Peter Izard is business development manager of Investec Private Bank
With many buyers now seeking the benefit of a rural retreat alongside their urban primary residence, demand for second properties has grown massively since the start of the pandemic. According to data from Hamptons, this saw around 22,000 second homes bought in the UK last year.
The boom of staycations in the UK has also contributed to this demand, as opportunistic property owners have sought to generate extra income, using their second homes as holiday lets.
At Investec, I’ve been speaking with a growing number of our high net worth (HNW) clients about how lending can help them quickly capitalise on opportunities.
Below are some of the key considerations and commonly asked questions which financial experts and intermediaries should be aware of as this trend gathers momentum.
Just as people have re-evaluated their living circumstances in the wake of the pandemic – seeking properties with home offices or bigger gardens – there has also been a huge shift in where people want to live.
Rural locations have seen a huge growth in popularity, particularly as people living in urban areas have ‘escaped’ from the city and relocated to the countryside. However, while some have relocated entirely, others have chosen to keep their primary residence and purchase a property further afield.
In the last year alone, 15 of the top 20 most popular areas to purchase a second home were in coastal locations. From speaking with some of Investec’s clients, for example, there is high demand for homes in regions such as Cornwall and Oxfordshire.
Holiday lets versus BTL
Many people with second homes are choosing to rent their properties out, as it gives them the ability to receive extra income from rent.
With the Great British vacation very much ongoing, holiday bookings in the UK have surged as foreign travel restrictions have remained restricted.
As such, the opportunity to secure some extra money is greater than before. What’s more, the income secured via this route is subject to a different tax structure than buy-to-let (BTL) income, which can make returns particularly lucrative.
To clarify the difference: when we talk about using second homes as holiday lets, this refers to a private residence for personal use that is being let out on an ad hoc basis. A BTL property, on the other hand, is a property purchased solely for commercial purposes.
The best lending approach
When working with a HNW client looking to purchase a second home – whether entirely for personal use, or to rent periodically – it’s important to work with a flexible lender.
There are specific mortgages available for holiday lets, but many come with set criteria and set rates, which can limit the amount that a buyer can borrow.
Many of Investec’s HNW clients have complex income structures which require a more tailored solution.
For this reason, it’s crucial to take a bespoke approach and work with a lender which can assess affordability based on a holistic understanding of an individual’s wealth.
Tax and management
While renting a second home or purchasing a holiday let can be an exciting prospect, it’s important to note that the upkeep and management involved can be costly.
With new COVID-19 hygiene protocols introduced over the past year, changeovers between guests need to be even more thorough than usual. There are specialist firms that can manage this process on a landlord’s behalf, but they can charge a commission of up to 15% 20% per booking.
Looking at tax, there are also special rules for holiday lets, otherwise classified as furnished holiday lets (FHLs). To qualify as an FHL, a property must be furnished and located within the UK, and be available to let for at least 210 days, with bookings in place for 105 days. This means that if the owner of the property would like to use it themselves, they can do so for the remaining 155 days of the year.
Assuming a property meets these requirements, a landlord can deduct the cost of their mortgage from their profits before calculating how much income tax to pay. This is in contrast to the tax structure for BTL landlords, who cannot 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.
However, as with any tax factors, if a client is considering letting a second home on a holiday let basis, I highly recommend seeking independent tax advice from a qualified accountant.