Updated 08 October 2021
Changing tax rules on buy-to-let properties along with a rise in UK staycations are making holiday lets even more attractive for the discerning investor. But are they better than buy-to-let investments? We outline all the considerations for second home property investors.
Despite concerns that the Covid-19 pandemic would push house prices to stall, the property market has boomed. A temporary cut to stamp duty rates prompted many homeowners to move, leading to a steep rise in property prices. Those who had been considering a property investment pre-Covid may be even more keen now that the market has proven undeterred by such a large-scale, unexpected crisis.
For many, the pandemic has also boosted their savings. The UK savings rate reached a record high 25.1% in the second quarter of 2020, meaning some people have more money ready to invest than ever before. And with mortgage rates currently low, now could be the ideal time to become a second-home owner as a way to generate more income. In this article, we weigh up whether it’s best to use the opportunity to become a landlord or a holiday let owner – both of which can be lucrative.
As a landlord, you can earn a regular income stream from people living in your property long term. Their rent can cover your mortgage and give you extra money to make improvements to the property or use as additional income. You can also benefit from capital growth, where your underlying investment continues to grow in value. This means you get more equity (cash) when you sell the property.
Becoming a landlord seems like a win win – what do you need to consider?
As a landlord, you can rent your property out to families, individuals, a few professionals or students.
The benefit of renting your house out to families and individuals is that they are typically lower-risk tenants. They are unlikely to default on rent payments and damage your property, and they may stay for many years.
Renting out a house of multiple occupancy (HMO) means you will have to comply with separate rules and deal with people moving in and out of the property, which can be a hassle. However, you may find you can charge higher rent rates per room.
Creating a student property let means you’ll most likely have to comply with HMO rules too. Bear in mind that students don’t need to pay council tax, but you will face a penalty if you’re unable to prove that students occupied the property. You’ll also need to consider the additional costs of furniture and insurance that covers student lets, though this is usually offset by the higher rent associated with HMOs. Also, if your tenants cause a nuisance, you could come up against the neighbours and the council.
One difference with being a landlord and a holiday let owner is that the former will need to set up tenancy agreements. This sets out the terms of the rental, including aspects like rent, deposit, responsibilities, etc. It’s designed to protect both you and the tenant. It’s advised to get a solicitor to help you draw up your tenancy agreement to make sure key details are covered. Although getting tenancy agreements signed can cause stumbling blocks, they are invaluable should something go wrong, like your tenants defaulting on rent.
The short answer is no – you can find tenants and deal with any issues yourself. This means being more hands-on, which can quickly drain your time. If you don’t feel you have the time to manage your property, you could hire a letting agent, but this will cost you fees.
These fees are usually a percentage of the monthly rent, and can cover:
Let only – just the costs of marketing your property and finding tenants
Rent collection – collecting rent and chasing payments on your behalf
Full service – finding tenants, collecting rent and dealing with maintenance issues
The more services they cover, the higher your fee will be.
You’ll have to pay income tax on your rental income, which you do through a Self Assessment tax return. The first £1,000 of income you make in a year is exempt thanks to the property income allowance. This allowance is for individuals, so more than one homeowner can claim it if you own the property with someone else. You’ll also be able to offset your tax bill with costs for things like property maintenance and letting agent fees, but you’ll need to keep receipts or invoices for these. You can no longer use your mortgage payments to offset the bill.
It is also worth noting that second properties are subject to capital gains tax when you come to sell.
If you want to buy a property to rent out, you’ll likely need a buy-to-let mortgage. These tend to be more expensive than other residential property mortgages, as they typically carry higher interest and fees. You’ll also probably need to put down a bigger deposit.
If the plan is to rent out your current property while you move elsewhere, or you want to let out a room in your home for a lodger, you should contact your mortgage and insurance providers. They may have rules on how your property is being used, so it’s important to get the green light first to avoid penalties or being unable to make a claim on your policy.
Over the last few years, thanks to sites like Airbnb, renting out a property as a holiday let has becoming increasingly commonplace. And since Covid-19 has made holidays in the UK much more popular, the possibilities to make income from a holiday let have only grown.
There are a few ways to get started as a holiday let owner. You could buy a second home to let out, rent out a room or create an annex, or set up something like a glamping experience.
You can generate high income from a holiday let. Yields are expected to be around 10% on average, which is higher than the average 3.63% of buy-to-let properties in the UK. So, what’s the catch? Let’s take a look.
Because holiday lets generate less stable income than buy to lets, mortgages for these kinds of properties are typically harder to secure. Some specialist lenders will offer them, and a mortgage broker could help you find a good deal, but most lenders won’t consider you.
There are ways around the mortgage problem for holiday lets. If possible, you could remortgage to release equity from your current property and either buy your holiday let in cash or sway lenders with a much higher deposit.
How about if you want to buy a property overseas? The good news is that mortgages are available both in the UK and abroad for overseas properties. Stick with a UK lender and you won’t have to worry about currency fluctuations affecting your mortgage payments, but you might only be able to buy a property in certain locations. Go with a lender based overseas and you may have more options, especially if you use a broker, plus mortgage rates can be lower. But the lenders won’t be regulated by the FCA, and exchange rate fluctuations could impact your repayments.
You’ll have to pay income tax on the amount you earn from your holiday let, which you’ll need to organise through a Self Assessment tax return. The same goes for properties that are located overseas, as earnings will be classed as UK income.
Some of the rules that apply to buy-to-let landlords don’t relate to holiday let properties, so you may be able to offset more of your costs to bring down your tax bill. An IFA specialising in tax or an accountant can help you do this.
You should also factor in the costs of council tax or business rate property tax. You’ll fall into the latter category if your property is available for more than 140 days and let out for over 70 days, but you may be able to offset this through Small Business Rate Relief.
If your property is overseas, you’ll need to pay capital gains tax when you sell your property if you’re a UK resident. The rules are different if you are a permanent resident of a different country though, so do speak to a tax specialist if you’re insure of how capital gains tax affects you.
As with any investment, it’s vital you speak to a financial adviser before you buy a second property to make sure it’s the right option for your circumstances. Search Unbiased to find an experienced IFA near you.
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