Property has been a popular investment for many years and some people view their property portfolio as their retirement pot, particularly where their conventional pension is unlikely to produce sufficient income for their lifestyle. Buy to lets, commercial property investment and furnished holiday lets are all popular, but recently they have been joined by a ‘new kid on the block’ the serviced accommodation and this sector is growing substantially.
What is serviced accommodation?
Serviced accommodation is short term lets, usually less than 90 days but could be for longer, which are similar in standard to a hotel but are slightly cheaper for the consumer and will offer more spacious living areas and more of a homely feel. It must have a fully fitted kitchen, living area, bathroom, TV and WiFi, all utilities and a housekeeping service.
Why is it a good investment?
Serviced accommodation typically provides higher returns on your capital outlay than an equivalent buy to let. In fact the yield could be two to three times higher.
That sounds good – what are the downsides?
There may be problems with consent to let a property as service accommodation. You would need to check whether any restrictions applied to your lending or lease. You could also have problems with inappropriate tenants or there could be local resistance to your plans.
You may also find you have considerably longer void periods (where the property sits empty) than with a buy to let. However because you can charge a lot more rent this might not be an issue.
The property must be fully furnished and you will also have to provide your tenants with facilities equivalent to a hotel, so a good TV, bedding and towels, a fully equipped kitchen, and usually tea, coffee and milk.
In addition you will need to consider who will manage the bookings, provide property access for your guests, do the laundry and cleaning and meet and greet the guests. If you have time you could do all this yourself but most people use a company to manage all of this for them.
What else do I need to know?
Income from serviced accommodation is vatable. Therefore if your turnover exceeded £85,000 in a year you would need to become VAT registered. You could use a flat rate of 10.5% and there is a Tour Operators Margin Scheme that could also reduce your VAT liability. You would need to consider how this might affect any other business income you have in a personal capacity, such as self employment income.
Are there any tax advantages?
If your serviced accommodation income meets the criteria for furnished holiday lettings (FHL) tax treatment then there are definitely tax advantages. The FHL rules are:
- The property must be available to let for at least 210 days per year.
- The property must actually be let for at least 105 days a year.
- The property must not be let to the same person for more than 31 consecutive days for more than 155 days during the year.
If you manage to satisfy all three criteria then you can take advantage of the tax advantages that attach to FHLs:
- You will potentially qualify for capital gains tax trader reliefs on a disposal of the property (business assets roll-over relief, business asset disposal relief, gift relief). Conditions apply to each relief so take care to seek advice before disposal if you wish to take advantage of one of those reliefs.
- You can claim capital allowances for any plant and machinery, fixtures and fittings and integral features expenditure incurred. Such allowances are not available for buy to let properties. This usually means you can set the cost off in full against the rental income in the year of purchase for income or corporation tax purposes.
- Income from FHLs counts as earnings for pension purposes. That means you can potentially make larger tax deductible contributions into your pension scheme. You would need to seek tax advice in this area though, as pension rules are complicated and you may be subject to other restrictions.
- There are no interest restrictions for loans taken out on FHLs. That means you continue to get tax relief at your top income tax rate on mortgage interest and other finance costs.
Is it worth investing in serviced accommodation?
It is certainly worth considering, due to the advantages mentioned in this article. If you do want to invest location is key. Most service accommodation is rented by people looking for a cheaper alternative to a hotel – so it could be for a family holiday or maybe someone working away from home. If you get the location right you could find yourself with a very lucrative investment!
The content in this blog is correct as at 22 June 2022. See terms and conditions.