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Is Buy to Let in the UK Over? Consider a Holiday Let Instead

holiday homes in terrace

Buy-to-let in the UK has been through the mill and it is no longer as attractive to many investors due to more stringent tax legislation. Taking everything into consideration in recent months, is it now worth considering a UK holiday let instead of a buy-to-let?

This does not constitute advice and advice should be sought in all instances before acting on it. The Financial Conduct Authority does not regulate tax advice. 

With staycations on the rise, is it time to switch?

In recent months following the easing of lockdown, there has been a renewed interest in UK holidays due to foreign travel restrictions.

With social distancing measures and fears of last-minute lockdowns, there has been an increase in holiday-home rentals from the coast to the country, which is prompting eagle-eyed investors to wonder if this is the next lucrative investment opportunity.

Buy-to-let investors have been struggling in recent years to make as higher profits as before, due to tax breaks being cut, particularly affecting higher earners. This has already caused many to sell-up or downsize their portfolio, with others sitting on the fence.

Is it worth switching your buy-to-let for a holiday let?

Buy-to-let versus holiday let for investment

Certainly, looking at the rental yield for holiday lets can be an exciting prospect. In some cases, the weekly rental you can achieve in a well-located holiday home is double the average monthly rental yield in a similar-sized property on the rental market.

However, there are a few things to carefully consider:

(1) A holiday home may be vacant for many months of the year, particularly in seaside towns that are only appealing in summer.

(2) The upkeep of a holiday let is considerably more than a long-term rental. Not only is the wear and tear of multiple guests a reason to need a refurb (at least a coat of paint) every year. You also need to factor in cleaning costs for each booking, which averages at £50 for a typical cottage (Schofields Insurance), but could be more for larger properties. Also, laundry costs, which are typically £30-£40 per booking.

(3) Although you may pay an agent to manage your buy-to-let, you may also choose to pay an agent to manage your holiday let. The agent then takes care of the bookings and check-in/out, saving you the hassle, but costing on average 15-20% of rental income (This is Money).

Also, you need to factor in the future of UK holidays – is this just a circumstantial rise in activity, or is it sustainable?

A more appealing tax system for holiday lets

Buy-to-let have recently been subject to tax changes meaning high-earners are only able to deduct a 20 percent tax credit for their mortgage interest costs, compared to before where they could deduct it at their rate of tax, 40 or 45 percent.

Apart from potential changes in the way we holiday, this is another reason why landlords may be considering a holiday let as a safer “bricks and mortar” investment.

For holiday lets, as long as they are classified as “furnished holiday let”, the mortgage interest will be deductible from income, before calculating profit and tax.

There is a stipulation that the home must be available for letting purposes for a minimum of 210 days per year, leaving 155 days for you to utilise how you wish. Also, lettings must be booked for 105 days, so a 50 percent capacity is needed.

Comparably, you are likely to pay less tax with a holiday home than a buy-to-let.

In addition, the Capital Gains Tax rate for holiday lets is just 10 percent, compared to 18 percent (basic) and 28 percent (higher) for buy-to-let.

Stamp Duty Land Tax (SDLT) Holiday

Those investing in a holiday home, can also benefit from the SDLT holiday. Whilst you will still be subject to the 3 percent surcharge, the base SDLT will be waived.

On a £300,000 second home, you can save £5,000.
On a £400,000 second home, you can save £10,000.

This applies to buy-to-let as well, but many investors are opting to utilise government incentives such as this, whilst they are available.

Use our Stamp Duty Land Tax Calculator to work out how much SDLT you would need to pay. Just enter the property value and select “Additional Property” under Property Type. The rest of the fields you can populate with anything. 

Mortgages for holiday lets

Securing a mortgage for a holiday let isn’t as straight froward as that of a buy-to-let, but it isn’t impossible.

Lenders have a little more difficulty in assessing the income potential and risk on a holiday let as everything is primarily based on projections.

However, there are a good range of products available with reasonable rates of interest for those with a deposit. According to MoneyFacts, in August there were just under 40 mortgage products available, varying from 60 to 80 percent loan-to-value (LTV).

The quickest route to finding an answer and product to suit your needs is to work with a mortgage broker that knows the lenders and options available to you.

Where to buy?

Most people are tempted to buy a holiday let in a seaside town and this can be a way of securing back-to-back bookings over the summer months. However, these are typically vacant for a lot of the year, so you need to do the maths taking into account the weekly income for the peak weeks and work backwards to ensure you can meet the 105 day booking quota, and importantly make a profit.

Rural locations like the Cotswolds and Peak District, which are popular for winter breaks, festive holidays and walking trips, can also be a good all-rounder.

Ultimately, a lot of people invest in a holiday let so they can use it for family breaks too, so it is natural that your own preferences will play a part in the decision.

Considering a holiday let investment? 
Investments | Financial Planning | Retirement | Save Tax | Protection | Mortgages

Dental & Medical Financial Services have been helping doctors and dentists to build and protect their wealth, whilst saving tax for over 25 years.
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