Is a holiday let better than a buy to let?

Cottage hanging over loch in scotland

Whilst traditional buy-to-let properties remain to be a very appealing investment opportunity, investors are wise to consider all types of property investment to decide which will work best for their portfolio. In recent years there has been a growing demand for holidays in the UK, or ‘staycations’ as they’re often called; a UK holiday let is an interesting prospect for investors.

So is a holiday let better than a buy to let? One offers the potential for short term lets at a higher rate and the ability to enjoy the property when it’s not let out. The other is better suited to being let on a long term basis.

Both types can prove to be a worthwhile investment but it’s wise to consider potential yields, tax benefits, financing and how the property fits into long term plans and a diverse portfolio.

Is a holiday let a good investment?

The demand for holidays in the UK has increased considerably over the past few years and are now considerably more popular in the wake of the pandemic as many are choosing to avoid travelling abroad for the foreseeable future.

One of the UK’s biggest holiday companies enjoyed their best ever day of sale at the end of June 2020; seeing one booking confirmed every 11 seconds in the hours that followed the announcement that the hospitality industry could reopen from July 4; there is a huge demand for holiday homes in the UK.

Return on Investment

Holiday lets located in beautiful, rural areas or those near popular tourist destinations tend to deliver high rental yields. In peak seasons a holiday let can earn in a week what the same buy-to-let property will earn in a month. Holiday letting has distinct seasons so owners expect some weeks to be unoccupied – this said, certain holiday let properties in prime locations comfortably earn a high annual yield than buy-to-let property.

Holiday lets and tax

Holiday let property is becoming increasingly popular due to the currently available tax advantages of Furnished Holiday Let as they are classed as a business rather than an investment.

To achieve the Furnished Holiday Let (FHL) status a property will need to meet a certain criterion which includes the level of furnishings, availability and annual bookings.

The advantages of owning a Furnished Holiday Let include different types of Capital Gains Tax Relief depending on your position and the ability to make use of Capital Allowances on items purchased to increase the potential rental income of the property.

You can also make tax-advantaged pension contributions as FHL income is classed as ‘relevant earnings’ and if you share ownership of the property you can portion the profit to suit your position for tax purposes, regardless of the ownership split.

Another advantage is that in England, holiday lets that are available to visitors for 140 days or more will be classed as a self-catering holiday property and be valued for Holiday Let Business Rates. Whilst the property will be subject to Business Rate Property Tax you might be in a position to claim Small Business Rate Relief.

Taking good tax advice when considering and purchasing a holiday let can be extremely advantageous and make the investment prospect even more attractive.

Do you need a buy-to-let mortgage for a holiday let?

If you’re planning on financing a holiday let purchasing using a mortgage then it’s wise to engage with a good broker early in the process to ascertain the rates and terms available.

Rates on holiday let specific mortgage products are often higher due to the deemed risk that the property could be vacant for long stretches in the low season whilst you’ll still have to pay the mortgage. To calculate the yield a lender will usually look at the typical rates during the low season, mid-season and high season in the area and find the average to come up with a monthly figure.

Simply put, it’s important to get the right mortgage for what you’re planning to do with the property and we always recommend our clients take advice from an experienced mortgage broker.

Holiday let investment

One of the reasons many fear holiday lettings might not work for them is the combination of unoccupied weeks and the hassle of running the property. There are entirely hands-off investment opportunities available in prime holiday locations across the UK that not only have on-site management to oversee bookings, run and maintain the property but also come with a long term rental assurance effectively erasing the worry of any periods where the property isn’t let in low season.

If you’d like to learn more about holiday let investment property in the UK please do contact us to talk through your plans and the opportunities that might suit your requirements. We’re available on +44 (0) 2039507939 or send us an email at info@thirlmeredeacon.com

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