Purchasing a lodge as a ‘buy to let’ investment gives the owner the best of both worlds – a secure return on investment and the opportunity to enjoy the use of a high-quality lodge during the year.

Thinking of Holiday Letting?

Of course, extensive occupation by an owner will reduce the available letting period, and therefore the income earning potential of your lodge, so most investors tend to occupy their lodge out of season and let the lodge park operator get on with managing the holiday letting business.

Most buy to let schemes involve placing the lodge into the hands of a nominated holiday letting agency, allowing the lodge development as a whole (including your lodge) to get the highest profile in the letting market place with good quality brochure and internet advertising.

Income

Normally the lodge park owner will have recent knowledge of letting income levels for lodges on the park.  Failing this, (especially for new developments), income projections and occupancy estimates will be provided to prospective investors.  This is sometimes backed up by a minimum income guarantee (usually for 2 or 3 years, sometimes longer).

Expenditure

Management on a day-to-day basis is undertaken by the lodge park owner, who will usually undertake a range of functions on the lodge owner’s behalf.  This is reflected both in the annual pitch fee or ground rent/service charge and an agency letting fee.

• Administration.
• Park security (usually with on-site staff).
• Grounds maintenance (including grass cutting, landscaping etc.).
• Maintenance of common areas.
• Provision of leisure facilities and amenities (depending upon the park).  This may involve a separate subscription or service charge.

In many cases the running costs are known from previous years, or many of the functions (eg cleaning, laundry, grass cutting and so on) may be contracted out on a fixed arrangement that leads to easy forward budgeting.

Net Profit Forecasts

Potential investors will need to ensure that both the income and expenditure levels shown on historic financial data and any projections is both reasonable and sustainable, and any forecasting for growth in income/profit is achievable year on year.

It is important that you obtain some background information about the lodge business and the operator.  Questions you should consider include:

• Is the business a limited company or partnership? 
• Are there recently awaited accounts (in the case of a limited company)? 
• If there are any unusual fluctuations from year to year, are these properly explained?
• Does the operator have a good track record?
• Is the property in a good area for holiday letting?
• What is the likely size of the finished development and are there likely to be additional improvements or facilities added?

The Holiday Letting Market

The following is a commentary from Simon Altham, Head of Product at Hoseasons.

Over the last two years it is estimated that over 70% of the new build holiday schemes have been ‘buy to let’ lodge style developments.  This is no doubt testament to the growing awareness of ‘lodge holidays’ as a whole and helped recently by continuing demand for holidays here in the UK. 

The high standards of UK lodge accommodation, hassles involved with flying and increased awareness of environmental issues have seen lodge lettings so far increase by 20% in 2007 compared with the same period in 2006.  Further growth is expected in what has become a late booking market, as customers today are taking an increasing number of shorter and more spontaneous breaks.

“One of the main advantages of purchasing a lodge on a development which is in partnership with Hoseasons” said Simon Altham, Head of Product at Hoseasons, “is the security of knowing that your lodge is benefiting from Britain’s largest self catering advertising campaign, millions of holiday brochures in circulation across the UK and a website which has over 8 million unique visits every year.  As the UK’s leading and largest self catering holiday operator and trading since 1945, you can be safe in the knowledge that your lodge is not only in expert hands, but with a company that is unlikely to go out of business overnight and one which can ride the peaks and troughs of an unpredictable market and deliver consistently solid return on investment.” 

“Whilst agency commissions can at first glance appear to be money lodge owners don’t want to pay, the reality is that driving enough customers throughout the course of the year to provide tangible returns is not an easy task.  Customers are becoming harder to reach, increasingly erratic in behaviour and whilst the on-line revolution has made it easier for browsers to find individual units of accommodation, it is not enough to simply create a website and hope you will be found.  On-line marketing now accounts for over 35% of our advertising spend, therefore the benefits of your lodge being included in a park letting scheme cannot therefore be underestimated.  With lodge owners recouping generous returns and substantial tax benefits it is not difficult to see why lodge developers are seeing greater demand from investors than the traditional customer looking to purchase a holiday home simply for their own use.”   

Taxation implications

The following sections have been provided by Stephen Hunter who is a Chartered Accountant and Chartered Tax Advisor for KPMG’s tax practice in Preston, Lancashire.

