The second instalment of our LBNB Ebook: Getting Started in Holiday Rentals
An ebook by the Luxury BnB Team for those who want to set up their own hospitality business.
By Abbey Warne and Dominic Johnson
Welcome to the second part of our brand new ebook! Our ebook aims to help you set up your very own rental property, and in this chapter (1b) we will cover insurance, tax implications, business rates, research and profit tips. Getting these sorted might initially seem like quite a daunting and complex process, but don’t worry – we’ve got you covered with expert advice to help give you a head start.
Information from Gary Hodgson at HODGSON INSURANCE
Insurance cover for your B&B, guest house or holiday home is a vital cog in the safe running of your business and for peace of mind should the worse happen. Here we give you some of our knowledge and tips when searching for insurance:
- Start with the right policy:
- Make sure your business is insured on a specialist guest house package policy.
- We see quite often customers have taken out a standard home policy via an online comparison site, and believe the public liability cover will cover them for taking in guests because they put down they’re B&B owners.
- A standard home insurance policy will not give you the correct liability cover to safeguard you against guests staying.
- Don’t try and obtain a public liability policy for guests separate to your main home insurance, thinking you’ll keep prices down.
- Always look for a single package policy that will include the correct liabilities and combine other main covers like buildings and contents.
2. Where to obtain the right policy?
- We would always recommend speaking to an insurance broker.
- A broker should have access to a panel of specialist guest house schemes.
3. Main covers to include:
- BUILDINGS: If you own the property then include the buildings, this must represent the full rebuilding cost of the property, should for example, it completely burn down.
- CONTENTS: Most guest houses are owner occupied, if that’s the case make sure the policy includes not just business contents, but also includes cover for your personal contents. Some policies include this altogether, but some insurers it can be included as an optional extra
- PORTABLE CONTENTS: In addition if you wish to include portable contents outside the home like jewellery, mobile phones etc, then again this an optional extra that only a few insurance companies provide
- PUBLIC LIABILITY: A specialist B&B or guest house policy will automatically include Public Liability cover for your guests should they get injured or maybe food poisoned whilst staying. The limits will generally be £2 or £5 million.
- EMPLOYERS LIABILITY: If you intend on employing staff, even temporary staff, then you legally have to include Employers Liability cover. This will protect you should an employee injury themselves whilst working for you. Not always automatically included, so if you have staff make sure this is included. Employers Liability cover limits should always be £10 million.
- BUSINESS INTERRUPTION: If, for example, a burst water pipe causing flooding in bedrooms, you may not be able to rent those rooms out for a number of weeks or months.Business interruption covers you for loss of income due to an insured peril like escape of water or a fire. A vital part of a business insurance policy, some smaller B&B policies may not offer this cover or only offer as extra.
Other not so vital covers will either be included or you can pay extra for, but the above are main areas you must look at.
Information from Matt Bryant at ZigZag Accountants
In running a bed and breakfast you will need comprehensive insurance to protect you, your customers, and your reputation. You are responsible for the welfare of your customers, suppliers, and any staff you employ.
- It’s important that your insurance includes public liability and employers’ liability insurance in case somebody falls ill or is injured as a result of being on your premises.
- This is on top of the normal building cover in case of theft, accidental damage, fire or storm damage, and you also require cover for all your fixtures, fittings, and contents.
- Not to mention your guests’ belongings too
- Additionally, you should have product liability cover as a safeguard against potential food poisoning, business interruption in case you are unable to trade for a period of time, an example of this is Covid-19, and financial cover for any money held on your premises.
The level of cover will need to be reviewed regularly as your business grows to ensure you have the correct level of cover.
What are the rules if the property is sold without VAT?
- Advantage of VAT – Maximum rule.
- Need to charge 20% more
Information from Matt Bryant at ZigZag Accountants
When running a guest house, B&B or any other kind of hospitality business, there are many important factors to consider, and one of the most important things to think about is tax, particularly VAT.
- Many small businesses are unsure whether or not they actually need to register for VAT.
- If your earnings from the property are over £85k then you must be VAT registered.
