The number of second homes in England has surged by over 50% in the past 10 years to 482,000. Interestingly, 45% of second-home investors use their property as a holiday home (Airbnb), while 35% use it as a long-term investment.Buying a second property is an exciting investment opportunity for those looking to build their real estate portfolio. However, it also comes with many additional factors to consider beyond a standard home purchase. This guide provides an in-depth analysis of what to know when buying a second home in the UK, starting with the tax implications.
Tax Implications of Buying a Second Home in the UK
Purchasing a second property in the UK comes with its own set of tax implications. Let’s examine the most important ones below.
Higher Additional SDLT Rates
One of the crucial taxes to consider is the Stamp Duty Land Tax (SDLT). As a second home buyer, investors would be required to pay an additional 3% surcharge on the standard SDLT rate. However, if the investor sells any other residential property they own at the time of purchase, then the 3% surcharge wouldn’t apply.
Outlined below is an overview of the current standard and higher SDLT rates.
|Property Purchase Price
|Standard SDLT Rates
|Higher SDLT Rates
|The next £675,000 (From £250,001 to £925,000)
|The next £575,000 (From £925,001 to £1.5 million)
|The remaining amount (The portion above £1.5 million)
For example, an investor purchasing a second home worth £300,000 without selling their current residential property would pay an SDLT of £11,500.
0.03 x £250,000 = £7,50; and
0.08 x £50,000 = £4,000.
This gives a total of £7,500 + £4,000 = £11,500
Capital Gains Tax (CGT) on Selling Your Previous Home
Besides considering SDLT, investors should also factor in Capital Gains Tax (CGT) when selling their previous property. CGT is a tax investors pay on the profit when they sell a property that has increased in value. The taxable gain is the difference between the sale price and purchase price, which includes the costs of improvements made to the property.
CGT is applicable to the remaining profit after deducting the tax-free allowance, which is £6,000 for the tax year 2023–2024. The CGT rates on residential properties are 18% for basic rate taxpayers and 28% for higher rate taxpayers. Investors must note that allowances and rates change annually, so it’s important they consult with their wealth manager.
In summary, the SDLT surcharge and potential CGT liabilities considerably affect the cost of acquiring a second home in the UK. Therefore, investors must calculate these taxes and explore all possible legal ways to minimise their tax impact before purchasing a second property. The next section will focus on the various ways to save costs when buying a second home.
4 Ways to Reduce Cost When Buying a Second Home
One of the disadvantages of owning two homes in the UK is the high cost. Hence, it’s important to learn the various ways to minimise these taxes and other costs. For investors looking for capital growth and rental income, keeping costs low is key to maximising returns.
Here are some of the recommended ways to get the best value for a second property or home:
- Sell the current main residence first.
- Capitalise on CGT relief for residential properties.
- Buy a new-build property.
- Claim back the SDLT surcharge.
1. Sell the current main residence first.
Buying a second home without selling the first will result in higher SDLT rates. Investors who sell their main residential property before buying a new one are exempt from the 3% SDLT surcharge applicable to second homes. Instead, they will pay the standard SDLT rates.
Using the above example of a £300,000 property, an investor who sells their current home will pay an SDLT of just £2,500 (i.e, 0.05 x £50,000), and not £11,500. That’s a savings of £9,000 that could be channelled into other purposes like furnishing the property.
2. Capitalise on CGT relief for residential properties.
Capital Gains Tax (CGT) relief, also known as Private Residence Relief, is not applicable if an investor has lived in the property for the entire period of ownership. This means any profit they make from selling their home won’t be subject to CGT.
For instance, if they bought a house for £200,000 and later sold it for £300,000, the £100,000 profit would typically attract CGT. However, if they’ve lived there throughout, this gain is exempt from CGT. This relief can significantly reduce an investor’s tax burden when selling a property.
3. Buy a new-build property.
Investing in a new build property can be an excellent move for many reasons.
