UK holiday homes: The shape of things to come?

If you happen to be fortunate enough to consider purchasing a second property as a holiday home, is it a better investment to get a buy-to-let that you can rent out on a long-term basis, or capitalise on the staycation boom and get a furnished holiday let?

Overview:

  • Buy-to-lets are becoming more tightly regulated, whereas furnished holiday lets, which are classed as a business, are experiencing heightened investment appeal – plus they also come with appealing tax advantages.
  • There’s been an upswing in domestic holiday bookings and mortgage options as a result of the pandemic, meaning favourable lending rates are easier to find – a trend that’s expected to continue for some time.
  • However, before making a purchase, ensure you’ve weighed up the pros and cons related to everything from location to property type, to additional stamp duty costs – as well as understanding how this investment might fit into your long-term financial plans.

For the majority of people, property investment means buy-to-let or, less frequently, owning and letting commercial premises or land. Yet, more recently, many have been pleasantly surprised to discover a highly enjoyable and worthy alternative – in the shape of a UK holiday home investment.

Weekend getaway pads have been popular for a long time, plus they can also generate an income – this is all the more pertinent now that the ‘staycation’ has become the best go-to option in the current climate.

Just as buy-to-let has become more tightly regulated – for example, investors cannot deduct interest on a mortgage from rental income declared to HM Revenue & Customs (HMRC) – the humble holiday home has become a viable and attractive option.

Tax benefits to boot

But why the attraction? First and foremost, HMRC classifies a ‘furnished holiday let’ as a business, and so subsequently you pay lower taxes.

Of course, there are set criteria for owners to meet – most notably, that the home is available to let for 201 days a year and is actually let for at least 105 days, with no single letting being more than 31 days. Furthermore, the property must be fully furnished.

While highly specific, these rules are worth adhering to, in order to be classed as a business. This would entail paying business rates instead of the usually higher Council Tax, while holiday homeowners can offset many operating costs against tax. What’s more, if the qualifying conditions are met for a furnished holiday let, Inheritance Tax allowances can also be utilised.

The fact that you, the owner, can enjoy your holiday home for up to 155 days per year without compromising the tax advantages might just seal the deal for you.

Wondering how to maximise your holiday lettings? Locations such as the Lake District are popular all year round with walkers, whereas Cornwall or other coastal areas usually have peak visitors in the spring and summer.

The pick of the products and rates

“This investment option has become increasingly attractive because of COVID-19 and the attendant rise in domestic holidays, together with the bedding in of remote working practices,” shares Paul Johnson, Client Banking and Mortgage Manager at St. James’s Place.

Rental agency Sykes Holiday Cottages recently shared that UK holiday bookings for July and August were 126% more than the same time last year.1

While it was positive news to hear of a jump in foreign holiday bookings following the Prime Minister’s announcement about the roadmap out of lockdown, many factors could make the return of international travel rather complex. These include the development of vaccine programmes both at home and abroad, the potential implementation of ‘vaccine passports’, the location of persistent COVID-19 variants, and whether other countries will give Brits the green light to enter.

Even when the worldwide travel sector regains some form of normality, staycations are bound to still be a draw. “We’ve seen a 50% increase in holiday let enquiries over the past five years at St. James’s Place,” Johnson comments, suggesting it’s a trend that has traction.

He goes on to say that there are many people who don’t realise how simple it is to set up a holiday let mortgage:

“At the moment, there are loads of products available, and lenders vying for business – making it easier to get an appropriate mortgage at competitive rates.”

Lenders will, of course, need to be sure that a holiday homeowner can cover mortgage payments during the low seasons for lettings – or when you occupy the property yourself.

For that reason, a standard buy-to-let mortgage isn’t an option, says Johnsons – you instead need one designed for a holiday home. Most require a minimum of a 25% deposit, and the best interest rates are available for those who can afford to put down a 40% deposit.

Factors, factors, factors

It goes without saying that there are plenty of other factors to consider before taking on a holiday let, ranging from the type of holiday home you purchase (for example, is it aimed at couples or whole families and groups of friends?) and whether you want to target an increasingly mobile, flexible workforce (for instance, by having Wi-Fi internet installed), to your choice of location.

Here’s what Johnson proposes:

“Buy in a location where you would want to holiday yourself. It’s likely it will be a popular tourist destination anyway, and using it yourself maximises your investment in a non-financial way.”

Other factors to consider are the additional 3% stamp duty charged on the purchase price of holiday homes, and the ongoing cost and arrangement of cleaning and maintenance between tenants. The reassuring aspect of this is that most areas popular with holiday home investors have a ready network of letting agents and local residents at work, doing everything from tidying up gardens to changing bed linen – and you can probably offset their charges against tax.

Thinking over the longer term, income from a holiday home or potential ongoing capital appreciation can be used to save for retirement or complement a pension – although be aware that residential property cannot be put into self-invested personal pensions.

Here at Wellesley, we’re here to offer professional, expert guidance in helping you make sense of this decision, as part of your overall financial plan. And remember that, unusually, this is one investment type that ticks the boxes for both your long-term finances and your short-term well-being. Could it be the shape of things to come?

Sources:

1 Sykes Holiday Cottages, February 2021

Your home or other property may be repossessed if you do not keep up repayments on your mortgage.

The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is dependent on individual circumstances.

Some Buy-to-Let mortgages are not regulated by the Financial Conduct Authority.

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