With the changes to the tax rules many buy-to-let landlords are thinking of creative ways to overcome the loss of income. Their inability to claim tax relief on their mortgage interest and the removal of their wear and tear allowance has made a big difference to the average landlord’s bottom line.
One creative way is to look to running properties as holiday lets or short-term Airbnb lets. This can get around many of the restrictions of the Housing Acts, also the tax rules on buy-to-let (classed as investments) and it gives the freedom and flexibility of holiday lets which are classed for tax purposes as running a business.
However, short term and holiday lets need to be managed. Change-overs occur in days or weeks as opposed to months or years. This creates a good deal of work and administration. Granted landlords can use one of the established holiday letting sites or Airbnb, but it still takes time. Cleaners and maids need to be employed unless the landlord is willing to do the work herself.
With a holiday cottage set-up correctly as a business operation, and providing its in the right location where holiday traffic is in demand, then this can work out very effectively as a viable business. There are strict tax rules to follow with furnished holiday lets (FHL) governing the amount of time the property is available to let and not in your own use, but generally they are classed as a business with many tax benefits. This can be a nicely profitable occupation.
For the first 12 months of being a FHL, your property is effectively in a ‘probationary’ period and during this time, the potential and actual availability of your property will be established and for your FHL status to become permanent your property must:
- be available for 210 days (30 weeks),
- be let commercially as a holiday property for 105 days (15 weeks)
- and if occupied for more than 31 days by the same person/people, there must not be more than 155 days (total) of such longer lettings.
- The days when you, or your friends and family stay at the property, even for free or at a discounted rate, then these stays do not count towards the total occupation requirements.
Short- term Airbnb type lets in flats, are a bit different. With an average flat, for example, an Airbnb let for one week may gross you £1,200 or more, something equivalent to a month’s let with a standard buy-to-let on an assured shorthold tenancy. Much of the above caveats apply, but, are you sure that letting your flat in this way is lawful?
Airbnb is an online platform that allows property owners to let their homes, rooms and flats to visitors on an ad hoc basis. But flats are almost certainly leasehold, and leaseholders in England and Wales must comply with their lease terms as well as a host of other rules and regulations if they are to let in this way. The first obstacle might be that the lease forbids the leasehold from carrying on a business in what is otherwise a residential property.
Health and safety
As a landlord (and the Responsible Person) you are responsible for the safety of the occupants of your property under common law. You are obliged to comply with all health and safety laws. When you are a leaseholder with a long lease, and you decide to let the property as holiday accommodation, the health and safety laws would apply to you as you would be considered to be the Responsible Person and a landlord under the law.
The Regulatory Reform (Fire Safety) Order 2005, s.3 says that a responsible person for complying with the Order is the person who has control of the premises in connection with the carrying on of a trade, business or other undertaking (for profit or not). Airbnb is considered a holiday let and the leaseholder would be carrying on a business, which means that they would need to comply with the fire safety Order.
Since 2015, the government approved the Smoke and Carbon Monoxide Alarm (England) Regulations 2015 which apply in England and Wales and are required to be installed, at least one smoke alarm on every storey of a property on which there is a room being used wholly or partly as living accommodation, and a carbon monoxide alarm in any room used wholly or partly as living accommodation which contains a “solid fuel” appliance, coal fire or wood burning stove for example. The guidance currently provided by the Ministry of Housing, Communities and Local Government’s (formerly the Department for Communities and Local Government) indicates that ‘solid fuel’ is coal or wood, so does not apply to gas or oil appliances, though it is wise to provide one for these also.
Most leasehold agreements for flats place the responsibility for insuring the building (the block) on the freeholders, leaving the leaseholder to choose whether to insure its own contents by obtaining contents insurance. However, landlords’ insurance goes further, insuring against third party and accident claims which is a vital part of cover.
It is vital therefore that any leaseholders intending to let their property as a holiday let on Airbnb establish with their insurance company that doing so does not invalidated their insurance cover. Should their insurance be invalid for this reason, they may also be in breach of their mortgage obligations. Airbnb offers Host Guarantee and Host Protection Insurance, but this will only go so far, its small print states that “this (cover) does not take the place of homeowners or renters insurance or of adequate liability coverage.”
