Buying a holiday let: Is it a good investment?

Will it be home or abroad for a holiday this year? As an alternative, if you’ve got money to invest, then buying a holiday let could be a good investment. Property prices in holiday hotspots have increased significantly in recent times, but there are potential pitfalls to be aware of. We outline the financial benefits and the tax implications of buying a holiday let.

Why is now a good time to invest?

Holiday Cottage company, Sykes, stated that new owner enquiries were up 80 per cent when UK travel resumed in summer 2020. And summer 2021 saw a similar boom.

The benefit of buying a holiday let

During peak seasons, a holiday let in a prime location can earn you as much in a week as you would earn in a month from buy-to-let. Holiday let landlords can earn up to 30% more yield than their buy-to-let counterparts. This delivers an 8 per cent return annually (approximately £13,000) while buy-to-let investors aim for a yield of around 6 per cent.

Compared to a buy-to-let property, the returns for a holiday let are higher. An average four-bed holiday cottage generates a gross income of £21,000 per year (Source Sykes).

Mortgage for holiday lets

As demand for holiday lets has increased, so have the number of mortgage offers. According to Moneyfacts, there are now twice the amount of mortgage products available for holiday lets, compared to August 2020. Speak to a mortgage adviser who can suggest the most suitable mortgage products currently available.

A holiday let mortgage differs from a buy-to-let mortgage, where you borrow money to buy a property that will be let-out on a long-term basis. As your property will be booked (hopefully) in days and weeks rather than months, the amount a lender will loan you is based on an income projection figure.

Be prepared for your own income to be considered too, as the lender will need to know you can cover the mortgage when the property isn’t occupied.

Bear in mind that the type of property you buy will also affect your ability to get a holiday let mortgage. Lenders want to know if the property could be easily sold, so they’re unlikely to give you a mortgage on a holiday park home, for example, which has a limited use.

And don’t forget the deposit. You’ll typically need a 25%- 30% deposit, because of the increased risk to lenders.

How much tax will I pay?

Business rates – Unlike domestic properties, which have council tax associated with them, a holiday let has business rates. Business rates are charges, that are taken to help pay for local services. They must be paid on most properties or parts of properties, that are being used commercially, such as holiday lets. Rates and rules do differ depending on which part of the UK you buy in.

Furnished holiday lets – There are special tax rules if your property qualifies as furnished holiday lettings (FHLs). According to HMRC, if you let properties that qualify as FHLs, you:

• can claim Capital Gains Tax reliefs for traders,
• are entitled to plant and machinery capital allowances for items such as furniture, equipment and fixtures, and
• can count the profits as earnings for pension purposes.

What criteria do you need to meet to qualify for the above though? Well, your property needs to be:

• Fully furnished.
• Available to let commercially for 210 days per year, with the intent to make a profit.
• Let out for at least 105 of these days.
• Not occupied by longer-term tenants (more than 31 days at a time) for more than 155 days per year.

If your property ticks these requirements, it qualifies as a FHL.

Small business rates relief – It’s also worth checking if you can claim small business rates relief. It could bring the cost of your business rates down. If your properties rateable value is less than £15,000 and more than £12,000, you will be eligible. If your property’s rateable value is £12,000 or less, you won’t need to pay business rates at all.

Other financial implications of buying a holiday let

While the returns may seem promising, don’t forget to budget for management of the property, unless you are going to do that yourself. And as well as a deposit and possible mortgage, you’ll need to pay for marketing, furnishing of your holiday let and possible changes to the property to comply with health and safety.

Making the move from buy-to-let to holiday let

If you’re currently a landlord who is looking to move into a holiday let business, best talk to your accountant!