Restrictions on foreign travel due to Covid have given a huge boost to the UK’s holiday let market. Here Paul Johnson of St James’s Place explains how it may offer an alternative to buy-to-let for budding property investors
For most people, property investment 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 due to Covid-19.
The rise in mortgage options has also made it much easier to find favourable lending rates. In comparison, buy-to-let has become more restrictive. For example, investors can’t deduct interest on a mortgage from rental income declared to HM Revenue & Customs (HMRC).
This combination means that the appeal of the holiday home has grown – and this is a trend that looks likely to continue into the future.
Holiday homes vs buy-to-lets
The tax advantages with holiday homes come 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. Holiday homeowners can also offset many operating costs against tax. 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.
However, you may choose to maximise holiday lettings instead. 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.
Staycations are here to stay
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.
Rental agency Sykes Holiday Cottages recently reported that UK holiday bookings for July and August were up 126% compared to the same time last year.
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 and it’s very simple 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, 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.
Some key considerations
There are plenty of other considerations you should take into account before taking on a holiday let, of course. These range from:
- What type of holiday home are you buying? Is it aimed at couples or whole families and groups of friends?
- Do you want to cater to an increasingly mobile, flexible workforce? For example, you could ensure that you have Wi-Fi internet installed.
- Finally, where will you buy? The best advice is to 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.
Financial factors to consider
Some other factors to think about include 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.
Generating income for the future
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 be advised that residential property such as holiday homes cannot be put into self-invested personal pensions.
It’s important to diversify your investments so that you’re not solely relying on any one to balance the risk, but holiday lets are one investment that isn’t just good for your long-term finances, but for your short-term wellbeing too.
Paul Johnson is head of mortgages at St. James’s Place
