With summer upon us, it is not uncommon to want to prolong that holiday feeling and dream of investing in a holiday home which allows you to return to your favourite spot more frequently. Holiday home ownership has boomed recently and in 2021 second homes accounted for more than 24,000 purchases. Many of these were on the coast or other areas of natural beauty, where house prices have also seen rapid growth.
‘If you are planning to buy a holiday home, it is important to consider the issues carefully and not get swept away by enthusiasm or high-pressure sales tactics,’ says Steven Douglas, a Solicitor in the residential property team with Richard Reed Solicitors. ‘Buying any property is a major investment, and holiday home ownership can involve additional considerations with long-term consequences, so there is plenty to think about.’
Second homes and tax
Tax may not be the first thing on your mind when choosing your holiday bolthole. However, the special tax treatment of a second home can result in extra costs, not always immediately apparent.
If you already own a property, or a share of one, stamp duty will be payable at a higher rate. This will be an extra three per cent of the purchase price on top of any duty ordinarily payable. So, on a home costing £300,000, you will pay £14,000 in duty instead of £5,000.
The rules are different for certain types of second homes, like static caravans or some lodges, which do not form part of the land. In these cases, there may be no duty. Unfortunately, it is not always clear which category a property falls into. Taking specialist advice could save you money or avoid problems later with HMRC.
When you sell, unless the property has become your main residence, you must also pay capital gains tax on any increase in value. The property will also usually form part of your estate for inheritance tax and is unlikely to attract any reliefs. This may not seem a priority now, but always consider your longer-term plans before buying. If your purchase is linked to retirement, this could be a good opportunity to discuss estate planning.
Mortgages and second homes
If you are buying with the help of a mortgage, you will need to satisfy lenders you can afford the repayments. They will consider your outgoings, including any current mortgage payments, as well as your payment history. With most residential mortgages, you will also need your lender’s consent to rent your home out, and many buy-to-let mortgages restrict Airbnb-style lettings. So, your choice of mortgage product may be limited. Consider using a specialist advisor and check the terms of any mortgage carefully before committing yourself.
Council tax and business rates
You may have read news stories about plans to restrict tax relief on holiday homes. Not everyone will be affected, but you should consider the impact on your plans.
Currently if your property is available for holiday lets 140 days a year, you pay business rates rather than council tax. You may then qualify for small business rate relief, which can reduce your outgoings. However, from April 2023, different rules will apply. To qualify then you must also prove you let your property commercially for at least 70 days.
This change reflects wider concerns about the impact of second homes on house price affordability. In theory, local authorities can give discounts for council tax on second homes. In practice few do, and in parts of Wales second homes could incur premiums of up to 300 per cent. You should check the rules in your chosen areas before buying, as council tax can add to the ongoing costs of ownership.
Renting out your holiday home
Letting your holiday home can be an attractive proposition, whether to offset your costs or as a commercial venture. Short term holiday lets should not give your guests the security of tenure of a residential tenant. However, you must ensure the contracts with them are correctly documented. You must also comply with regulations which are different from those associated with personal home ownership or being a buy-to-let landlord, for example, on gas and fire safety.
Legal title to your holiday home
With a bricks and mortar property, the same legal issues apply as with any house purchase. However, you may have more flexibility on completion dates as you will not have a property to sell. Your solicitor will conduct the usual conveyancing searches and check the seller’s title. This is vital as any title problems could affect the property’s value, making it harder to sell in the future.
In addition, there will be some holiday areas meriting special consideration. For example, some properties have planning conditions limiting occupancy to agricultural workers or those with an established local connection. Local planning policies may also make it harder to change the use of a building or how it looks. If your home is in an Area of Outstanding Natural Beauty or a National Park, for example, you may need planning permission for work when you would not elsewhere. Your solicitor can explain the impact of any policies in your chosen location.
Buying an apartment can be an appealing option, minimising the amount of time spent on upkeep. However, title is likely to be leasehold and could contain restrictions on its use. These could affect your plans, for example, by making it harder for you to reconfigure or rent your property out. You will also need to consider the impact of ground rent and service charge provisions, which could add to the ongoing cost of ownership.
If you are buying on a holiday park, the site owner may claim you do not need an expert solicitor as the sale does not involve the transfer of land. Unlike buying a conventional home, you would own the park home but not the land on which it is situated. Instead, you enter into a licence agreement for the pitch. However, this arrangement can easily create additional issues. You will, for example, want to ensure you can enjoy your holiday home in the years to come without facing large fee hikes, so it is advisable to take legal advice.
Think carefully about alternative ‘ownership’ schemes
There are various schemes, such as timeshare, holiday clubs and bonds, which may seem to offer some of the benefits of holiday home ownership at a fraction of the cost. Unfortunately, they are not always as good as they appear. Hidden costs and difficulty selling on your interest may make them a poor investment in the longer term.
Similarly, buying a property ‘off plan’ may appear attractive, but will involve additional risks. For example, the developer could become insolvent, and the true level of service charge or the property’s resale value is untested.
You should consider all the facts carefully. Be wary of any high-pressure sales techniques; there is no need to rush. Remember that a pushy sales executive may have an ulterior motive in wanting you to sign up quickly. There are various rules and regulations which operators should comply with. However, sometimes they may tailor their product to avoid these or may fail to explain your rights. So, always get some independent advice before committing yourself.
How we can help
Whatever type of holiday home you have in your sights, we can help ensure your purchase goes smoothly, and, just as importantly, that there are no hidden legal issues to spoil your future enjoyment.