IS A HOLIDAY HOME IN THE UK A GOOD SOURCE OF INCOME?

Property investment for most people means buy-to-let or, less frequently, owning and letting commercial premises or land. However, many are discovering a surprising and often highly enjoyable alternative: a UK holiday home investment.

While weekend boltholes have long been a source of great pleasure, they can also provide income – especially now that the ‘staycation’ has become both fashionable and necessary.

As buy-to-let has become more restrictive – investors cannot, for example, deduct interest on a mortgage from rental income declared to HM Revenue & Customs (HMRC) – so holiday home appeal has grown.

This is because HMRC classifies a ‘furnished holiday let’ as a business, with consequently lower taxes.

Owners must meet certain criteria – chiefly 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 exceeding 31 days. And, of course, the property must be fully furnished.

These rules are highly specific, but sticking to them is worthwhile in order to be classed as a business.

This would mean paying business rates instead of the usually higher Council Tax, while holiday homeowners can offset many operating costs against tax. When it comes to selling the property, the Capital Gains Tax liability is lower than on a buy-to-let investment. And if the qualifying conditions are met for a furnished holiday let, there are also Inheritance Tax allowances you can utilise.

There’s an extra bonus, too: you, as the owner, can use your holiday home for up to 155 days per year without compromising the tax advantages.

Alternatively, you may wish instead to maximise holiday lettings. Locations like the Lake District have year-round vacation markets for walkers, whereas Cornwall or other coastal havens are typically much busier in the spring and summer than at other times.

“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,” says Paul Johnson, Client Banking and Mortgage Manager at St. James's Place.

Rental agency Sykes Holiday Cottages recently reported that UK holiday bookings for July and August were up 126% compared to the same time last year1.

And while airlines and travel companies reported a jump in foreign holiday bookings after the Prime Minister announced his roadmap out of lockdown, there are many factors that could complicate the resumption of international travel.

These include the progression of vaccine rollouts at home and abroad, the possible introduction of ‘vaccine passports’, the location of persistent COVID-19 variants, and whether other countries will agree to let British tourists in.

Even when the global travel sector returns to a semblance of normality, it’s unlikely interest in staycations will wane. “We’ve seen a 50% increase in holiday let enquiries over the past five years at St. James's Place,” Johnson notes, suggesting it’s more than a short-term trend.

He adds 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, however, need to be reassured about a holiday homeowner’s ability to cover mortgage payments during ‘quiet seasons’ for letting – or when you occupy the property yourself.

For that reason, says Johnson, you cannot use a standard buy-to-let mortgage, and instead need one designed for a holiday home. Most require at least a 25% deposit, and the best interest rates are available to those who can put down a 40% deposit.

There are plenty of other considerations you should take into account before taking on a holiday let, of course.

These range from the type of holiday home you buy (is it aimed at couples or whole families and groups of friends?) and whether you want to cater to an increasingly mobile, flexible workforce (for example, by ensuring you have Wi-Fi internet installed), to where you buy.

“Buy in a location where you would want to holiday yourself,” suggests Johnson. “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 think about are the additional 3% stamp duty charged on the purchase price of holiday homes, and the ongoing cost and arrangement of people to clean and maintain a property between tenants.

This latter point sounds complex, but most areas popular with holiday home investors have a network of letting agents and local residents working in the field, doing everything from changing bed linen to tending gardens – and it’s likely you can offset their charges against tax.

In the longer term, income from a holiday cottage or possible ongoing capital appreciation can of course be used to save for retirement or complement a pension, although residential property such as holiday homes cannot be put into self-invested personal pensions.

As usual, expert, regulated guidance offers peace of mind and can help place this option in the context of a tailored overall plan. Less usual is the fact that this is one investment that isn’t just good for your long-term finances, but for your short-term wellbeing too.

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.

1Sykes Holiday Cottages, February 2021