For one, new builds often attract a specific tenant calibre: high-quality, long-term renters. Young professionals and new families are often drawn to the modern amenities, energy efficiency, and minimal maintenance needs of a new build. These types of tenants typically provide a consistent rental income, which can be a significant boon to an investor’s finances.
If the monthly rental income is higher than the mortgage payment, it can help an investor pay off their home mortgage much quicker. Thus, a new build property can be a lucrative investment strategy to save on costs.
4. Claim back the SDLT surcharge.
If an investor has already bought a second home and paid the Stamp Duty Land Tax (SDLT) surcharge but then sold their first home within three years, they may be eligible for a refund of this surcharge.
For instance, let’s say they bought a second home for £300,000 and paid an SDLT surcharge of £9,000. If they sell the previous property within 3 years of purchase, they can claim this £9,000 back. However, the previous property must be their main residence.
This provision is particularly advantageous for those who originally wished to sell their existing property before buying a new one but couldn’t do so earlier and had to pay the SDLT surcharge that they should have been exempted from.
With strategic planning, investors can purchase a second property and build their portfolio while avoiding unnecessary closing costs. Carefully considering the options available to reduce fees, like the SDLT surcharge, can make a substantial difference to investment returns over the long run. But there are more ways to save on cost via equity financing, as we’ll see shortly.
Using Equity to Finance a Second Property
Owning a second home often incurs significant financial responsibilities. Many buyers utilise the equity in their primary residences to finance their second home purchase, i.e., remortgaging to release equity. This can be an advantageous strategy, but buyers should be aware of the risks and responsibilities involved.
The equity in a homeowner’s primary residence represents the portion of the property value they own outright, calculated as the market value minus any outstanding mortgage balance. This equity can be used as a home equity loan or line of credit to generate funds for a down payment on a second home. In other words, provided the homeowner’s equity in their existing property is enough to cover the downpayment of a new property, they can use it as a downpayment instead of getting a new mortgage.
However, there are some risks to consider before taking this approach.
Risks to Consider
If property values decline, the equity in both homes could drop significantly, potentially leading to negative equity situations. The additional debt from a second home also reduces the buyer’s debt-to-income ratio, which could limit their ability to qualify for other loans in the future.
In the event of financial hardship, keeping up with mortgage payments on two properties may prove challenging. In fact, defaulting on either mortgage could put both homes in jeopardy. For these reasons, buyers should only borrow what they can afford to pay back, even if their financial situation changes.
Using equity from a primary residence to finance a second home can also have tax implications. The interest on home equity loans and lines of credit is typically tax deductible, but the deductibility depends on how the funds are used. Interest can only be deducted if the equity is used to buy, build or substantially improve the primary home or second residence.
Buyers should consult a tax professional to understand all the potential tax consequences before proceeding.
With prudent planning and an understanding of the responsibilities involved, leveraging equity from an existing home can be a viable way for buyers to finance a second property. However, it’s not without risks, so investors must go in with their eyes open to the challenges of owning multiple mortgaged properties. That said, let’s outline the process of buying a second home.
How to Buy a Second Home in the UK in 6 Steps
Having understood how to save costs on a second home in the UK, the next step should be taking action to buy the property.
Here are 6 steps to buying a second home in the UK:
- Assess the current financial situation.
- Research on the location.
- Secure financing.
- Work with real estate advisors.
- Finalise the mortgage.
- Exchange contracts and complete the purchase.
1. Assess the current financial situation.
Before looking for a second home, investors need to understand their current financial capabilities. This includes their income, savings, and how much they can afford to pay for a mortgage. Buying a second home means they’ll have additional expenses like insurance, maintenance, and possibly higher mortgage rates, so financial buoyancy is essential.
2. Research on the location.
Location is paramount when it comes to real estate. Investors should consider factors like the proximity to amenities, the state of the local property market, the potential for rental income (if they’re planning to rent it out), and personal factors like how often they’ll visit and how far it is from their main home. While a real estate agent can offer valuable insights, we suggest investors consult with their wealth managers first.
