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Buying a second home

Dreaming of a holiday home? Sort out the legals before putting your feet up

| Published on October 15, 2018

Are you are dreaming of owning a property where you can get away from it all? Somewhere for weekend breaks, a few weeks in the summer or New Year with friends? A holiday home offers an ideal retreat, and also a potentially profitable investment opportunity.

Whether you are considering a purchase for your own private use or to provide rental income, Anne Spicer, Licensed Conveyancer with Humphries Kirk in Parkstone, explains that there are several important legal issues to consider.

Private bolthole or rental investment?

One of the first things to think about is how you plan to use the property. Given the costs of owning a second home, including higher stamp duty, many holiday home owners rent out the property when they are not using it. If the property is going to be offered as a holiday let, you need to make sure you have a suitable holiday letting agreement which your solicitor can draw up for you. You must also make sure you comply with your obligations as a landlord, especially around fire safety and potentially hazardous facilities such as a swimming pool or Jacuzzi.

Holiday let mortgages

If you need a mortgage to purchase your holiday home, you will need a specific holiday let mortgage. Buy-to-let mortgages, which give the tenant the right to live in the property for a fixed number of months, do not allow for short-term holiday lets or for seasonal fluctuations in rental prices.

The mortgage lender will consider both your income and the rental income from the property, and will usually require that the property is let for a minimum number of months during the year. Typically, the forecast rental income will need to cover the mortgage interest payments by at least 125 percent.

Insurance

Your mortgage lender will require you to take out suitable insurance cover. Standard buildings and contents insurance policies will usually exclude properties that are empty for more than 30 days at a time. You will need special holiday home insurance which covers things like loss of rent and damage by tenants. It is also advisable to take out public liability insurance which will cover you if anyone is injured while staying in your property. Your solicitor can advise you on this as well as the need for legal expenses insurance to cover any disputes with tenants.

Planning and rates

If you are offering the property as a holiday let for the first time, planning permission may be required for a change of use. There may also be specific local planning restrictions which must be followed. For example, in St Ives in Cornwall recent legal changes mean that any new build property must be bought and continue to be owned for full residential use, restricting the development of new holiday homes.

If your property is available to let as a holiday home for 140 days or more during the year, it will be classified as a self-catering property and therefore valued for business rates rather than council tax.

Tax liability

There are various tax considerations when buying a holiday home, so it is important to take advice at an early stage. The stamp duty surcharge introduced in 2016 applies to additional residential properties and is charged at an extra three percent in each stamp duty band. Unlike standard stamp duty which applies in tiers, the surcharge applies to the entire purchase price. Any additional residential property bought for £40,000 or more will be caught, including holiday homes in the UK or abroad, and you will have to pay the tax even if you just buy a share in a property as long as your share is worth at least £40,000.

On the positive side, income from a holiday home is taxed more favourably than income from property let to long-term tenants. Holiday lets are treated as a trade for tax purposes, so mortgage interest costs can be deducted from rental income. There are strict rules on what qualifies as a holiday let. For instance, the property must be available for at least 120 days a year and must be let for at least 105 days. Importantly, it must be let commercially, which means you cannot include any days that you let the property to friends and family for free or at reduced rates.

If you require advice on the purchase of a holiday home, or any other conveyancing matter, please contact Anne Spicer on 01202 715815 or email a.spicer@hklaw.eu

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