Long and Short Term Leasing

Letting Options - Which is better, short-term or long-term?

Having made the big leap and bought your buy to let property, one of the first questions you will have to consider is whether you are going to let it on a short-term or long-term basis. So what exactly are the pros and cons of these options?

The decision about whether to let on a long-term or short-term basis is entirely a strategy decision and not necessarily one that you have to make once and for all, as the purpose and letting strategy can, of course, change over time.

It is reasonably obvious that weekly rental on a property in a popular holiday resort during high season will invariably bring a higher return than a week of rent from a long-term tenant. However, with these short-term booms come the short-term lows of the off season or times when the property is vacant.

Location

One of the main factors when it comes to determining rental strategy is to think about the type of property that you own and its location. If you have a property that is in a traditional holiday spot, then the short-term gains are likely to be so high that short-term rental would seem to be the obvious choice. However, investors need to factor in the additional management costs that will have to be paid if a property is to be serviced, on a weekly basis. As a general rule, investors should expect to be paying around 20 percent of the rental income to a management agent for a short-term letting facility.

Long-term letting will generally not produce the same financial reward; however, as the tenancy agreement is normally for a minimum period of 6 months, there is a degree of consistency which, if the rental income is to be relied upon as the sole income, can be vital.

Letting strategy

One of the often overlooked issues when it comes to letting strategy is the tax efficiency aspects of a UK furnished holiday let. Furnished holiday lets can be treated as a trade, in certain circumstances, which allows owners to pay tax under Schedule D and not the traditional Schedule A, which is used for personal income. This may not seem like a big deal, but the reality is that a UK furnished holiday let can save you literally thousands in tax liability. As it is treated as a trade, a property that meets the requirements will attract business asset taper relief, capital allowance and beneficial loss relief. For example, after the property has been held for 2 years, capital gains tax is only payable on 25 percent of the gain in the case of a business asset, in comparison to 90 percent in a personal asset.

In order to be classified as a business asset, the accommodation must be available for letting at least 140 days a year and must actually have been let for at least 70 days, during the year. The property must also not be let for a continuous period of more than 31 days to the same person for at least seven months out of the twelve month period.

Wear and tear

Another key difference between long-term lets and short-term holiday lets is the difference in treatment of wear and tear.

Wear and tear is calculated as 10 percent of total rent on residential lets only. This cannot be claimed on furnished holiday lets. With a holiday let, the cost of renewing furnishings can be claimed as a capital allowance, provided that these renewals do not also form part of the deductible expenditure calculation when the property is later sold.

Theoretically, VAT is due on holiday lets; however, one property is unlikely to push investors over the VAT threshold and will, in practice, be a very minor consideration.

The best tax plan for your individual circumstances should always be discussed with a professional, particularly if you are considering the issue of inheritance tax planning, as this is often hugely complicated in this area.