Is it worth buying a holiday home?

Over the last few years, there has been a surge in the number of self-catering domestic holidaymakers within the UK. The continued uncertainty caused by the pandemic, ongoing Brexit issues, and the cost of living crisis have all contributed to this rise in ‘staycation’ holidays.

Although you need a lot of money to begin with, buying a holiday home can be a great investment and, in many ways, there has never been a better time to do it. However, there are still some considerations and issues that you should be aware of before committing.

So is it worth buying a holiday home?

Join us as we explore the ins and outs of buying a holiday home and find out whether or not it really is worth it.

Is buying a holiday home worth it?

If you have the available finances, buying a holiday home can be both a great investment, as you can let it out to other holidaymakers, and a luxurious retreat that you can use yourself. To ensure your investment is worth it, you need to plan and budget carefully because a holiday home has steep outgoings, and there will be some seasons and years in which the revenue stream falters.

You can choose to buy a holiday home anywhere you like. However, with the recent rise in staycations coupled with numerous tax incentives, the UK is currently a good choice to invest in a holiday home.

So let’s jump in and find out what exactly a holiday home is.

What is a holiday home?

A holiday home is a property that is either used as a second home, let out to holidaymakers, or both. Therefore, a holiday home can be an investment as you can rent it out when you are not using it.

For a property to be regarded as a holiday let by law and be eligible for the tax advantages (which we will explore later), it must be furnished and available for letting for at least 210 days a year. This means you can use it for your personal use for up to 22 weeks a year.

Are holiday homes a good investment?

Holiday homes can be a financially rewarding investment if managed properly. You can employ a letting management company or an individual manager to take care of your lets, but this will cost you more money.

If you choose to manage the property yourself, you need to understand the letting market of the local area and the wider holiday homes market. If the home has a mortgage, you also need to keep on top of current interest rate trends to ensure your rent is set at a price that will keep your property profitable.

Should you get a holiday home in the UK?

There has been a recent surge in the popularity of domestic holidays within the UK, known as ‘staycations.’ The coronavirus pandemic, ongoing issues surrounding Brexit, and the cost of living crisis have contributed to this, with many people feeling unsafe or uncertain about traveling abroad and wanting to spend less on travel by staying within the UK.

So, with more people than ever choosing to stay in the UK for their holidays, there is great demand for holiday lets.

However, with the recent rise in interest rates, potential investors need to consider carefully whether they can afford the more expensive mortgage payments.

What are the tax benefits of owning a holiday home?

If you own a home that qualifies as a furnished holiday letting, you are eligible for certain tax reliefs as it is classed as a trade rather than an investment. The tax reliefs include:

  • Capital Gains Tax reliefs for traders, such as business asset rollover relief, entrepreneurs’ relief, relief for gifts of business assets, and relief for loans to traders.
  • plant and machinery capital allowances for fixtures, equipment, and furniture.
  • profits used for pension purposes.

You need to work out the profits or losses from your holiday home to benefit from the reliefs. If you have multiple furnished holiday lettings, you will need to keep a record of the gross income for each as they are treated separately.

You will still have to pay Council Tax on your holiday home, but you may be able to negotiate a discount with the local council. However, it is up to them whether they offer a discount and, if they do, how much they offer.

What qualifies as a furnished holiday letting?

To qualify as a furnished holiday letting, your holiday home must fulfill the following criteria:

  • it must be situated in the UK or the European Economic Area.
  • it must be furnished. This means that there must be sufficient furniture provided for normal occupation.
  • it must be available for letting for at least 210 days of the year.
  • it must be commercially let. This means you must intend for it to make a profit.

How can you make the most of your holiday home?

To make the most of your holiday home you need to know exactly what you want to get out of it.

Perhaps you want somewhere you can regularly frequent yourself? Or maybe you are just looking for a long-term property investment that will provide you with an extra source of rental income or even be the start of a bigger holiday letting business. Or you might want to create a home that people can go to for extended periods to use a retreat for writing, painting, walking, or anything else you may be interested in.

Generally speaking, short-term holiday lets are more lucrative than long-term. Short-term tends to be anything that is less than 30 days. So when you think about what you want to get out of your home, factor in the kind of holidays people will have there.

If you want to use the house yourself, remember that it must be available to let for 210 days a year at a minimum. You should also consider when you want to visit the house and when the high season for the local area is.

If, for example, you want to make the most of the house for your use during the summer or Christmas, you may have to sacrifice some of the most lucrative weeks for rentals.

What should you be aware of if you own a holiday home?

We have seen some of the many advantages to owning a holiday home that certainly make it worth buying one if you have the finances available.

But are there disadvantages, and what issues should you be aware of that could cause you problems down the line?

Ongoing costs

Owning a house costs money. There are bills and taxes, furnishings and fixtures to repair and replace, cleaning products to buy, etc. All of this adds up to thousands of pounds every year, and there may be years in which the costs are not covered by the revenue.

You will need to budget accordingly and ensure you have enough money for slow periods.

Seasonal income

Another thing to consider is that your income from your holiday home will be seasonal. This doesn’t have to be a disadvantage, but if not managed properly, it can become a problem, especially if you need to make regular mortgage payments.

You need to plan for this. One way to ensure your revenue remains steady throughout the low season is to allow only short breaks during that time. This means you won’t get long bookings, which – as we saw earlier – are less profitable.

Ongoing management

If you don’t use a letting agency or employ a manager, the ongoing management of a holiday let can be time-consuming and demanding. If you have several short lets back to back, you will have to ensure the changeovers are smooth and that you are available for communication should your guests need anything.

You can pass the responsibility onto another person or a management company to manage your property for you, but you will have to pay them, which will only add further ongoing costs to the maintenance of the property.

Stamp Duty

If you buy another property that isn’t your permanent place of residence, you will have to pay the higher rate of Stamp Duty as long if any of the following conditions apply:

  • The property is worth £40,000 or more, and you already own a property worth £40,000 or more.
  • You part own the property and your share is worth £40,000 or more.
  • You own a property abroad and want to buy an additional property in the UK worth more than £40,000.

You don’t have to pay the higher rate of Stamp Duty if:

  • The property is worth less than £40,000.
  • The property is mobile, such as a caravan, houseboat, or mobile home.

The higher rates of Stamp Duty currently are:

Property valueStamp Duty rate
Up to £250,0003%
The next £675,000 (the portion from £250,001 to £925,000)8%
The next £575,000 (the portion from £925,001 to £1.5 million)13%
The remaining amount (the portion above £1.5 million)15%

When and where to buy

At the time of writing (autumn 2022), both property prices and mortgage rates are rising in the UK. It is a challenging time to know whether investing in property will ultimately be a wise decision or if you will end up having to put your rent so high to cover the costs that it deters visitors from staying.

The unfortunate truth with this conundrum is that there is no way of knowing. There are still plenty of locations in the UK with affordable properties that are now becoming increasingly popular. So now could be the best time to make the most of those opportunities before the moment passes again. But every decision should be taken carefully, and you should always weigh the risks and benefits.

Summary

A holiday home is certainly worth it if managed correctly and you have requisite funds in the coffers. You can enjoy the property for your personal use for much of the year and then rent it out for others to enjoy.

You need to be well organised and prepared for the low periods, but with a bit of work, you can have the luxury of a holiday home and an extra source of income all in one.