- To check the current threshold you can either ask your accountant or go to Gov VAT Registration
From your effective date of registration, you must:
- Charge the right amount of VAT
- Pay any VAT due to HMRC
- Submit VAT Returns
- Keep VAT records and a VAT account
Most VAT registered businesses that earn over £85,000 must also follow the rules for ‘Making Tax Digital for VAT’. Your accountant should be able to assist with VAT, from finding out whether you have to register, deciding on a suitable VAT scheme and preparing the VAT returns.
Advantages of being VAT registered:
- You can claim back the VAT on purchases – this can be a huge cost saving of 20% on all purchases.
- Many agents or OTAs charge VAT and so you can claim this back – e.g. one of the agents I use charge me 22% + VAT = 26.4%.
- So if you plan to use these providers extensively this needs to be considered.
- Google and Facebook do not charge VAT on their ad spend in the UK.
Disadvantages of being VAT registered:
- You need to charge VAT on all rental income.
- Since the majority of your guests (assuming this is the case) will not claim back VAT (individuals not businesses) then your fees will be increased by 20%.
- You will need to do a VAT return every month but this is very simple with most accounting bookkeeping systems.
EXTRA VAT INFORMATION
Can I register for VAT if my revenue is below £85k?
- Yes, it is still possible to register yourself for VAT even if your revenue is below £85k.
New builds and VAT:
- If you have a new build you might be able to recoup the VAT even if you are not registered – this is the case when people buy new homes.
- You can also claim back up.
Property and not business:
- The £85k is related to the property and not your business
- So if you own 10 properties charging less than < £85k rev per year, you do not need to be VAT registered.
Flat rate scheme:
- There is a flat rate scheme where you charge 20% but only need to send the government less than 20% (for hotels it’s normally 8.5%).
- At the moment this is all changed due to covid – check the government website for further information: Gov Flat Rate Share
More Insurance Information from Gary Hodgson at HODGSON INSURANCE
All policies will have a standard policy excess – this is the amount you will need to pay towards any claims costs. A standard excess should range from £100-£250. We don’t recommend going any higher than this unless you’re getting a significant saving by doing so. Look closely in policy conditions as sometimes higher excess’s can be added for example a flood risk area, flat roof excess’s, subsidence and similar.
Most guest house policies will include theft caused by violent or forcible entry only. Some, more comprehensive policies, include full theft by guests, whether it’s a break in or if a guest just walks away with a tv. Check you’re happy with the level of theft cover.
Some policies have no security conditions which makes it easier not having to worry if you have the correct locks, especially a hospitality business where guests are coming in and out all the time. Many policies do however have minimum security requirements, if so then make sure you can adhere to them.
Every B&B owner operates differently, you may just let bedrooms to holiday guests, but if you allow guests access to the kitchen cooking facilities, you maybe take in DSS/council referrals or you have a self-catering annexe this can completely change the type of policy you need to be on. Make sure you give your broker a full description on how you intend to run your business.
Check the small print:
There isn’t a standard guest house policy. Every policy has very different policy terms, conditions and claim excess’s. Make sure you always check the finer points of any quote. An insurance broker worth their weight should help and point out any significant policy conditions or exclusions.
How much will you pay:
It’s impossible to say what you will pay for your insurance as all guest houses have different requirements, sums insured and different postcodes. An example cost of a recent guest house policy we’ve set up…
- A 5 bed guest house in Gwynedd LL30, with buildings insured for £462,000 and contents at £85,000.
- Annual Premium: £628 with optional Legal Expenses £36.
- The policy had just a £150 claim excess, no security conditions and full theft by guests cover included.
Using a broker:
Yes, we’re possibly being biased but we’d always recommend using an independent insurance broker, possibly a broker who specialises in hospitality trades. A broker should help find the correct policy for your needs, will be able to make any changes during the year, help with claims advice and be able to search the market again at renewal time. Also brokers don’t all have access to the same providers and schemes, so it’s recommended to try 2 to 3 brokers so you get a good spread of quotations.
How much should you insure your buildings for?
The buildings should represent the full rebuilding cost of the property including debris removal, architect and associated fees. If you have a mortgage they’ll often insist on you insuring for a certain amount. A free website you can login to and get an estimate of the rebuild is the BCIS website here. A more accurate way is paying for a chartered building surveyor, but will often be £500+ for this type of report.
This section will take you through the research you need to do step-by-step prior to setting up your holiday rental property.
Identifying the market
- With your place in mind – location, room size, types of guest.
