What to Consider When Buying a Second Home

As a nation, Brits have long been enamoured with the idea of owning a second home, whether as a holiday retreat, a buy-to-let investment, or a future retirement residence. According to recent statistics, one in ten people in the UK now owns a second property. If you’re considering joining this ever-growing group, there are several factors to keep in mind, including mortgage options, capital gains tax, stamp duty, and council tax. This article delves into these crucial financial aspects to help you make an informed decision when purchasing a second home.

Aerial view of residential properties near a coast.

Mortgage Options for Second Homes

Securing a mortgage for a second home is generally more challenging than obtaining one for your main residence. The eligibility criteria tend to be stricter, with lenders typically requiring a higher deposit, a good credit score, and proof of sufficient income to cover both mortgage payments. While a deposit of 25% is standard, some lenders may ask for up to 40% for second home mortgages.

There are two main types of mortgages to consider for a second property:

  1. Residential mortgages: If you plan to use the second home as a holiday retreat or future retirement residence, you will need a residential mortgage. Lenders may impose additional restrictions, such as a minimum distance between your main and second property, to ensure the new purchase is a genuine second home.
  2. Buy-to-let mortgages: If you intend to rent out your second property, a buy-to-let mortgage is required. Lenders will assess the property’s rental income potential, which must usually be at least 125% of the mortgage payments. Additionally, they may have stricter lending criteria, including higher interest rates and arrangement fees.

Capital Gains Tax

When selling a second home, you may be liable for Capital Gains Tax (CGT) on any profit made. CGT is charged at different rates for residential property and other assets:

  • Residential property: 18% for basic rate taxpayers and 28% for higher or additional rate taxpayers.
  • Other assets: 10% for basic rate taxpayers and 20% for higher or additional rate taxpayers.

Various factors influence the amount of CGT due, including the length of ownership, property improvements, and the availability of reliefs or exemptions. It is crucial to seek professional advice to minimise your CGT liability and ensure you are compliant with HMRC requirements.

Stamp Duty Land Tax

Stamp Duty Land Tax (SDLT) is payable on property purchases in England and Northern Ireland. For second homes, an additional 3% surcharge applies on top of the standard SDLT rates, which workout as follows:

Up to £250,0000%3%
£250,001 to £925,0005%8%
£925,001 to £1.5 million10%13%
Over £1.5 million12%15%

In Wales, Land Transaction Tax (LTT) applies, with a 4% surcharge on second homes. In Scotland, the Land and Buildings Transaction Tax (LBTT) is levied, also with a 4% surcharge for additional properties.

Council Tax for Second Homes

Council tax applies to all domestic properties, including second homes. The amount payable depends on the property’s valuation band and the local council’s tax rates. However, some councils offer a discount on council tax for second homes, typically between 10% and 50%, depending on the property’s usage and the local authority’s discretion.

To benefit from any available discounts, you must inform the local council that the property is a second home and provide relevant supporting documentation.

Purchasing a second home can be an exciting and rewarding venture, but it’s essential to carefully consider the financial implications and responsibilities involved. By understanding the different mortgage options, capital gains tax, stamp duty, and council tax requirements, you can make an informed decision that aligns with your financial goals and long-term plans.

Before embarking on your second home journey, it is advisable to seek expert advice from mortgage brokers, financial advisors and solicitors to ensure a smooth and successful purchase. Additionally, researching the local property market, potential rental income, and understanding the costs of property management and maintenance will help you make the most of your investment.