Tax Considerations
There are various reasons you might be considering buying a second home, whether it be a Summer home, a holiday home, a property to let when not in use, or simply an investment to let full-time. It can be a costly but worthwhile venture, but it is imperative that you consider the various tax implications.
By taking advice on how stamp duty land tax (SDLT), council tax, capital gains tax and income tax operate with regards to second homes, you can ensure it is a cost-effective solution for you and your family, and potentially minimise your tax costs.
Second-home Stamp Duty
As of April 2016, the SDLT rates for second properties are 3% above those for your primary property. Therefore it is essential that you factor in this additional cost when outlining a budget for your second home.
| Property Value Band |
Additional Property SDLT rate |
| £0 - £125,000 |
3% |
| £125,001 - £250,000 |
5% |
| £250,001 - £925,000 |
8% |
| £925,001 - £1.5m |
13% |
| Above £1.5m |
15% |
It is important to note, the rate is charged on each portion of the property’s value. For example, if you buy a second home for £220,000, you pay 3% on the first £125,000 and 5% on the remaining £95,000. Properties costing less than £40,000 are not subject to SDLT.
Council Tax Conundrums
Research the council governing your new home’s area, as council tax charges, and specifically rules on concessions for second homes, can vary dramatically from council to council.
Some will offer significant savings on council tax for second homes that are not permanently occupied, in some instances as much as 50% off. However, other councils will charge a premium on the standard rate if your property is unoccupied for more than six months of the year.
Once you’ve made the decision to purchase, there are other points to note. Most councils offer a grace period on council tax for the first six months of owning your second home if the property remains unfurnished and unoccupied, although do inform them as early as possible that it is a second home as you may be billed for council tax at the full rate once it’s fully furnished.
Deciphering Capital Gains and Income Tax
Just like your employment income, letting income is taxable so all rental income must be declared on an HMRC tax return. Deductions are available for expenses, such as insurance, mortgage interest and letting agents’ fees, however, expenditure is an important factor to consider when calculating the possible return on your investment. You should take advice to ensure you are claiming a deduction for all relevant expenditure to minimise your income tax liabilities.
Finally, when the time comes to sell your second home, tax comes in to play again. Any profit you make on the sale of your property will be subject to capital gains tax and again this would need to be declared on a tax return. Where you have used the second property as your main home for a period of time, there may be some relief from capital gains tax but the rules are complex and advice should be sought. Where you own more than one property it may be necessary to make an election to HMRC to determine which is to be treated as your main residence for tax purposes, and this must be done within certain time limits.