Second Home Ownership: Navigating Costs and Potential Profits in the UK Holiday Market

The UK's holiday property market is experiencing shifts as increased taxes and running costs impact second-home ownership. While some owners are selling, others are finding ways to make a profit by letting out their properties, particularly with a staycation summer anticipated due to factors like EU customs delays and warm weather.

Owning a second property has become more expensive over the last decade. Changes to stamp duty, with a surcharge for additional properties rising from 3% to 5% in 2024, and the imposition of 100% council tax premiums by some English councils, have significantly increased ownership expenses. These are compounded by rising renovation and energy costs.

A survey by Sykes Holiday Cottages indicated that 71% of homeowners who do not currently rent out their properties are considering doing so. Research from Equity Residences suggests that a second home in the UK valued at £2 million could incur over £1.2 million in additional costs within five years. This includes £370,000 in acquisition expenses such as stamp duty, legal fees, and surveys, and £83,000 in annual running costs. The study also notes an opportunity cost of £450,000 over five years compared to investing in ten-year gilts. These figures do not account for exit taxes, estate planning, or furnishing costs. For higher-rate taxpayers, a £400,000 capital gain could result in a tax bill of approximately £96,000, while inheritance tax exposure for a single owner of a property in the £2 million to £5 million range could exceed £670,000.

Tim Milwood, who owns two properties in Weymouth, Dorset, has shared his experience letting out his second home, Wolf Cottage. He purchased the three-bedroom property for £250,000 in 2022. After renovation, he lets it out through Sykes Cottages, achieving 80-90% occupancy and a 10% yield.

Milwood's annual costs for Wolf Cottage include £4,000 for utilities, £1,000 for insurance, £6,000 for maintenance, and £1,000 for accountancy fees. Expenses related to high guest turnover are £12,000 for changeovers, £8,000 for the letting agent's commission, and £1,000 for guest amenities. By paying business rates instead of council tax, Milwood reported a gross annual profit of £40,000 from this property, with his second property, Otter Cottage, generating similar returns and contributing to his early retirement plans.

Milwood noted that the loss of Furnished Holiday Lettings tax reliefs has tightened profit margins. He advises potential owners to understand all costs before purchasing and to maintain a contingency fund for unexpected expenses. The uncertainty of tax regulations, especially for second-home owners often associated with local housing shortages, remains a concern.

In Wales, councils have the authority to increase council tax rates for second-home owners. Pembrokeshire, for instance, raised its rate to 200% in 2024 before reducing it to 150% due to negative impacts on local tourism. The Land Transaction Tax (equivalent to stamp duty) also presents a higher cost, with a £1.5 million second home incurring £186,200 in tax, compared to £111,750 for a primary residence.

Carol Peett, founder of West Wales Property Finders, observed that many second homes in Tenby are being put up for sale, which has been detrimental to the local economy. She suggested that long-term ownership might be necessary for profitability.

An alternative for some owners is purchasing lodges or park homes, which are not subject to council tax. Claire and Ray Duckworth, from Staffordshire, opted for a three-bedroom luxury lodge at Dylan Coastal Resort in Carmarthenshire, costing from £375,000. They were drawn to the fixed annual bills and a simpler way to recoup costs.

The Duckworths pay £13,000 annually, comprising a £10,000 service charge, £2,000 for utilities, and £990 for water and sewage. They anticipate recouping their investment in the lodge within 13 years. The resort manages the property, taking 30% of the net rental income, and achieves 80% annual occupancy. The couple plans to use the lodge for up to three months a year and rent it out during peak season, stating that this covers their costs. Despite the property being on a 100-year lease and potential depreciation, they intend to pass it down to their family.