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BUYING A SECOND PROPERTY: A BEGINNER’S GUIDE

Whether you’re interested in buying a holiday home or making an income from a buy-to-let, this guide will give you all the essential information you need to manage the process of purchasing a second property.

What Are the Benefits of Owning a Holiday Home?

  1. Holiday Accommodation Suited to Your Needs

Owning a holiday home gives peace of mind that the needs of you, your family and your friends will be met. This is especially important if one of you has a particular need, such as wheelchair access.

Staying in a property you have never visited before is always a risk. What if the rooms aren’t clean? Is the layout a nuisance? Are the local shops and entertainment facilities much further away than you thought? Holidaying in a familiar place you call your second home is one of the best ways to ensure a relaxing and enjoyable getaway.

  1. Quality Time with Family and Friends

If you’ve invested in a holiday home, you’re far more likely to schedule the time to use it. It’s much easier to relax and enjoy quality time together when everyone is away from work and life’s other commitments. These precious moments will allow you to build relationships and memories with family and friends.

  1. New Experiences and Cultures

Wherever your second home is, it’s likely the local environment and culture differ significantly from the area where your primary home is located. Having a property that you regularly visit offers a fantastic opportunity to understand and fall in love with new people and traditions. This is a great experience for adults and children alike.

  1. An Additional Income

Rent your holiday home out when you’re not using it to earn a healthy second income. If the idea of having strangers in your second home is offputting, restrict invitations to people you know and friends of friends.

Is Buy-To-Let Still Worth It?

No investment is risk-free, and the introduction of an additional 3% stamp duty tax on second homes, along with the removal of a landlord’s right to offset mortgage payments on buy-to-let (BTL) properties, has made them a less attractive option to many. The requirement for a minimum 25% deposit is also prohibitive for many would-be second-property buyers.

However, if you’re in it for the long haul, buy-to-let can still be a savvy financial investment. Rental yields may have dropped due to changes in tax laws, but the capital growth a property makes the longer you own it can make BTL profitable long term. As with any major financial investment, it’s a good idea to speak to a legal professional before making a big commitment.

Can I Afford a Second Property?

Whether you can afford a second property is not just about the house sale price.

  • You will need a deposit of at least 15% or 25% for a buy-to-let property.
  • If you have a mortgage on your main residence and need a loan to buy a second home, there will be strict affordability criteria to meet.
  • Mortgage rates are typically higher for a second home.
  • If you plan to rent out the property, you will need to take out a buy-to-let mortgage.
  • Remember to factor in the ongoing maintenance costs of a second property.
  • If you sell your second home for a profit, there will probably be Capital Gains Tax to pay on the gain made.

How Much Stamp Duty Will I Have to Pay on a Second Home?

Stamp Duty Land Tax (SDLT) is due on all residential properties over £125,000. When you buy a second home, there is an additional 3% levy to pay on properties costing more than £40,000. 

There is no way — legally — to avoid paying this tax. It is due on both leasehold and freehold properties, regardless of whether you are buying with cash, a mortgage, or both. However, it doesn’t apply to mobile homes, houseboats or caravans.

There are five SDLT bands. Your total tax due is calculated by applying the rates for each threshold. For example, on a property bought for £500,000, you will pay:

  • 0% on the first £125,000
  • 2% on the next £125,001 to £250,000 = £2,500
  • 5% on the last £250,001 to £500,000 = £12,500.

This means your total tax bill would be £15,000 if this were your only home. For a second home, you must add the 3% additional charge to calculate the total tax bill:

  • 3% on the first £125,000 = £3,750
  • 5% on the next £125,001 to £250,000 = £6,250
  • 8% on the final £250,001 to £500,000 = £20,000.

This gives you a stamp duty total of £30,000.

What Is Capital Gains Tax, and Do I Have to Pay It?

Capital Gains Tax (CGT) may be due when you sell a second home or buy-to-let property. CGT is payable on the gains you make when selling. For example, if you bought a second home for £250,000 and sold it five years later for £280,000, the tax would be due on £30,000.

All taxpayers have a CGT allowance each year, allowing them to earn a certain amount without paying tax. In 2022, the annual allowance is £12,300. You cannot roll over any of your allowance to the next year — use it or lose it!

The rate of CGT payable depends on your tax band. A basic-rate taxpayer will pay 18%, and a higher-rate taxpayer will be charged 28%.

Check out the government website for more information and consult a qualified legal professional with expertise in this area to ensure you understand your tax obligations when selling a second property. 

Final Thoughts on Buying a Second Property in the UK

The best way to decide whether buying a second property in the UK is a good decision for you is to set clear objectives, prioritise these and speak to qualified legal and financial professionals. What’s right for one person may not suit the next, so take time to assess your circumstances and understand what you’re getting into before making any big investment decisions.

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