Tax on Second Homes
, by Matt Stevens
Everyone knows that getting a spot on the property ladder is an expensive ordeal, yet this costliness is often exclusively discussed in reference to the mortgage deposit that one has to save up for.
While this is understandable, it’s just as important to be aware of all the other extra fees and charges that come with getting a house. Moreover, how the extent of such fees varies depending on your specific situation.
This is true for those buying a second home, because second properties come with more tax implications than initial ones do, regardless of if you’re buying or selling. To help you inform yourself on the matter, we’ve put together this article which covers all you need to know about tax on second homes.
What is a Second Home?
A second home is a property you’ve purchased which stands apart from your main residence, i.e., the house where you live. On this point, individuals and couples likewise are only legally entitled to have one main place of residence.
Whether you bought or inherited a second property, you are liable for paying extra tax charges on it. In the former case, the purpose for buying the second home also does not matter. So, for instance, this includes whether the property is a holiday home for weekend getaways, a buy-to-let property for tenants, a long-term investment property for profit, or a seasonal/short-term let.
One thing to note is that even if your partner has come to own a second home, while you personally have not, then this will still qualify as your secondary residence, meaning that you’ll still have to pay the consequent charges.
What is Second Home Tax?
In the context of buying a second home, the primary tax implication is that of Stamp Duty Land Tax. Stamp duty is the most common and significant form of tax that you’ll have to pay. The amount of stamp duty someone has to pay varies depending on the value of the property they’re purchasing.
Stamp Duty Land Tax
Stamp Duty Land Tax is directly paid when you buy a home. For those in England and Northern Ireland, the rates for main residences are as follows:
For a property valued up to £125,000: 0%
For a property with a value between £125,001-£250,000: 2%
For a property valued at between £250,001-£925,000: 5%
For a property with a value between £250,001-£1.5m: 10%
For a property valued above £1.5m: 12%
When specifically buying a second home, there is an additional surcharge of 3% which is added on top of the respective rate which applies to you. Rates may differ in Scotland, where stamp duty is known as the Land and Buildings Transaction Tax (LBTT), as well as in Wales which has Land Transaction Tax (LTT).
What Taxes do I Have to Pay on a Second Home?
Alongside Stamp Duty Land Tax, there’s also other types of tax you’ll have to pay if you own a second home. Namely:
Council Tax
You will be liable for Council Tax on both properties if you own a second home. Having said this, there will not be any extra charge on the second property, instead some councils actually offer discounts on second homes if you only stay there occasionally.
Income Tax
You will have to pay Income Tax on your second home if you rent it out to tenants, and thereby gain an income from it. How much income tax you’ll have to pay exactly is determined by the profit you gain from the rental property. You should bear in mind that your rental income from a second home has the potential to send you into a higher tax bracket.
Capital Gains Tax
Unlike the previous types of second home tax, Capital Gains Tax (CGT) applies if you decide to sell your second home. That is, the profit you make from the property sale will be taxed according to the rest of your overall income. Albeit, the threshold for CGT is £12,300, so if your profit falls under this figure then you will be within the capital gains allowance.
Do I Have to Pay Stamp Duty on a Second Home Abroad?
Yes, as mentioned previously, even if your second home is a property abroad being used for holidays, it’s still classed as a second home. Therefore, you will have to pay the correct Stamp Duty Land Tax charge.
Can You Avoid Second Home Tax?
No, you cannot avoid paying second home tax. Although, some second homes do not incur such tax implications. For example, you can legally circumvent second home tax if your property is a caravan, worth less than £40,000, or if you choose to sell your main residence within three years of buying a second property.
Thinking of Buying a Second Home?
If you’re considering purchasing a second home, but are understandably confused by all that is involved in the process, then look no further.
We at The Mortgage Genie have helped many of our UK clients to get a mortgage on a second home. With years of experience, we have the knowledge needed to ensure you get a product that’s perfect for you, whether it entails a holiday home or buy-to-let property.
We’ll guide you through each step of the way so that you have confidence from beginning to end. If you’re in need of a team of expert mortgage brokers, then be sure to contact us at 01915809890 today. And why not see how much you could borrow up to right now by using our mortgage calculator?
