Buy-to-Let vs. Air BnB - From a Tax Perspective

Buy-to-Let vs. Air BnB - From a Tax Perspective

When it comes to understanding the best route to take with your investment property, there are many considerations to bear in mind. To better understand the questions, it is good to remember why you made or want to make the investment in the first place. Is it to generate a steady income with no possibility of windfalls on your investment? Or was it to generate the best return on your investment?

Let us take a brief look at the investment landscape. For those with a demeanour adverse to risk and happy leaving their money with the bank, this is perfectly fine, but you are unlikely to see a significant amount of interest against those savings. However, for those with an urge to set their money to work, you would have probably considered property, and why wouldn't you? With Buy-to-Let properties returning on average 3-4% annually on investments, this is a great starting point. What if you are looking for something with a little more teeth? While it can be more location dependant ‘Furnished Holiday Letting’ (globally recognised as the Air BnB model), can be a great choice, with average returns in the region of 8+% annually for successful investors. Furthermore, with stay-cationing on the rise, is looking like an increasingly viable option to many.

Buy-to-Let vs. Furnished Holiday Let - things to consider

Buy-to-Let

A 3-4% yield on an average investment of £350k could see a return of around 13k per year. However, with mortgage interest relief changes under Section 24, the scrapping of the ‘wear and tear’ allowance, and the introduction of the 3% stamp duty surcharge, landlords’ profits have been hit hard over the past couple of years. This largely explains why so many people are exiting the Buy-to-Let market. A report from Howsy mentions "landlords are left with just £2,140 from an annual return of £13,000 because they are paying out for so many hidden costs".

It is true, there are ways around these gargantuan fees, providing you speak to the right Accountants & agencies. However, for some, the truth remains, (especially for first time second home investors), that this type of investment could leave a sour taste in your mouth if you fail to do your homework.

Furnished Holiday Let

An 8+% yield on an investment of £350k this could see a return of around £28k per year. But there are some considerations to take. From a management perspective, managing 1-3 properties for many, is achievable. However, you would need to be available for check-ins, change overs, booking management as well as the almost guaranteed late-night emergency call.  Agencies can be a fantastic alternative to this somewhat taxing role. With many agencies charging reasonable management fees and the invaluable peace-of-mind that your investment is being managed daily, for a lot of people it is a no-brainer. This will, however, have an impact on your net returns.

From a tax perspective, there are a host of benefits that unsurprisingly many investors are capitalising on. If your property qualifies as a Furnished Holiday Let, you may be entitled to the following.

Capital Gains Tax Reliefs

• Entrepreneur’s relief

• Hold-over relief

• Roll-over relief

These are benefits that are usually given to trades (non-investment business) and are certainly something that your Accountant should be making you aware of.

Capital Allowances

Capital Allowances, also referred to as ‘Plant & Machinery’ Allowances, can provide a substantial windfall of £10s of thousands on the property acquisition price.

Simply put, if you purchase a property that qualifies as a Furnished Holiday Let, let us say for £350k, you could be entitled to claim of as much as £105k in Capital Allowances.

Capital Allowances figures are not a pound for pound cheque from HMRC. For a 40% UK taxpayer, on the above example, you could be looking at £42k in tax saved! For many, this can mean no tax being due for up to five years. In some instances, Furnished Holiday Let owners have even found themselves on the receiving end of a substantial cheque from HMRC for past payed tax. Which makes a pleasant change to the norm to say the least!

Conclusion

On reflection, there are obviously debates for and against investing in Buy-to-Let and Furnished Holiday Lets. However, for the moment at least, it would seem Furnished Holiday Letting may offer a far better tax landscape than the Buy-to-Let model.

What now

If you own or are planning to own a Furnished Holiday Let and would like some advice around Capital Allowances, our tax team are always happy to help. Equally STax know a plethora of good hosting providers and Accountants that we work with on a regular basis. If this is something you are considering, we would be happy to put you in touch.