Investing in a holiday let can be a great way of generating some extra income, while also providing you with a home away from home that you can use when you want.
However, when it comes to purchasing and running a holiday let, the process can be expensive and time-consuming. It’s really important to do your research before buying a holiday let, and ensure that you fully understand your obligations before parting with your money.
Here are some of the main things you should consider before you invest in a holiday home.
Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.
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Will your holiday let be available and let for enough days a year?
If you’re thinking of buying a holiday home then you’ll need to make sure that it will be let for a certain number of days per year for several reasons.
There are strict rules around holiday lets. Since April 2023, in order to qualify as a business, your holiday let will need to be available to rent for at least 140 days a year and be actively rented out for at least 70 days a year. Meeting this criteria means you will pay business rates instead of council tax.
Business rates are not set at fixed rates, rather they are calculated by multiplying the ‘rateable value’ of your business property by a set multiplier. This often works out cheaper than council tax. You may qualify for Small Business Rates Relief, which can relieve you of up to 100% of the rates you have to pay. Read more about how to estimate your property’s business rates and whether you qualify for relief at GOV.uk.
Currently, there are extra tax benefits if the home is available to rent for at least 210 days a year and let to holiday makers for at least 105 days a year (though lets of more than 31 days don’t qualify, so you’ll have to subtract these if relevant). If you meet these requirements, and the property is fully furnished, the property will be considered a furnished holiday let (FHL).
However, the Chancellor announced in his 2024 spring budget that these tax benefits will be scrapped from April 2025.
At the moment, the main benefits of a property being considered a furnished holiday let are:
- If you have a mortgage on your holiday home, you will be able to deduct 100% of your interest payments from your rental income before your tax bill is calculated. You can also claim capital allowances for wear and tear on the property.
- You can also deduct business operating costs, such as marketing the property, and the price of furniture and other items bought to make the property more appealing to guests, as long as these relate solely to your business.
- If you decide to sell your holiday let, you’ll be able to claim relief on the Capital Gains Tax (CGT) you pay on sale. ‘Business asset disposal relief’ means that you will only pay 10% tax on the sale, and you may be able to delay paying the tax if you use the profits to buy a new holiday home.
Bear in mind that you will have to complete a self-assessment tax return in order to pay tax on the income generated from your holiday let.
Of course, you’ll also want to ensure that you have enough guests staying to cover costs and provide additional income. Upkeep and mortgage costs on a holiday let can swiftly rack up, and you’ll want to earn enough money to make the process of buying and running a holiday let worthwhile.
Bear in mind that a holiday let isn’t usually occupied for the entire year, particularly if it has seasonal appeal (such as being beside the beach). So you’ll need to consider that even if your holiday let is popular, and attracts plenty of guests, the income stream it provides could be inconsistent. There may be long periods of the year where you don’t see much business, but the property will still need to be maintained and bills met.
Is your holiday let in an appealing location?
Location is really important when it comes to choosing your holiday let. It may be a great property and furnished to a high standard, but it probably won’t make for a lucrative investment if it’s situated in an area that isn’t particularly desirable to holidaymakers.
Part of the process of choosing the ideal holiday let is finding one that will prove popular with holidaymakers while also appealing to you (if you’re planning to use it as well). Holiday homes beside the beach or cottages situated in beautiful countryside are always popular, for example. If you’re planning to buy a city holiday let, it should ideally be situated in a popular tourist destination, and relatively near popular tourist attractions and transport links.
Who will manage your holiday let?
With any holiday let, you’ll ideally need to have somebody who lives nearby who’s able to hand keys to guests, take care of any other in-person requests and be on the scene if there is an emergency. You’ll also need to get the property professionally cleaned between each set of guests.
Unless you’re buying a holiday let close to where you live and you have the time to mange it yourself, you’ll most likely need to find a property management company or someone who can provide you with local services. You may find a particular company who will do everything, from advertising, cleaning and managing your property let on your behalf, but you’ll have to pay for this.
Some people choose to buy holiday lets near to where they live so that they can look after the property and guests themselves. This could be ideal for you if you live in a popular tourist destination already, for example. However, this can be stressful and time-consuming, and you’ll still need to advertise the property and have it professionally cleaned between each visit.
Can you afford a holiday let?
It goes without saying that buying a property is a huge investment, and investing in one in a desirable tourist spot can be particularly pricey. Make sure you have given the decision plenty of thought, and seek advice if you are planning to get out a mortgage.
Remember that holiday home mortgages are different to both residential mortgages and buy to let mortgages. Holiday home mortgages typically require a deposit of 25% or even 35% of the property’s value. Lenders will also check that you have enough income coming in already to keep up with repayments for the times when your property is not generating an income to cover these. You can read more about how holiday home mortgages work in our article Holiday let or buy to let: which is better?
Remember that you’ll also have to pay the usual survey and solicitor fees to buy a property, as well as Stamp Duty Land Tax (SDLT), which is higher on second homes. Read more about the rates you’ll pay on SDLT in our article Stamp Duty explained.
There are also plenty of other regular costs to consider. Bear in mind that these costs can currently be deducted from your income before you pay tax if your property meets the requirements to be considered a Furnished Holiday Let. They might include:
- Decorating the property – potential guests expect a holiday home to have an inviting interior.
- Amenities – it’s common to add special facilities and equipment to a holiday home to boost its appeal to guests, and enable you to charge more for stays. For example, hot tubs are always popular, or if the property is near the seaside, you could supply some beach gear.
- Bills – you’ll have to pay all the usual bills associated with a property (electricity, water, Wi-fi, etc).
- Management costs – if you have enlisted the help of a management company to take care of housekeeping, they’ll have a fee to pay.
- Cleaning – getting the property professionally cleaned between guests is extremely important. Guests may complain or request a partial refund if the property is untidy and/or dirty upon their arrival. Property management companies will usually take care of cleaning for you, but you’ll have to find cleaners yourself if you are going without their services
- Advertising – there’s no point having a perfect holiday home if nobody knows about it. Advertising your property is really important, and most platforms will charge a fee for this. Again, management companies will often take care of this for you.
These tax benefits will be scrapped in April 2025.
Is your holiday let covered?
There isn’t a legal requirement to have buildings insurance on your holiday home, but mortgage lenders will most likely require it as part of the mortgage application process.
Holiday home insurance usually covers the same things as a standard home insurance policy, so it covers both the building (the actual physical structure of the home and any permanent fixtures) and the contents (furniture, gadgets, and any other valuables that you have in your holiday let).
Some providers may also include public liability cover if a guest injures themselves at the property and decides to sue you.
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A standard home insurance policy won’t be suitable for a holiday home, as they generally don’t cover homes that will be unoccupied for more than 30 days.
Beware that providers may not cover your holiday home if:
- It is used for stag or hen parties
- It is let for an extended period
- It has a certain number of bedrooms
- It is built from non-standard materials, for example if it is a thatched cottage. You may need to seek non-standard home insurance instead
There is almost no reason not to get holiday home insurance, as both the home and its contents will be expensive investments, and it makes sense to protect them.
Should I buy a holiday let?
Whether you decide to invest in a holiday let will depend on whether you’re willing to manage the necessary administration involved, your personal circumstances and financial goals. While holiday lets can be particularly lucrative, the upfront costs are considerable and they can prove a burden if you’re not prepared for the work involved, particularly to get things up and running.
If you’re keen to invest in property but you aren’t sure whether a holiday let is the right option for you, our article How to invest in property suggests some other ways that you might be able to make money through property, including those that don’t involve buying physical bricks and mortar.
Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.
If you’re looking for expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,250 reviews.
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