It is important to understand the differences between these two categories. Just because the both involve letting does not mean that they are similar; in fact the word “let” is possibly the only similarity. The law, taxation and finance for these including much of the underwriting rationale for the finance are quite different
Let us look at the fundamentals for each.
Buy to Let (BTL). This term arises from the mortgages used to purchase such properties; it is not a term in itself. It applies to the long term letting to residential tenants of a residential property using an Assured Shorthold Tenancy Agreement, as prescribed and amended by several versions of the Landlords and Tenants Act. It is for residential applicants only, not for businesses who subsequently sub-let to residential tenants or for House in Multiple Occupation (HMO). In the case of businesses, a formal commercial mortgage should be used. In the case of an HMO, this a hybrid of residential and business. It uses a specific type of BTL mortgage which has its own underwriting requirements but otherwise the laws that govern the landlord and tenant are as with BTL as are the rules on taxation.
Holiday Let. The term used by her Majesty’s Revenue and Customs is Furnished Holiday Let (FHL) and you will see it used frequently. FHL is a business and the property, which is usually a residential property, is let to on short term lets of less than 4 weeks each for holiday use. The law refers to commercial agreements and taxation is different to BTL.
Can I use a BTL mortgage for FHL or vice versa?
This is commonest question that we are asked and I will address this immediately.
The answer is NO. It would be a direct infringement of the mortgage conditions and the lender is within their rights to demand immediate repayment of their loan. FHL and BTL use different criteria and thus they are not interchangeable.
How would a lender find out? I can list 3 circumstances that we alone have seen and have tried to rescue clients
- Neighbours have contacted the mortgage lender. A BTL mortgage was being used for FHL
- Solicitors, who, remember, act for you and the lender at the same time, and have seen suggestions in the application that contradict themselves
Loss adjusters acting in an insurance claim have, after checking Her Majesty’s Land Registry (HMLR), reported that a lender was being used who does not allow that usage. A BTL mortgage was being used for FHL. In this case the consequences were dire! Not only was the insurance claim rejected, it was stated that he application for insurance had been purposely misrepresented, which was fraud. This misrepresentation would have to be reported on any insurance application even for car insurance. We can only extrapolate other potential and similarly dire consequences, for example that such fraud appeared on your credit history under the CIFAS section (Credit Industry Fraud Avoidance System)
Issues to look out for in BTL as opposed to FHL
This is the one which has over the last few years attracted most interest and debate. HMRC regard BTL as an investment whether it is owned by a private individual or by a company, and taxation has followed that principle. Recent changes to the tax treatment of the relief on finance costs has made this a high-profile subject and many people have bought or moved their BTLs into limited companies in order to maximise the relief available. This may prove to be poorly advised. The principle that needs to be demonstrated is whether is truly a trading business and not just cosmetic.
Precedent was established in 2013 in ELIZABETH RAMSEY VS HMRC . Although this case was primarily for the treatment of Capital Gains Tax (CGT) it established principles which apply to taxation of finance costs. In the Ramsey case Judge Roger Berner overturned the decision of the First Tier Tribunal. which did not allow relief to the tax payer. Judge Berner reviewed a number of previous cases and it gave rise to six criteria for determining whether an activity is a business.
- Whether the activity is a ‘serious undertaking earnestly pursued’, or ‘a serious occupation, not necessarily confined to commercial or profit-making undertakings’, both of them cited to and referred to by the tribunal in their decision;
- Whether the activity is an occupation or function actively pursued with reasonable or recognisable continuity
- Whether the activity has a certain measure of substance as measured by the quarterly or annual value of taxable supplies made
- Whether the activity was conducted in a regular manner and on sound and recognised business principles
- Whether the activity is predominantly concerned with the making of taxable supplies to consumers for a consideration
- Whether the taxable supplies are of a kind which, subject to differences of detail, are commonly made by those who seek to profit by them.
The other major point in Judge Berner’s decision was that the tax payer in the Ramsey case spent at least 20 hours per week on their business for it to be regarded as a business. Importantly Judge Berner did not ask for Ms Ramsey to provide any evidence of spending 20 hours in her business, and therefore the number of properties also did not matter. It is possible for HMRC to ask for evidence of 20 hours per week, and it may be difficult for you if you are already in full time employment. If you can show that you are also actively looking to purchase additional properties, showing the time you spend on travelling and viewing properties this will help you.
The point to draw from this is that if you employ a letting agent, it is going to be difficult to show that you spend 20 hours a week running your property/properties.
BTL insurance primarily insures the building and includes Property Owners Liability for harm to tenants. It does not routinely include contents insurance, unless specifically requested. Nor does it include any rent protection of legal protection unless specifically requested. Be prepared for the insure to credit score the tenant if rent or legal protection is requested.
I have already warned above about the consequences of having the wrong insurance for the wrong mortgage. But there is another problem that leads me to think that most landlords who think they are covered are not actually covered. Part of the blame is with letting agents and part with the landlords.
Within the terms of the insurance there will be a section which refers to how often visits must be done to a property whilst occupied and also whilst unoccupied and to make a record of the visits. If you do not do the visits as specified, then the insurer is at liberty to reject your claim. If you have changed insurer and not informed the agent, then that visit frequency may have changed. Similarly, it is the landlord’s responsibility to make sure the agent does the visits as per the required frequency.
Another point which is worth checking in the policy wording is how the cover may change if the property has been empty for a while. Normally after a period of time of un-occupancy, usually 45 days or 60 days, insurers will reduce the cover to what is known as “Basic Perils”, unfortunately with the acronym of FLEA cover – Fire Lightening Earthquake and Aircraft, although the liability component stays in force.
Issue for FHL as opposed to BTL
I will not go into the issues on taxation of FHL. FHL is still treated by HMRC as a business even if you do not spend 20 hours a week on it and even if you go through an agent. Tax treatment is very different to BTL and I will not go into all the areas pertinent to FHL. I strongly recommend that you seek the advice of a qualified accountant.
The insurance is specially designed for FHL. One important factor that is taken account is that it may be occupied one week and empty the next. You may ask why that is important. Well on the basis that the property is well furnished it is attractive to burglars. From a burglars point of view if he sees the lights are off on a Monday he can guess that he has all week to ransack it.
I respect of furnishing, an FHL needs to provide facilities and furnishings that attract holidaymakers. It is as simple as that. It is for the landlord to decide what those facilities should be. This ranges from an overnight hostel for walkers in the Brecon Beacons to luxury apartments on the North Devon Coast.
When considering an FHL investment it is not just the furnishings and facilities that you need to consider. There are other routine costs such as laundry, cleaning and gardening, together with “meet and greet” and inventory. Whereas the overall gross income for FHL is almost always greater than for BTL, so are the costs.
I have tried to cover the most salient issues for these two types of investment but please call us if you have any other questions.