Holiday homes: how to buy a place in the sun

Furnished holiday homes can be a tax-efficient way of buying to let, says Sarah Moore.

941_MW_P22_Inv-Prop

Buying a bolthole could prove lucrative

If you're contemplating buying a holiday home to rent out, there are several important issues to consider before you can start perusing brochures of exotic beach houses. First, there's the small matter of how to pay for it. A standard mortgage doesn't allow you to let out the property, while a buy-to-let mortgage isn't suitable either: lenders would assess affordability on the assumption that you may not be able to let it out full time.

Because the income you can get from renting out a holiday home is deemed less of a safe bet than money made from a buy-to-let property, holiday-let mortgages are seen as riskier. As a result, the pool of lenders in this area is fairly small, and mainly made up of building societies. Lenders will look at whether the property will be able to provide a rental income of typically 125%-145% of the interest payable on the mortgage, and you will probably need to put up a deposit of at least 30%, according to lobby group HomeOwners Alliance.

Expect interest rates of between 2% and 4%, slightly higher than those on a traditional mortgage. For example, Leeds Building Society offers a two-year fixed-rate mortgage at a rate of 2.44%, with a fee of £999 and a maximum loan-to-value ratio of 60%, while Cumberland has a five-year fixed-rate product for a rate of 2.99% with a £1,000 fee and maximum loan-to-value ratio of 75%. You may wish to consider going through a broker to make sure you end up with the right product.

Before you go off the idea, keep in mind the preferential tax treatment given to furnished holiday lets (FHL). In order to qualify as an FHL, however, the property must meet certain requirements. As you might expect, it needs to be furnished and must be available to holidaymakers for at least 210 days a year, not including days you spend there yourself. It then needs to be let commercially for at least 105 days over the year, while stays for longer than 31 days are only permitted if the total number of those days doesn't exceed 155. See HMRC's guidance on gov.uk for more information on conditions and grace periods.

Preferential tax treatment

For instance, if you own an FHL, you can still deduct the full amount of interest you pay on your mortgage from your income for tax purposes. The government began to scale down this relief for buy-to-lets in 2017. You can also claim capital allowances for items such as furniture, equipment and fixtures. Buy-to-let owners can only deduct the actual cost of replacing domestic items.

Importantly, your profits from renting out an FHL are classed as "relevant earnings", meaning you can put them into your pension and benefit from tax relief. You can also get capital-gains tax relief when you sell the property. Finally, if the FHL is in England and let out for more than 140 days a year, it should be charged business rates rather than council tax. Then, if it has a rateable value of less than £15,000, you could be eligible for small-business rate relief of up to 100%.

Recommended

No let up in house price rises as new records set
House prices

No let up in house price rises as new records set

House prices continued to boom in April, with £20,000 being added to the price of the average home in the last 12 months.
14 May 2021
The best Tudor properties for sale now
Houses for sale

The best Tudor properties for sale now

From a timber-framed hall house dating back to 1542 in Swaffham Bulbeck, Cambridge, to an Elizabethan farmhouse in Norfolk, eight of the best Tudor pr…
14 May 2021
Three commercial property funds that go beyond offices and shops
Property

Three commercial property funds that go beyond offices and shops

When it comes to commercial property, these three real-estate investment trusts in promising niches look most appealing, says David Stevenson.
11 May 2021
Could you end up paying inheritance tax on your family home?
Inheritance tax

Could you end up paying inheritance tax on your family home?

The value of the average UK home has risen by 53% since April 2009, but the inheritance tax threshold has remained static. And that means more people …
7 May 2021

Most Popular

How will Joe Biden’s capital gains tax rise affect crypto prices?
Bitcoin & crypto

How will Joe Biden’s capital gains tax rise affect crypto prices?

The US president wants to increase capital gains tax – and that’s going to hit a lot of American cryptocurrency speculators. Saloni Sardana looks at h…
14 May 2021
US stocks look expensive – here’s what to own instead
Investment strategy

US stocks look expensive – here’s what to own instead

Right now, US stocks are among the most expensive in the world. So if you want a decent return on your investments, you should look into diversifying …
17 May 2021
Inheritance tax planning: the rules around gifting
Inheritance tax

Inheritance tax planning: the rules around gifting

There are plenty of legal ways to minimise an inheritance tax bill. Perhaps the simplest is to give away assets to reduce the size of your estate. Dav…
11 May 2021