When subletting a holiday lodge the income will be treated as either Furnished Lettings (‘FL’) or Furnished Holiday Lettings (‘FHL’).

There are a number of tax advantages available where the income is treated as FHL.

Furnished Holiday Lettings

In order to qualify as FHL, the following conditions must be satisfied:

• The holiday lodge must be let on a commercial basis with a view to making a profit;
• It must be available for commercial letting as holiday accommodation to the public for at least 140 days of the tax year;
• It must be actually let at a commercial rent for at least 70 days in the tax year; and
• It must not normally be occupied for more than 31 days by the same person in any seven month period.

“With a view to making a profit”

In recent years HM Revenue & Customs (‘HMRC’) have undertaken a review of their approach to FHL.  HMRC now make the assumption that, in the majority of cases, FHL treatment will not apply to an individual lodge owner making a loss.  In order for FHL treatment to apply, HMRC will now consider whether or not an individual lodge owner has prepared a business plan at the outset and will expect them to draw up annual accounts to 5 April, taking account of depreciation.  Hence, it is important to demonstrate there is a reasonable likelihood that a lodge owner will make a profit at the outset.

Private use and use by family and friends will also be taken into account.  For example, where all the best weeks are reserved for use by your friends and family and only the poor weeks are let out to the public at a discount, it is unlikely that FHL treatment will apply.

Private use will also affect the extent to which expenses and capital allowances are available for offset.

Calculation of Income

All legitimate running costs may be deducted in calculating the taxable profit for FL and FHL, including interest on any loan taken out to buy the holiday lodge.

Private use and use by family and friends will reduce the extent to which expenses may be offset.

Capital Allowances

Capital allowances should be available on the original purchase of the holiday lodge at the rate of 25%.  As the holiday lodge is a leased asset, 40% first year allowances are unavailable.  Private use and use by family and friends will reduce the extent to which capital allowances are available.

Fixtures and Fittings

No allowances are available for the initial cost of fitting out a lodge with furniture, fixtures and fittings where the income is treated as FL. Instead, HMRC will allow relief for replacement furniture, etc.  On a renewal basis – which if course means that no tax relief is given until the initial furniture wears out. Alternatively, an annual depreciation allowance can be claimed. This will normally be 10% of the rent, net of council tax and water rates and any other services provided by the landlord which are normally liabilities of the tenant.

Capital allowances may be claimed at 25% on the initial fitting out costs where the income is treated as FHL.

Loss Relief

Losses on FL may only be carried forward and set against future profits arising in respect of the holiday lodge, though it may be possible to offset excess capital allowances against other income in certain circumstances.

FHL is treated as a trade and as a result any loss can be offset against other income.

Capital gains tax

The same definition of FHL applies for capital gains tax as applies for income tax.  As a result the following capital gains tax relief become available:

• Roll-over relief;
• Gift relief; and
• Taper relief

The availability of the above reliefs means that in many circumstances any chargeable gain arising on disposal of your holiday lodge can be deferred or tax paid at an effective rate of 10%

Such reliefs are unavailable in respect of FL.

Inheritance Tax

HMRC guidance indicates that business property relief will not be available in respect of FL and only available in certain circumstances with respect to FHL.

HMRC will normally allow relief where the lettings are short term (for example, weekly or fortnightly) and the owner is substantially involved with the holidaymakers in terms of their activities on and from the premises even if the lettings were for part of a year only.  However, this very much depends upon the facts and even if FHL treatment is obtained, this does not necessarily guarantee that business property relief will be available.

VAT

In principle the grant of a right to occupy holiday accommodation is standard rated for VAT purposes.  How this affects the owner depends on whether he is or needs to register for VAT.

The ordinary holiday lodge owner who is not carrying on a VAT registered business will not need to register and charge VAT if his total VATable income is under the VAT registration limit.  From 1 April 2006 the registration limit is £61,000.

A holiday lodge owner who is already registered for VAT will need to include the furnished holiday accommodation income in his VAT return, whatever the amount.

Disclaimer

Please note that the above represents general advice and does not take account of individual circumstances.  Potential investors should take advice on the consequences for their own particular circumstances.