If It Looks Too Good To Be True…
Why you need to ask the right money questions
Short term lets are booming in the UK, but not everyone is having a holiday. Source: https://www.ukinsurancenet.com/
As part of my ongoing research into personal finance, I recently attended an education session on ‘Serviced accommodation’. This is a form of property investing or business activity which involves letting out residential properties on a very short term – anything from a day to several months – where linen and towels are provided.
This type of letting has really taken off over the past five years, with websites like Airbnb and Booking.com enabling a wide range of people to have a more cost effective, comfortable and flexible alternative to a hotel room.
As well as tourists and holidaymakers, serviced accommodation is also used by insurance companies to provide homeowners with temporary accommodation (the recent floods in South Yorkshire and the Midlands a case in point), contract workers in the IT and construction sector, temporary professional workers such as locum doctors and teachers, and people attending family or other events away from home.
Compared to two hotel rooms costing, say, £80 per night each, a comfortable two bed cottage at £110 a night looks great value. And for the homeowner the income looks much more attractive. Why bother letting to one tenant at, say, £750 per month when you can generate £2,200 per month for letting short term for just 20 days a month?
Serviced accommodation comes under the same classification as furnished holiday lets (FHL) and as such it is subject to the same planning and tax rules. From here on I will refer to the strategy as FHL.
The education session I attended made a lot of the fact that outside of London you don’t need planning permission to operate an FHL as the use hasn’t changed. And they pointed out that the tax treatment is far more favourable than letting to one tenant, with mortgage interest fully deductible and capital allowances available to offset against rental income.
Now, I’m all for people being paid for delivering value, and FHL can be very valuable in the right situation. But despite the speaker’s glowing endorsement of the opportunity, I had some nagging doubts that FHL isn’t the sure-fire route to fast cashflow that it was made out to be. At least not if you do it properly within the rules and regulations.
Planning Permission
What was claimed by the speaker:
“Outside of London you don’t need to obtain planning permission to operate a home as an FHL as the use hasn’t changed.”
The truth:
While the speaker’s claim was true in the strict sense of the word, case law suggests that each local authority can, on a case by case basis, define whether they believe there has been a ‘material change’ in use and as such whether or not planning permission is required.
What might be acceptable in a remote cottage isn’t likely to be acceptable in a suburban area. If neighbours complain to the council about lots of different ‘guests’ coming and going, creating noise and disturbance, expect a visit from the planning department.
In Greater London, you may not operate an FHL for more than 90 days a year without obtaining planning permission, which you are unlikely to get. The outlook is for some form of licensing scheme to be introduced in London, similar to that which applies to student lets, as suggested by London Mayor Sadiq Khan.
If you operate an FHL without planning permission when you should have obtained it, you run the risk of prosecution. If you are successfully convicted the Proceeds of Crime Act applies and potentially all the rental income you’ve generated from letting can be seized by the authorities, not to mention the associated legal fees.
Tax Rules
What was claimed by the speaker:
“Unlike buy-to-let properties an FHL can enable the owner to deduct all running costs, including mortgage interest from gross rental income, to determine taxable income. You can also offset taxable income against capital allowances based on the cost of certain fixtures, potentially providing several years of tax-free income.”
The truth:
While the speaker’s claim was true, it only applies if you meet strict rules on how many days the property is available for let (min 210), how many days are actually let (min 105) and stay below the 31 day limit for consecutive days you can let the property to any one guest.
Any letting which exceeds 31 consecutive days to the same guest is deducted from the 105 per annum minimum let days requirement. And if the total of all lettings that exceed 31 continuous days is more than 155 days in a year, then the property won’t be treated for tax purposes as an FHL in that year. More information is available from the HM Revenue and Customs website here.
Making Money From Properties You Don’t Own
What was claimed by the speaker:
“You can make money by renting a property from a landlord on a short hold tenancy and then operate it as a serviced accommodation/holiday let. You keep the uplift in income and the landlord gets the tax benefits applicable to serviced accommodation.”
The truth:
By virtue of you (whether in your own name or a limited company that you own) letting the property for more than 31 days and that exceeds 155 in a year, the property will not qualify as an FHL.
Other Risk Factors
The speaker failed to address these points:
Mortgage lender: Operating an FHL is treated as a business activity and this is prohibited under the terms of most buy to let mortgages. You’ll need to either get the lender to agree to this activity or replace the mortgage with a (usually more expensive) commercial mortgage. If you don’t do this you can be treated as in default and the lender can call in their debt for repayment. This article shows the approach of most buy to let lenders to FHL.
Insurance: Standard landlord insurance is not appropriate for FHL and you need to put in place a proper FHL policy, which is also usually more expensive.
Right to rent checks: The Home Office advises that ‘Right to rent checks should be made by landlords, agents or householders who are letting private rented accommodation….to ensure that the prospective tenants or occupants have a right to rent. If the check is not made and the occupier has no right to rent, there may be a civil penalty to pay.’ Find out more here.
Criminal activity: FHL, particularly in urban areas, have been used by criminal gangs as ‘pop up’ brothels. While prostitution itself is not illegal, sex trafficking and human slavery are potentially associated with this type of activity. In addition, use of stolen cards to pay for lettings is a real possibility, and you’ll need to put in place appropriate fraud protection to avoid against being charged back by the card issuer.
FHL does offer a legitimate business opportunity, but only if you know what you are doing, the property is suitable for use as an FHL and you understand the potential pitfalls. The rules relating to FHL were tightened a few years ago and I wouldn’t be surprised if they were tightened further against a backdrop of more people operating FHLs, a lack of affordable private rental property and a need to raise taxes to pay for increases in State spending.
There are no low risk, high return investments, including those based on property. High returns come with a range of risks which you need to understand, quantify and mitigate. Knowing what you don’t know about investment opportunities, doing proper research and learning from the mistakes of others is essential in your wealth building journey.