only going to get worse for landlords.”

Nick Morrey, product technical manager at broker John Charcol, believes those switching to holiday letting are also motivated by the growing staycation trend.

Another factor driving landlords to change strategy is the Government’s plan to abolish Section 21 evictions.

Many landlords are concerned they will be stuck with difficult tenants for long periods of time once this change comes into force.

“With longer-term lets, it can be riskier taking on tenants if they don’t turn out to be quite what you hoped,” says Dumbleton.

“Landlords may find themselves stuck in a binding contract when things aren’t ideal.”

Although frequently dubbed ‘no-fault’ evictions, landlord groups such as the National Landlords Association (NLA) have warned that landlords are typically using Section 21 to evict tenants who are not paying the rent or causing damage.

There is another process that can be used in these circumstances – a Section 8 eviction – but NLA research has shown landlords do not believe this process works.

Landlords: how to cut your buy-to-let costs and fees

How do the numbers stack up?

In many areas, it tends to be more lucrative from a rental income point of view to rent out properties on a short-term basis.

But costs and managing agent fees also tend to be higher for holiday lets, so the overall financial picture in many cases was not different enough to warrant the extra hassle for many landlords.

With the tax disparity added into the mix, this may no longer be true, especially for higher rate taxpayers.

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Example one: a holiday hotspot

We crunched the numbers on a two-bedroom holiday let in popular seaside town Whitby to see whether a landlord would end up with more money in their pocket via buy-to-let or holiday let.

Rental income figures for buy-to-let taken from home.co.uk; for holiday let provided by Sykes Cottages.

Mortgage rates provided by John Charcol – 2% for buy-to-let; 3.3% for holiday let, based on a five-year fix at 75% loan-to-value (LTV) on an interest-only basis. Figures based on the average flat value in Whitby of £118,643, taken from home.co.uk.

Commission rate estimated at 12% including VAT for buy-to-let; 24% including VAT for holiday let.

Other running costs estimated at 10% for buy-to-let; 20% for holiday let. Based on a tax rate of 40%.

Example two: a city centre pad

We also crunched the numbers on a city short-let in Fairfield, Liverpool, using data provided by short-term letting agent Portico Host.  

In this example, we used Portico’s rental income and average house price data for this area (£126,779), which was based on AirDNA, Rightmove and Land Registry data.

We made the same mortgage, commission, running costs and tax assumptions as in the Whitby example.

'We're using a holiday let to boost our retirement income'

The bottom line

As it can be seen in the scenarios, in both cases, a landlord would be better off renting a property on a short-term basis rather than on a long-term one, albeit only slightly in the Whitby example.

But while a city-centre property might be more lucrative, a seaside hotspot might be more appealing for those looking to use the property themselves or retire there in the future.

It’s worth pointing out there are lots of other considerations to take into account if you’re pondering moving from long-term to short-term lets.

In some areas – London, for example – there are rules prohibiting short lets for more than 90 days per year unless you’ve applied for planning permission.

There are also far fewer lenders offering mortgages for holiday lets so obtaining finance is likely to be more difficult than for buy-to-let.

If you own a leasehold property, you’ll also need to seek the permission of your freeholder and this may not be granted.

There’s a lot to consider if you’re thinking about changing strategy, but the numbers suggest it could be a worthwhile move for some landlords.

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