- Start by searching for properties closest to your new place in the overall proposition.
- Find out where they market their properties and who to.
- Find their booking form and create a spreadsheet of total possible income.
- It can be quite tricky to find this information and you’ll need to have a good poke around.
- Where possible, under estimate.
- Many holiday lets say a property is not available when the owners are using it.
- Sometimes it’s hard to get a full year’s bookings.
- Profile at least 3 properties where possible. The purpose of this is more about seeing where the busy times are and also get a rough idea of revenue.
- Create a rough price plan.
- At this stage look at all the possible outgoing and estimate the costs.
- You can then divide this by 12 to get a monthly outgoing.
- Compare this month on month to your estimated pricing to get a break-even point.
- Compare this to the above and see if it is realistic and you are comfortable with the risk.
- Consider again your personal situation and work out if you can afford the risk.
- Where possible, overestimate the outgoing line and underestimate the income.
Holiday rental in the UK is often peaky and so you’ll need to manage cash throughout the year. Is this to be considered?
- If you are entering the holiday let market to finance a house you want to use, you might need to make compromises here.
- What is often perfect for a holiday home is often not workable for a house you live in.
- For example, storage. You need very little storage space for a holiday let.
Information from Catax
Capital Allowances – A Much-Needed Cash-Injection for B&B Owners
2020 will always be known as the year of staycations, with many families avoiding holidays abroad in favor of staying in the UK. Although the Bed & Breakfast industry in some areas of the country has enjoyed a market boost, others have faced significant cash flow challenges due to the ever-changing COVID-19 restrictions. Here, Clare Mckee from specialist tax relief firm, Catax, explains how a cash-injection in the form of capital allowances can be a lifeline for many businesses, and what to consider if you’re looking to buy a B&B property.
What are capital allowances?
“Capital allowances are a type of tax relief that offsets the hidden expenditure in commercial property, including B&Bs. This comprises elements such as air conditioning, heating and lighting – essentially everything that would remain in the building if you tipped it upside down! It can be claimed by anyone that owns their commercial building and is a UK taxpayer. However, if you let out a residential building, it must qualify as a furnished holiday lettings business to be eligible – it has to be available for holiday letting for at least 210 days of the year and let out for 105 days or more. Contrary to misconceptions, claiming for capital allowances will not impact the value of the property or capital gains tax.”
Do capital allowances have to be claimed on recent property purchases, or can it be processed for older sales too?
“Capital allowances can be claimed at any time, as long as you still own the building. We routinely process applications for expenditure that incurred 10 years ago or even longer! However, we would highly encourage owners to make a claim when they purchase the property or at the earliest opportunity, in order to benefit from the tax relief available. Should the building be sold at a later date then the balance of the claim can be retained or passed to the new owner. In addition to purchases, capital allowances can also be applied for on property refurbishments and extensions or new builds.”
What if the property was built by the owner many years ago and they have no records of the build costs, how can it be identified which costs can be claimed on capital allowances?
“It is not essential to provide records/invoices relating to the construction expenditure. Accounts and tax computations from the period of construction can often provide the necessary information, together with a conversation with the accountant that acted at the time. The land registry is often able to provide evidence of the price paid for land and this provides a basis from which to calculate the construction costs.”
If a B&B business doesn’t have sufficient taxable profits to benefit from capital allowances, could they still be eligible?
“Yes, it is definitely worthwhile to still identify qualifying capital allowances, especially if you expect your business to make taxable profits in the near future. Sometimes, capital allowances do not equate to an instant return, however they can be used to offset capital gains tax liabilities, passed to new owners and more. Ultimately, each set of circumstances is different, and I’d recommend carrying out an appraisal and seeking expert advice.”
Is this something that accountants usually deal with?
“Most accountants provide some form of capital allowances advice. However, as capital allowances claims are extremely complex, they are ideally suited to being dealt with on a standalone basis separately to other tax matters. Capital allowances specialists possess a specific skill set with a more detailed and up-to-date understanding of what is included in capital allowances than most advisors who deal with this area of taxation less frequently. This ensures that property owners get the largest cash injection possible; for example, at Catax, our average client benefit for a Capital Allowances claim is £53,000.”
So, what is the process?
