I'm not an accountant or IFA, to clarify! But we looked a lot at Buy-to-Let recently.
Paying off the mortgage for the 2nd UK home might work out to your advantage if you intend to keep the 2nd UK property for a long time (decades). It's only when you go to sell that you realise Capital gains tax penalty, and you could earn a hefty profit margin from letting the 2nd home otherwise, until your death, really. It's often in retirement that people most need an income stream like that, too. You didn't mention anything about your pension provisions.
I think there's no way to avoid paying some income tax on the 2nd home rent. However, any money you use to upgrade/repair the property is tax deductibile, and therefore may be a good investment in the long run.
Given the numbers involved, and your complicated finances/tax domicile situation, etc. I think it's well worth your while to consult (pay) an accountant to assess your options.
Yes we probably will need every penny in our retirement as I don't have any pension provisions at all (only 24 tho so that might change) apart from the equity in our second home.
My DH only has the property abroad as his "pension" and of course our current house. He started to pay into a pension fund when he started to work in the UK 2 yrs ago so there isn't much in there - maybe upping contributions might be a good idea with some of the rental income..?
Yes maybe we should get some (paid) advice as might be worth it in the long run!!!
On my rough estimates - excuse me if I'm completely incorrect, you will actually have approx £300 pcm to 'invest.' I've assumed you have £1000 net of letting agency fees and after 40% tax of £500 rental income, this comes to £300. Personally, if you have children, I would top up their CTFs' followed by topping up your own pensions.
Sorry, my mistake, the house is in your name so it's potentially basic rate tax on the rental income rather than higher rate tax subject to the rest of your income e.g interest from your savings/investments.