The government has announced potential changes to the regulatory landscape surrounding short-term property rentals, which include holiday lets and Airbnb.

These changes could impact our advice to clients interested in letting their properties on a short-term basis.

The government’s proposals are driven by its aim to balance the economic benefits of short-term rentals and tourism against the essential need for affordable housing in local communities.

Short-term lets qualify as a trade for tax purposes if they meet specific criteria

These changes come from proposed legislation requiring planning permission for short-term rentals. This could potentially limit the number of such properties in areas where they are exacerbating housing shortages.

In addition to these planning changes, the government is proposing a new registration scheme for short-term lets. The primary goal is to gather comprehensive data on the number and location of these rentals to better understand their impact on local communities.

These changes are outlined in the Levelling-up and Regeneration Bill going through parliament. Depending on the outcome of the consultation, due to end on 7 June 2023, we can expect these changes to be implemented later in the year through secondary legislation.

The popularity of short-term lets, particularly holiday lets, has grown considerably over the past few years. Several factors have caused this, including the boom in ‘staycations’ and the tax advantages to short-term lets.

Lenders typically fall into one of two camps of criteria

The tax treatment of short-term let properties is different from that of standard rental properties. Short-term lets qualify as a trade for tax purposes if they meet specific criteria, such as being available for letting for at least 210 days a year. This means the investor may be eligible for certain tax reliefs, like mortgage interest relief.

When a buy-to-let (BTL) is held in an individual’s own name, mortgage interest relief is restricted to 20% on standard BTL properties but not on short-term lets, making them attractive to higher-rate taxpayers.

Higher yields

Another reason for the increase in popularity is the higher yields compared to those of standard BTL properties. A holiday-let property in the right area in peak season could generate as much income in one week as it would in a month on a standard BTL basis.

If you are looking for an option where the whole holiday rental income is considered, you will need a more commercially minded lender

Higher yields are attractive in times of increasing interest rates, but other factors need to be considered. There are costs such as furnishings, wear and tear, management, and holiday-let promotions and bookings.

From a mortgage perspective, short-term lets may be a solution for a property that otherwise would not fit the rental affordability calculator. The adviser, however, should take care to understand the lender’s offering because it is not always straightforward.

Lenders typically fall into one of two camps of criteria. The first is the specialist lender that likes to offer short-term lending without the complications of underwriting the loan as a business. Lenders such as Foundation and Molo have this type of offering. An assured shorthold tenancy (AST) is not required, but the lender does a rental assessment as if the property were a standard BTL, and affordability is calculated on this figure.

A lender may consider holiday lets but will not automatically consider Airbnb or serviced accommodation

If you are looking for an option where the whole holiday rental income is considered, you will need a more commercially minded lender that can underwrite applications based on the actual income the property generates. But how different lenders calculate this and how much of this income is used can vary.

With Paragon, for example, for a property the client has owned for over two years and where accounts can evidence two years’ holiday rental income, the gross annual rental income, averaged over 12 months, can be used as long as it is equal to or exceeds the interest coverage ratio (ICR) of 150%.

Lendco will consider 30 weeks’ income based on the average of the high, medium and low seasons, subject to a minimum of 100% AST coverage; and Cumberland Building Society uses the holiday-let income in its ICR calculation, subject to a 20% deduction for costs.

The tax treatment of short-term let properties is different from that of standard rental properties

Suffolk Building Society is similar. The potential rental income will be based on a letter from a holiday lettings agent confirming the anticipated average season rent and multiplied by 30 weeks. However, if there is a minimum two-year occupancy history, the average will be multiplied by 35 weeks.

Another point to watch is that a lender may consider holiday lets but will not automatically consider Airbnb or serviced accommodation.

Given the current short-term lettings popularity, as the regulation changes unfold it will be essential to stay informed to best advise our clients. Advisers who can add value by guiding their clients on all the considerations will be in demand.

Liz Syms is chief executive of Connect Mortgages 

This article featured in the June 2023 edition of MS.

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