Choice of holiday let deals rises ahead of tax changes

While the holiday let mortgage market improves for landlords, upcoming tax changes may pose challenges.

The number of buy-to-let mortgages that borrowers can use to finance a holiday let purchase increased to 445 at the start of August, according to analysis by Moneyfactscompare.co.uk.

By contrast, there were just 362 products to choose from one year ago and 415 available at the start of the year.

As the number of deals on offer increased, the number of lenders providing these specialist mortgages also rose slightly to 34, compared to 32 in August 2023. The majority of these lenders are building societies.

In further positive news, average rates on mortgages that can finance holiday lets dropped over the past year, falling from 7.16% at the start of August 2023 to 6.20% at the start of August 2024.

But, even with these encouraging developments in the buy-to-let mortgage market, landlords of holiday lets need to prepare for a range of changes in 2025.

Fewer tax advantages

The former Chancellor of the Exchequer, Jeremy Hunt, announced in the Spring Budget that the Furnished Holiday Lettings (FHL) tax system would be overhauled and brought in line with the tax system for longer-term lets from April 2025.

As a result, landlords of holiday lets will no longer receive certain tax advantages. For example, they won’t be able to deduct mortgage interest from their taxable income and they won’t receive a capital allowance that allows them to deduct costs of furniture, fixtures and other expenses involved in the property.

This new tax system is designed to help local communities in UK holiday hotspots by removing some of the financial benefits of being a landlord of a short-term holiday let, in the hope that this will increase the availability of longer-term rental properties.

Landlords of furnished holiday homes may be concerned about the impact the new tax rules could have on the profitability of their activities.

In light of these changes, landlords may be thinking of selling their holiday lets, particularly if they are higher-rate taxpayers. The Spring Budget lowered the higher rate of Capital Gains Tax (CGT) from 28% to 24%, which could help to encourage some higher-rate taxpayers to sell up as it means they would pay less tax on any profit they make.

But before deciding whether to keep or sell your holiday let, it’s important to get professional advice on how the tax changes could affect you and the properties you let out.

Are holiday lets still worth it?

Many holidaymakers choose to enjoy a break away in the UK so, even with the removal of some of the tax benefits, a holiday let could be a viable and profitable investment.

“These [tax] changes will no doubt come as a blow to both existing and prospective landlords, but the demand and profitability of a holiday let could still be worth weighing up,” commented Rachel Springall, Finance Expert at Moneyfactscompare.co.uk

“It would be wise for new investors to do their research and pick a property to let with their head, not their heart, and getting advice from a listings service is also wise to explore seasonal dips,” she added.

If you’re considering a holiday let or you’re an existing landlord looking to remortgage, it’s worth comparing the range of buy-to-let mortgage options available, as well as considering all the other costs involved of owning a holiday let.

Speaking to a mortgage broker can also help you find the most suitable deal for your individual situation.

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