Holiday lets, a good investment to top up your pension? | moneyfacts.co.uk

Michelle Monck

Michelle Monck

Consumer Finance Expert
Published: 03/07/2020

As more of us are expected to holiday in the UK this Summer and potentially into 2021, those looking at options to improve the returns on their savings might consider a switch to managing a holiday let property.


Income tax-relief benefits are no longer available to landlords, meaning that income tax at the applicable rate is due on any profits generated from the property. However, the current low interest rates make the potential of greater actual returns possible from property more attractive and a holiday let can offer specific advantages for the retired when compared to a buy-to-let property.

What are the financial benefits of a holiday let property?

Holiday lets offer the benefits of potential greater earnings and lower costs of sale compared to a buy-to-let property. However, they do also come with additional ongoing costs not experienced with buy-to-let, such as marketing and cleaning costs.


Investors into holiday lets must be clear on what makes them qualify as a holiday let for tax purposes. Property can be in the UK or European Economic Area (EEA) and must be available for let at least 210 days of the year. The property must also be commercially let (for example, not let free to family members) for at least 105 days each year. Lets of more than 31 days cannot be included in these figures. Finally, the property must be fully furnished.

Investors may find holiday lets appealing as it allows them a method to earn an income, while also having a regular holiday home to visit for their own and their family’s holidays. Financially, holiday lets usually achieve a higher weekly rent than a buy-to-let property, however investors will need to work hard to get occupancy rates up outside of peak seasons to earn more annually. Another potential benefit comes when investors want to sell the property, as holiday lets have a lower rate of Capital Gains Tax (CGT) at 10%, compared to 28% and 18% for higher and basic rate taxpayers for buy-to-let property. Holiday lets that qualify for CGT can also register as a business and pay business rates instead of council tax. Often, business rates are lower than the equivalent council tax on the same property. Holiday lets can also offset some of their operating costs against tax, for example cleaning fees or items of furniture or equipment for the property.

Those investing in buy-to-let and holiday lets need to pay stamp duty when they purchase their new property. Second homes have a higher rate of stamp duty and those looking to find out how much they will need to pay can use our stamp duty calculator. One property type that is exempt from stamp duty is those that can move, for example caravans, mobile homes and boats. Those thinking about purchasing a caravan or mobile home on a leasehold basis at a caravan park will need to check if the lease allows them to let this for holidays and if they can obtain a buy-to-let mortgage for it. In addition, any leasehold property will also have a ground rent and potential facilities costs to pay, and this will eat into your annual profits.


Profits generated from buy-to-let and holiday let properties will be taxed at the relevant rate of income tax. Those considering investing in a buy-to-let or holiday let property should consider the impact of any earnings that take them into a higher rate tax band.
Those who are not yet retired and still saving for their pension will find that any profits generated on a holiday let count towards their income for pension tax relief.

Which lenders offer holiday let mortgages?

Those who have recently accessed their pension drawdown or have access to a lump sum of money may choose to use this as a deposit for a holiday let mortgage. In June 2020, there were 34 buy-to-let mortgages launched that accepted holiday lets, ranging from 60% to 80% loan-to-value (LTV). Of these, 28 mortgages were specifically for holiday let mortgages. Those lenders accepting holiday let mortgage applications include:

  • Furness Building Society
  • Ipswich Building Society
  • Monmouthshire Building Society
  • Principality Building Society
  • Teachers Building Society
  • The Melton Building Society
  • Tipton & Coseley Building Society
  • Vernon Building Society.

Investors may also want to consider speaking with a mortgage broker to help them access the lenders most likely to approve their buy-to-let application and to help with the application process.

What rates are available for buy-to-let mortgages accepting holiday lets?

At the end of June, Furness Building Society offered the most competitive rate a 65% LTV at 2.49% discount variable (a discount of 2.65%) for two years reverting to 5.14% variable thereafter. There is a £995 product fee and incentive include free valuation and legal fees.


Those looking for a fixed buy-to-let mortgage deal will find the best rate for holiday lets from The Melton Building Society at 2.79% fixed until 30 November 2022, after which it increases to 4.99% variable. Borrowers will need to have a deposit of at least 25% (75% LTV) to qualify for this mortgage. The Melton Building Society will only accept applications for this mortgage through a mortgage broker. Investors can speak to our preferred mortgage broker to find out more about this and other deals that are available.

Disclaimer

Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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