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.
In this article 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
To take advantage of HMRC tax breaks for holiday lets, it had to qualify as a Furnished Holiday Let. This involved meeting several criteria, imposed by HMRC.
However, this is changing.
Changes announced in the Spring 2024 Budget will abolish the special tax regime for FHLs from April 2025 onwards.
For FHL owners, the changes mean that from April 2025:
- No More Capital Gains Tax Reliefs: Business Asset Disposal Relief (BADR) and other specific reliefs will no longer apply, with gains taxed at standard residential property rates.
- Loss of Full Mortgage Interest Deduction: Instead of deducting mortgage interest, owners will receive a 20% tax credit, resulting in a significant reduction in tax relief for higher-rate taxpayers.
- Impact on Pension Contributions: Profits from FHLs will no longer qualify as “relevant earnings” for pension purposes, limiting tax-advantaged pension contributions.
These changes will make FHLs less tax-efficient for some owners, potentially impacting profitability and investment decisions.
Owning a holiday let with a limited company can offer financial advantages, such as being able to fully offset the mortgage interest paid each year. However, this should not be done without advice.