Buy-to-Let Watch Episode 10

June 6, 2023

In the latest instalment of our Buy-to-Let Watch series, Buy-to-Let Watch Episode 10 | An Extraordinary Long View on Short-Term Lets, we explore the key regulatory developments shaping the short-term let market in 2023. This follows our previous update, Buy to Let Watch Episode 9, which examined the challenges landlords face in a shifting rental environment.

Recent government announcements have outlined potential reforms to the rules governing short-term rental properties, including holiday lets and platforms such as Airbnb. These proposals form part of a broader effort to balance the economic benefits of tourism with the increasing demand for affordable housing in local communities.

Such changes may influence the recommendations brokers provide to clients considering short-term letting. Landlords exploring this sector should stay informed, particularly where compliance requirements and local authority expectations may evolve.

As the regulatory landscape develops, advisers need to reassess their guidance and ensure clients understand how these adjustments might affect their rental strategies. Episode 10 offers a long-view analysis of the short-term let market, highlighting the considerations brokers should keep in mind when supporting clients.

Short-term lets qualify as a trade for tax purposes if they meet specific criteria

Short-term lets can be treated as a trade for tax purposes, but only if they meet HMRC’s defined criteria. As the popularity of holiday accommodation grows, the government is preparing significant regulatory changes to bring greater oversight to this part of the rental sector.

One of the most notable proposals is the introduction of mandatory planning permission for short-term lets, particularly in areas already affected by housing shortages. This measure is intended to curb the rapid expansion of holiday properties in communities where long-term housing is in short supply.

Alongside the planning requirement, the government has also proposed a new national registration scheme for short-term rentals. This system would establish a central record of properties, locations and operating details. By gathering reliable data, policymakers will be better equipped to assess the impact of short-term lets and implement targeted housing policies.

These recommendations form part of the Levelling-up and Regeneration Bill, which remains under parliamentary consideration. The final direction will be shaped by the outcome of the government consultation, which closed on 7 June 2023. If the consultation findings support the proposals, the new rules are expected to progress into legislation later in the year.

The surge in short-term lets has been driven mainly by the rise in domestic staycations and the tax advantages associated with qualifying holiday-let properties. As a result, the proposed regulations aim to balance landlord opportunity with community needs by addressing housing pressures and promoting a more sustainable rental market.

For advisers supporting investor clients, staying informed on evolving legislation is crucial. You can explore more detailed guidance through our resources on buy-to-let mortgages and stay updated with further developments via our lender updates for brokers.

Lenders typically fall into one of two camps of criteria

Lender criteria for short-term lets usually fall into two clear categories, and understanding these distinctions is crucial for brokers supporting clients in this niche. The tax rules for short-term let properties differ significantly from those for standard buy-to-let homes, and these differences can affect affordability and long-term planning.

Short-term lets are treated as a trading activity for tax purposes when they meet specific conditions, including making the property available to let for at least 210 days per year. When these criteria are met, investors may qualify for a range of valuable tax incentives, such as full mortgage interest relief, which remains one of the most substantial advantages in this sector.

This treatment contrasts sharply with the position for traditional buy-to-let mortgages, where mortgage interest relief is restricted to a basic-rate 20% tax credit for individuals. Because short-term lets are exempt from this cap, they can offer far greater tax efficiency, particularly for higher-rate and additional-rate taxpayers looking to maximise post-tax returns. This difference alone makes short-term letting an increasingly attractive strategy for landlords seeking stronger income performance and greater flexibility.

For brokers, it is essential to ensure clients appreciate how these tax considerations, lending criteria and operational requirements affect profitability. Clear guidance can help investors decide whether a short-term let, a standard BTL, or a specialist lender route is most suitable. Directing clients toward expert resources, including our support through our mortgage network, or checking live product changes via our lender updates for brokers, can provide added clarity when structuring cases.

By understanding these tax distinctions and lender expectations, investors are better positioned to evaluate the long-term financial impact of a short-term let investment and choose the most effective route for their portfolio strategy.

Higher yields

Rising demand for short-term holiday lets continues across the UK, mainly driven by the potential for higher rental yields than traditional Buy-to-Let investments. In many popular tourist destinations, a well-positioned holiday let can generate peak-season weekly income that rivals, and often exceeds, the typical monthly return from a standard buy-to-let property. For brokers supporting landlords exploring stronger yield opportunities, directing clients to our buy-to-let mortgage guide can provide deeper insight into structuring these cases effectively.

Financial Benefits and Key Challenges

Short-term lets can deliver strong rental yields, particularly during periods of rising interest rates, making them an appealing option for many property investors. However, higher income potential comes with additional responsibilities. Landlords must factor in the cost of furnishings, ongoing maintenance, property management, and digital marketing for holiday lets. These operational expenses directly affect overall returns, so understanding the true cost of running a short-term rental is essential before moving forward with any investment strategy.

Mortgage Factors for Short-Term and Holiday Lets

From a lending perspective, short-term let mortgages provide flexibility for properties that may struggle to meet traditional affordability assessments. This can be particularly useful for investors targeting seasonal or premium-rate rental markets. However, advisers must be mindful of lender-specific criteria, as short-term let products vary significantly across the market. Ensuring clients meet both affordability and eligibility requirements is crucial to ensuring a smooth, efficient application process.

You can explore more detailed guidance through our resources on holiday let finance options.

Working with Specialist Lenders

Lenders offering short-term let products generally fall into two categories. Specialist lenders, including brands such as Foundation and Molo, tend to offer greater flexibility for holiday-let investors. These lenders typically streamline the process by avoiding complex business assessments. Unlike traditional buy-to-let mortgages, they may not require an Assured Shorthold Tenancy agreement. Instead, they assess affordability using standard BTL calculations, which can open up more opportunities for clients whose properties generate varied or seasonal income.

Why Lender Criteria Matters for Advisers

Understanding how different lenders approach short-term let applications is essential for mortgage advisers. Each provider applies its own set of requirements, including acceptable property types and minimum income, as well as rental assessment methods. Advisers who stay ahead of these nuances are better equipped to match clients with the most suitable products, improving outcomes and ensuring long-term investment success.

By reviewing the range of lender criteria and the opportunities within the specialist lending market, advisers can confidently support clients pursuing holiday-let investment strategies and maximise the potential of short-term rental income.

Exploring Holiday Let Income with Commercially Minded Lenders

Securing finance for a holiday let mortgage requires working with lenders who understand the realities of short-term rental income. While many lenders will consider traditional holiday lets, far fewer are willing to assess Airbnb or serviced accommodation income unless they operate with a stronger commercial focus.

Partnering with a commercially oriented lender can give brokers and landlords more flexibility. These lenders look beyond standard AST projections and are willing to assess applications based on the property’s proven holiday rental income. However, the way income is calculated varies, and each provider may consider only a portion of the submitted figures.

One example is Paragon, which uses a more tailored approach for established holiday rental properties. If the property has been owned for more than two years and there are two full years of accounts, Paragon may assess the application using actual performance data. Their method involves averaging the gross annual holiday let income over 12 months to determine affordability.

To progress, the rental income must satisfy an Interest Coverage Ratio (ICR) of 150 per cent, ensuring the loan remains sustainable. This detailed assessment allows advisers to position cases confidently for clients who rely on seasonal or varied rental income.

Working with a lender that understands the sector can meaningfully improve outcomes. For brokers supporting landlords with expanding portfolios, exploring specialist providers can open opportunities not found in mainstream lending. To compare wider options, review our guide to holiday let mortgages and discover how different lenders approach criteria, income assessment and rental coverage.

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