“The first stage of the process is to collect all the information for the Capital Allowances claim, including information on the property purchase, as well as details of any refurbishment expenditure. A specialist will then assess your claim and undertake any technical analysis. Generally, a surveyor will then conduct a site survey of your building to see if there’s anything further that could be included within the claim. It is then up to the capital allowances specialist to maximise the value of your claim and produce a report, which is submitted by the HMRC via your accountant. Once the claim is processed and completed, you will receive your refund!”
To find out more information about Catax and its Capital Allowances service, contact Clare Mckee, Catax hospitality specialist firstname.lastname@example.org or call Clare on 0121 293 1197 | www.catax.com
Make sure you read our essential guide to short-stay holiday let tax.
More information on Tax Implications from Matt Bryant at ZigZag Accountants
Capital Allowances for Commercial Properties:
It is estimated that over half of all hospitality businesses in the UK haven’t claimed their capital allowance entitlement, which could be worth hundreds of thousands of pounds. It is important to get your accountant’s early involvement to look at analysing historic expenditure to compile robust capital allowance claims. By identifying qualifying assets within the building which attract tax relief. In some cases, more than half the project expenditure will attract capital allowances, including professional fees.
Where there has been constructed or undertaken the construction of a new building or an extension to an existing building you are able to analyse the costs incurred and to fully comprehend the construction processes involved and the documentation used to capture the costs, and hence maximise the level of allowances available. Early involvement in the construction planning phase can offer opportunities to proactively manage the tax relief process and often increase the level of allowances available.
Purchase of an existing property:
A client may purchase an existing building, either for use in their business or as a commercial investment. In these cases, in order to claim capital allowances, the purchase price must be split down into the components of the building and the land. The changes to the rules for claiming capital allowances on second-hand plant and machinery fixtures, brought in by the Finance Act 2012, have a significant impact on property buyers. Whilst property sellers will not suffer directly from the new rules, there will be consequences for all businesses incurring expenditure on fixtures within commercial property and we offer a consultancy service to advise both buyers and sellers on the impact of these changes to them and the allowances within their properties. Timely advice can ensure that allowances remain available to purchasers and subsequent owners, which could otherwise be lost.
Refurbishment, alterations and fit-out works:
Expenditure incurred on an existing building can be analysed in a similar way to the cost of a new building or extension, by a detailed review of actual invoiced costs. The value of relief available in connection with refurbishments, alterations or fit-out works is generally enhanced by capturing the cost of all incidental expenditure. Whilst the cost of the works may be capitalised, some costs may be capitalised repairs and attract 100% tax relief in the current year.
Capital Gains Tax for B&B Owners:
When you decide you want to sell your B&B you will have tax to pay.
- There are several factors which will impact your Capital Gains Tax position on the sale of a B&B, it is most certainly not a “work it out yourself” guide.
- It is advisable to get advice from you accountant before your sale.
There are potentially several tax reliefs available. Some of the current reliefs available in 2020 which can help reduce (or eliminate) Capital Gains Tax are:
- Principal Private Residence Relief
- Letting Relief
- Annual exemption
- Entrepreneurs’ Relief
Relief everybody gets:
Every person is entitled to a CGT exemption. For the tax year 2020/21 the exemption is £12,300.
Information from Matt Bryant at ZigZag Accountants
Business rates generally apply to bed and breakfast establishments unless;
a) The business does not intend to offer short-stay accommodation to more than six people simultaneously.
b) You occupy part of the property as your only or main home, and letting out the rooms is subsidiary to the use of the rest of the house as your home.
- Business rates apply to a self-catering establishment unless you offer short-term lets for fewer than 140 days a year.
- Only the part of the property used for business purposes is subject to business rates.
- Your local authority will calculate the business rates for your property based on its ‘rateable value’.
You will need to pay business rates if you are providing serviced or self-catering accommodation, unless you qualify for Small Business Rate Relief, OR for bed and breakfast if:
- You do not intend to offer short stay accommodation to more than six people simultaneously, and;
- You (the owner) occupy part of the property as your only or main home, and;
- Letting out the rooms is subsidiary to the use of the rest of the house as your home (‘subsidiary’ is based on factors such as the length of your season, the scale of modifications undertaken for guests and the proportion of the house you occupy).
