27 Jul 2021

Second homes as holiday lets: what brokers need to know

The rise in UK vacations is inspiring clients who want to purchase a second home. It may be possible to use these properties for holiday lets.

With many buyers seeking the benefit of a rural retreat alongside their urban primary residence, demand for second properties has grown since the start of the pandemic. According to data from Hamptons, around 22,000 second homes were bought in the UK in the last year.

With continuing travel restrictions creating a surge in demand for UK vacations, these second homes could potentially be used as holiday lets when they’re not occupied.

At Investec, we’re seeing a growing number of high-net-worth (HNW) clients and Brokers look to discuss this opportunity. With this in mind, we spoke to Peter Izard from our Mortgage Intermediaries team to learn more about how borrowing for this purpose works.

What’s driving the increased demand for second homes?

Just as we have seen many people re-evaluate how they live in the wake of the pandemic – and seeking a new property with a home office or with more outside space – we’re also seeing a shift in where they want to live.

While some clients have taken the opportunity to relocate from towns and cities to more rural locations, others have chosen to keep their primary residence and purchase a second property further afield.

In the last year, 15 of the top 20 most popular areas to buy a second home were on the coast. At Investec, we’re seeing high demand for homes in regions such as Cornwall and Oxfordshire.

What is Investec’s approach to working with clients who want to purchase a second home?

 We always take a bespoke approach to lending which assesses affordability based on a holistic understanding of their wealth. Our offering is client-led rather than product-led.

That said, if a client or potential client is considering buying a property with the intention of offering holiday lets, we ask that they inform us in advance. Similarly, if a client has an existing mortgage with Investec, they need to ensure their Private Banker is made aware and there is appropriate insurance and permissions in place.

Why do people want to use second homes as holiday lets?

The main reason is it gives them the option to receive some income from rent. With British holiday bookings surging while foreign travel remains restricted, the opportunity is greater than before. This income is also subject to a different tax structure than buy-to-let income which can make the returns attractive.

holiday home by the lakes
Peter Izard, Mortgage Intermediaries team, Investec

When we talk about using second homes as holiday lets, we are referring to a private residence for personal use that is being let out on an ad-hoc basis.

How does the purchase of a second home for holiday let differ from a buy-to-let?

When we talk about using second homes as holiday lets, we are referring to a private residence for personal use that is being let out on an ad-hoc basis. A buy-to-let property, on the other hand, is a property that is purchased with the sole purpose of producing an income stream and therefore is used only for commercial reasons. 

Peter Izard, Investec Private Bank
Peter Izard, Mortgage Intermediaries team, Investec

For a property to qualify as a Furnished Holiday Let it must be furnished and located in the UK. The home must also be available to let for at least 210 days, and bookings must be in place for 105 days.

Are there any tax or management considerations to be aware of?

The upkeep and management involved in running a holiday let can be costly. Furthermore, Covid-19 hygiene protocols mean that changeovers between guests must be even more thorough than usual, making it a time-consuming process. There are firms who manage this process on the landlord’s behalf, who usually charge a commission of around 15-20 per cent per booking.

From a tax perspective there are special rules for holiday lets, otherwise known as ‘Furnished Holiday Lets’ (FHLs). For a property to qualify as a FHL it must be furnished and located in the UK. The home must also be available to let for at least 210 days, and bookings must be in place for 105 days. Therefore, if the owner of the property is planning on using the property themselves, they can do so for the remaining 155 days of the year.

Assuming the property meets these requirements, then the landlord can deduct the cost of their mortgage from their profits before calculating how much income tax to pay. This differs from the tax structure for buy-to-let landlords who are not able to deduct the interest they pay on their mortgage from the rental income they declare to HMRC and instead can claim a 20% mortgage interest tax credit.

Anyone who is considering letting a second home on a holiday let basis is advised to seek independent tax advice from a qualified accountant.

Disclaimer: The above summary should not be construed as tax advice and anyone who is considering letting a second home on a holiday let basis is advised to seek independent tax advice from a qualified accountant.

If you’re a Broker with a HNW client who is looking to purchase a second home, please get in touch for more information.