Leaseholders who have their flat on a mortgage must also make sure that by letting their property as a holiday let on Airbnb they are not in breach of the terms of their mortgage. The Council of Mortgage Lenders handbook states that the lender should advise the borrower that consent is to be obtained if the borrower wishes to sublet the property. Lenders also reserve the right to change the terms of a mortgage, or require a higher rate of interest if the borrower requests a change to allow sub-letting.
Mortgage interest rates are usually set for as long as the owner occupies the property as their only or main residence. Subletting usually requires consent in writing from the lender. Failing to obtain this can technically result in a demand for full repayment of the loan, or repossession of the property.
Letting a home for short periods does not normally need planning permission – it is still a family dwelling. However, a more permanent use of a property for short term lets, especially if it may in any way affect neighbours, is likely to be considered a change of use, and it will then require consent.
In most instances so far, planners have been reluctant to use their powers in this area but if complaints are generated it is likely that a local authority enforcement officer will issue a notice requiring a landlord to cease letting their property on a short-term basis. Failure to comply with this notice would be subject to a fine of up to £20,000.
In London, there is specific legislation which limits short term Airbnb type lets to no more than 90 nights per year, unless full planning permission is obtained. There are no such rules outside of the capital, meaning planning officers must decide on a case-by-case basis whether the short-term letting is causing unreasonable harm to neighbours.
The Deregulation Act 2015 amended earlier legislation for London to allow landlords to let their properties as temporary accommodation for up to 90 days, as long as the host remains liable to pay council tax. Local authorities can remove the 90 days rule from certain types of residential premises and in certain areas, so landlords should check with their local council before letting short-term.
Flats and houses come under the Use Classes Order 1987, this is a “C3” use for residential dwellings for planning law purposes, so from a planning point of view the authority would want to determine if there had been a change of use and whether planning permission would be needed. Does operating a short-term let Airbnb type business on a more or less permanganate basis with its associated disruption for neighbours represent a change of use?
There have been a couple of cases which could go against this use. In Nemcova v Fairfield Rents Ltd the Judge ruled that what was important was the duration of the stay “…for the property to be used as the occupier’s private residence there must be a degree of permanence going beyond being there for a weekend or a few nights in the week.” Therefore granting short-term lets for days or even weeks as opposed to months and years would breach the planning laws without gaining planning permission and would also breach most standard lease agreements, which usually contain a clause to use the property as a private residence only.
Another ruling, this time in Edinburgh, where the council took enforcement proceedings against a landlord which resulted in a court case due to the increased comings and goings of tourists causing inconvenience to neighbours. The landlord’s argument was that even though the property was used for short term holiday lets, it was still essentially a single residential dwelling. However, the court determined that there was a “material change of use” which would require planning permission. The landlord therefore would need to apply for change of use to Class C1 use, which is the same as for hotels, guest houses and hostels. Given the disturbance and complaints it would seems he would be unlikely to get it.
Landlords who let or licence a furnished room in a property which is their main or only residence can benefit from the ‘rent-a-room’ income tax relief scheme with tax relief is worth £7,500. But given the recent popularity of short Airbnb type lets, the government has added an additional test of ‘shared occupancy’ for rent a room relief to be available. In essence it means that the taxpayer must be living in the property for at least some of the time that the accommodation is let. So letting out the property while absent will no longer qualify for the rent-a-room relief.
The Lease Agreement
Leaseholders should ensure that they are not prevented from sub-letting by the wording of their lease. It is common for leases to contain such clauses and ordinarily leaseholders would need permission in writing from the freeholder if they intend to do short-term letting on a permanent basis.
Unfortunately, short term lets are usually in breach of flat leases and the flat owner run the risk of the freeholder taking enforcement action against them that could ultimately result in the forfeiture of their lease.
Leases sometimes prevent owners from keeping certain types of pets, so any short-term letting where the occupants have pets could breach the lease terms. It has been known for Airbnb lets to be used for rave parties, which would inevitably, as the landlord has no control, result in complaints and possible legal claims from other leaseholders.
So, although Airbnb and other online accommodation websites like it have revolutionised short-term holiday lets and have created opportunities for property owners to maximise rental income, it also presents potential short-term landlords with problems to overcome. Airbnb operates with minimal regulatory control and in England and Wales leaseholders need to be aware of the law, planning laws, lease restrictions, health and safety, insurance, taxation and other regulatory controls if they want to enter into this business.