- For example, if you only let only two of six bedrooms in your property as a bed and breakfast, business rates are unlikely to apply. However, if you let four of your six bedrooms, you will probably have to pay business rates. Your local authority will be able to advise you.
Note: If you must pay business rates, but use your property for business and domestic purposes, it is only the part you use for business purposes that is subject to business rates.
Council Tax and Valuation Officers:
- The domestic accommodation is liable to council tax.
- Where parts of a house have a shared use, such as a kitchen or dining room, the Valuation Officer will visit the property and assess the amount to be paid.
Small Business Rate Relief:
- Small Business Rate Relief is available to businesses. For up to date information please visit the gov website
- Currently as of 2020 where the rateable value of the property is less than £15,000, businesses with a rateable value of up to £12,000 receive 100% relief.
- While businesses with a rateable value between £12,000 and £15,000 receive tapered relief.
Extra Small Business Rate Information:
If you have a second property, you’ll keep getting any existing relief on your main property for 12 months. You can still get Small Business Rate relief on your main property after this if both of the following apply:
- None of your properties have a rateable value above £2,899
- The total rateable value of all your properties is less than £20,000 (£28,000 in London)
Note: If your property has a rateable value of more than £15,000 but less than £51,000 your bill will be calculated using the small business multiplier, which is lower than the standard multiplier.
How are business rates calculated?
- If you need to pay business rates, your property will have a ‘rateable value’ based on the rental value of your property.
- These values are set by an independent Government Agency, the Valuation Office Agency (VOA).
Note: Due to the impact of COVID-19, the Government has announced that the planned business rate revaluation will no longer take place in 2021.
Where can you get details of a property’s Rateable value?
- You can obtain details of the rateable value of your property from your local Valuation Office or the business rates department of your local authority.
- The VOA website allows you to access entries in local rating lists.
Advice on lodging an appeal
- You can make an appeal against the 2017 valuation of your property at any time during the life of the valuation (i.e. until April 1, 2022).
- You are advised to appeal as soon as possible as you will have to pay your rates in full until a decision has been reached and, for most appeals, there are limits on how far any resulting change in value will be backdated.
How are appeals made?
- Appeals are made in the form of a ‘proposal’ to the local Valuation Officer or online through the VOA website.
- If an agreement is not reached within three months of receipt of your proposal, it will be automatically referred to the local Valuation Tribunal, which will hear the case and give a decision.
What do people look for?
- Who your ideal guest is (demographics)
- What your advantages are
- How you differ from your competition
- Which rooms and services got the best and worst feedback
- What your weaknesses are
- What your vision is
Every business is different and will have their own targets and profit margins, but it is important to maximise these. Below are some tips to consider:
- Systemise Everything
- Know Your Key Drivers and Monitor Them
- Focus on a few key metrics. Eg. Gross profit margin. Bed Occupancy
- Review Your Prices
- Look at your price points.
- Work your margins.
- Maximise Efficiency, Automate.
- Use systems to monitor effectiveness.
- Justify Costs
- Look at all your costs, Are they necessary?
Extra things to consider:
- Hen parties, dog walking, water sports – who are your audience and what do you think to that?
- Cancellation policies, bedrooms, kitchen equipment etc.
- Look at the other properties and copy their terms.
- Many ask for 30% up front to secure the booking, balance within 60 days.
- Then the damage deposit needs to cover the insurance (payment you pay with any claim). Mine is £500.
Identifying the competition (nearby businesses):
- It is useful to select similar size properties close to yours and also properties close by.
- Consider what size of property is selling
Final things to consider in terms of profit:
Setup estimate & cashflow forecast (for year 1)
- You need to be realistic about when you will launch which will dictate the first year’s earnings.
- Maybe your place is a summer place and so launching in October will leave a low year 1 revenue.
SUMMARY OF CHAPTER 1B
This brings Chapter 1B to a close, and we hope you now feel more confident when it comes to the more complex areas in setting up a holiday rental property.
It is definitely worth it in the end though, especially when you see guests enjoying themselves and the great reviews come rolling in, which is why it is good to cover all the ground you can at the very beginning, so you don’t run into issues later on down the line.
Keep a look out for Chapter 2 which will tell you everything you need to know about business plans, legal entity and finance – don’t miss it!
This article was first published in Issue 46 of the Luxury BnB Magazine in February 2021: