Are you thinking of buying a second property? Here is everything you need to consider, from tax implications and mortgages to how to utilise a second home’s rental potential.
Almost half a million households in the UK own a second home. While some use the second property as a weekend getaway, others let it out to tenants—whatever your intentions, you need to decide on how you will use the house before purchasing it as this will determine how much tax you need to pay and the type of mortgage you should apply for.
Here are the most common uses for a second home in the UK.
One of the most popular reasons for buying a 2nd home is to use it as a holiday or rural retreat from the hustle and bustle of city life. Keep in mind that even if you are using a second home for a limited time during the year, you still need to pay stamp duty (at a higher tax rate than the standard). You also need to think about the maintenance costs involved for the months the home is not in use.
Buying a second house to rent is another popular reason for purchasing a second property, mostly because of the additional income buy-to-let properties provide. Before you go down this road, though, research how much you can charge for rent and check whether the rental yield can cover your mortgage payments and leave you a little extra on the side.
Speaking of home loans, you should consult a professional advisor before applying for a buy-to-let mortgage since these tend to be more complicated than residential mortgages. Fees and interest rates are higher than with residential mortgages as well.
You will also need to take out a landlord insurance policy—it will give you peace of mind and facilitate the management of the property. What’s more, insurance is a common requirement among buy-to-let mortgage lenders.
You can become an accidental landlord if you are forced to let out your second home if you
If this is the case, you could switch from a residential to a buy-to-let mortgage which will allow you to rent out the second property. Remember that renting out a house that is under a residential mortgage could get you into trouble with your lender, so it is best to talk to your loan provider before you decide to let property.
Related reading: How to invest in property in the UK?
You could turn your second home into an Airbnb—if you furnish it and make it available for rent 210 days a year, it will be classed as a business by HMRC, allowing you to deduct some of the costs, such as the interest on your mortgage.
Note that not all lenders are willing to lend your money for short-term holiday lets since these properties are seen as riskier due to the high turnover of guests.
There is an option to nominate your new property as your main residence, but this must be done within the first two years. You will still need to pay stamp duty land tax, but you can claim a refund if you sell the first home within 3 years of the purchase of the second house.
If you wish to continue to provide for your elderly parents or children after they have moved out of your house, you could purchase a property for them, but keep in mind that capital gains tax and even inheritance tax may be due when you gift a home.
Did you know that 13.9 million trips were made by Brits abroad just at the beginning of 2020? Buying a home abroad gives you the chance to enjoy sun and sea all year round, but there are taxes and regulations to consider both in the UK and in your chosen country.
Also known as property flipping, property developers usually buy a home in poor condition, fix it up and then sell it later when it increases in value. As with gifting a home, you will be liable for capital gains tax and on certain occasions, you may have to pay corporation or income tax as well.
The same rules apply to property developers who buy additional homes as a long-term investment, i.e. holding on to the house and selling it when its value goes up.
A mixed-use property is one that is used for business purposes and as a residence. While stamp duty is lower on these properties (the maximum rate is 5%), there are other taxes you need to pay at higher business rates.
Want to make the house-buying process easier? Here is a list of questions to ask about the home to make sure there are no hidden issues.
Unless you have savings to buy the property outright with cash, you will need to buy a second home by taking out a mortgage.
Homeowners interested in purchasing a second home for their own use rather than as an investment property, can either remortgage their existing property, release equity (if they are older than 55) or apply for a new home loan—provided their existing home is unencumbered, i.e. has no loans or debt attached to it.
To get a second mortgage, your lender will require that you have
Make sure to consider more than just the interest rate the lender offers and look into other home loan expenses, such as early repayment fees, arrangement charges, and late payment fees.
If you cannot raise the deposit for another mortgage, you could remortgage your existing property by using the equity in your home. This way instead of having two mortgages, you will increase your existing mortgage to raise money for the deposit.
There are several specialist lenders that allow you to remortgage an existing loan or you could get a new deal with your current lender. Whichever option you decide on, make sure you check for early repayment charges that might apply to your loan—in some cases, it might be better to wait until your current mortgage is paid off before you borrow more.
Borrowers over 55 can release the equity in their home through a lifetime mortgage that entitles them to a tax-free lump sum without the need to sell the home. There will be no monthly mortgage repayments—instead, the loan will be repaid (with interest) when the home is sold.
If you are planning on buying a second property to rent out, you will need to take out a BTL mortgage. Lenders will typically offer a choice between
Keep in mind that buy-to-let lenders will ask for a higher deposit—usually around 25% (or 30% for holiday lets) as well as details on how much you expect to make in rent. Most lenders will want the property to provide income that is at least 125% of the interest due on the buy-to-let loan.
Did you know that only 14% of all mortgages issued in the UK are buy-to-let?
In addition to the deposit, there are additional costs that come with purchasing a second home.
Stamp duty is payable on all second homes bought for £40,000 or higher.
The SDLT on additional properties is also higher than the one paid on one’s primary residence, usually three per cent above the normal rate.
|Property value||Stamp Duty rate on first homes||Stamp Duty rate on second homes|
|Up to £250,000||0%||3%|
|Over £1.5 million||12%||15%|
So, how much tax do you pay on a second property in the UK?
Stamp duty increases incrementally with the price of the property. So if you buy a second home worth £300,000, you will pay
You can use the government’s free SDLT calculator to work out how much tax you need to pay.
Note: Stamp duty is payable on second properties abroad as well, but not on ‘movable’ homes such as houseboats and caravans.
CGT is not payable when you buy or sell your principal residence, but it does apply when you sell your second home and make a profit higher than the capital gains allowance (£12,300 per individual).
How much you will pay depends on your income. At the moment, basic rate taxpayers pay 18%, and higher rate taxpayers 28% in capital gains taxes. You can learn more about capital gains tax and how to avoid it here.
Note: The capital gains allowance will be reduced to £6,000 from April 2023 and to £3,000 from April the following year
You might also be required to pay council tax on second homes, although this will not cost extra since many councils offer a discount on properties that aren’t occupied all year round.
Council policies vary from one area to another—for instance, some councils might charge you more if the home has been empty for two years. Check with your local authority for more information before buying the home.
Note: Council tax is not payable on holiday lets.
Homeowners that receive rent from their second properties will have to pay income tax on the money they earn. Although this is taxed at the same rate as the rest of your income, earning more a year might push you into a higher tax rate, so you will have to pay more tax on what you make.
Note: Previously, you could get more generous tax relief on mortgage repayments on your buy-to-let property. However, these have been capped at a 20% tax credit since April 2020 (higher-rate taxpayers used to get tax relief at 40%).
Whether you are renting out the home or using it as a weekend bolthole, the property and contents need to be insured under a separate second home insurance policy—you cannot legally cover two properties with one policy.
Landlords can take out a standard insurance policy that will cover most common issues, such as leaking roofs, accidental damage to appliances and liability cover in case of third-party injuries on the property.
Note: Standard home insurance policies do not typically cover houses that are vacant for a month or two. If you have a holiday home that is empty for more than 30 days, you will need to take out a specialist unoccupied home insurance policy.
Owning a second property comes with other costs in addition to tax and insurance, such as
Landlords also need to think about covering utilities and maintenance costs while the property is between tenants and there is no rental income coming in.
Before you buy a second home in the UK, carefully consider whether you have the finances to cover ongoing costs on two properties.
Buying a second house can be costly. However, if you can afford it, purchasing a second home can be a great investment—even if you are not renting it out you can always sell it once it increases in value.
Before you take the plunge and invest in a second home, make sure you
Yes, whether you buy a house with your partner who already owns a property, you inherit one or you purchase another home to rent or use for holidays and weekends, it is legal to own two properties (or more) in the UK.
This loan is designed for people who wish to rent out their primary residence so they can buy another place to live. The first home is let out temporarily until homeowners raise enough money to buy a second property. The let-to-buy mortgage market is not as extensive as the buy-to-let market, so it might be best to talk to a mortgage advisor about whether this product is right for you.
The most obvious issue is the cost. Houses are expensive, so when thinking about buying a second home consider whether you can afford the following:
If you are able to fit all the costs associated with buying a second property in your budget and have the time and energy to manage it properly, owning a second home should not present any major issues.
My name is Marija, and I'm a financial writer at DontDisappointMe. Although finance might not be everyone's cup of tea, my 10+ years of working in one of the biggest banks in my country, and my interest in extensive research on everything finance/investment-related, have made me somewhat of an expert in the field (if I do say so myself). No longer having the passion to work in a corporate setting, I decided that I couldn't let all of this knowledge go to waste so I started writing. And, here I am! Today I try to share my knowledge with my audience in the hopes of making this topic as simple and interesting as possible. In my leisure time, I like spending time with my family and travelling to new locations.