3. Secure financing.
If an investor can’t afford to buy the home outright, they’ll need a mortgage. Investors should shop around for mortgage lenders with the best rates and terms to avoid high-interest debt. A second home mortgage may also have stringent requirements, but a seasoned wealth advisor can provide recommendations on the best mortgage providers, especially for international investors.
4. Work with real estate advisors.
A local real estate advisor will have valuable knowledge about the housing market and can help investors find properties that offer the best value. They can also guide them through the process and handle all the legal processes and paperwork.
5. Finalise the mortgage.
Once a suitable property has been found, investors can conclude mortgage dealings. The mortgage lender may also conduct a valuation to ensure the investment property itself is worth the amount being borrowed.
6. Exchange contracts and complete the purchase.
Once everything is in order, the investor and the seller will exchange contracts — at this point, the sale is legally binding. The buyer can then pay the deposit, and on completion day, they’ll pay the remaining balance, and the property will be theirs. This typically involves some legal considerations, but a wealth manager or advisor can handle that.
Given how important finding the right location is for the success of a property, we will elaborate more on it in the next section.
Finding the Right Location for Investment Potential: 5 Top Picks
One of the most important rules for buying a second home is to choose the right location by working with a reputable local real estate agent via a wealth advisor. Areas experiencing urban regeneration and new infrastructure development, like transit hubs, are often good predictors of future capital appreciation and higher rents. Similarly, areas with a surge in new businesses can also show potential for property value increase.
At API Global, we’ve identified cities like Manchester, Liverpool, Ashford in Kent, Birmingham, and Nottingham as the best places to invest in UK property for capital growth and strong rental demand, and here is why:
Manchester is a solid area for capital growth due to its rapidly growing economy and property market. It’s a major hub for industries like technology and finance, attracting young professionals who drive rental demand. Moreover, significant urban regeneration projects and infrastructure development are enhancing its appeal, making it a promising area for property value appreciation. It’s also home to several universities, creating a robust demand for student housing.
Thanks to a thriving economy and a booming property market, Liverpool is an excellent area for capital growth. It’s a cultural hub with a vibrant music and arts scene, drawing in a diverse population. Significant urban regeneration projects and infrastructure improvements are boosting its appeal, promising property appreciation. With several universities in the city, there’s a consistent demand for student housing, making it an attractive location for property investment.
3. Ashford in Kent
Ashford in Kent is a promising area for capital growth due to its strategic location and ongoing development projects. Its direct high-speed rail link to London makes it attractive for commuters, boosting property demand. The town is undergoing significant regeneration, with new homes, commercial spaces, and amenities being built. Its quality schools and picturesque countryside also add to its appeal, making it a viable choice for property investment.
Birmingham is a strong area for capital growth, driven by its dynamic economy and extensive regeneration projects. As the UK’s second-largest city, it’s a thriving hub for business and education, attracting a diverse population. The ongoing infrastructure enhancements, including the HS2 rail network, are set to boost property values, and the city’s multiple universities ensure a robust demand for student housing. All these factors make Birmingham a promising location for property investment.
Nottingham presents a compelling opportunity for capital growth due to its robust economy, vibrant cultural scene, and significant regeneration projects. As a key city in the UK’s Midlands Engine, it’s attracting businesses and creating jobs, driving rental demand. Its two large universities ensure a steady demand for student housing. Also, infrastructure improvements, such as the proposed expansion of the tram network, are set to enhance property values, making Nottingham a promising destination for property investment.
Finding an up-and-coming UK property area with solid investment potential is key, but the choice of property also matters greatly. A dwelling near schools, shopping, dining, vacation homes, and recreational facilities will attract quality long-term tenants and maximise returns. Once a good location has been identified, investors must learn how to maximise their rental income — check out the next section for more information.
3 Tips for Maximising Rental Income From Your Second Home
One of the things to consider when buying a second home is to maximise rental income, and here are some strategies to help achieve this:
- Identify the target market.
- Provide extra amenities and facilities.
- Set competitive and fair pricing.
1. Identify the target market.
Identifying a property’s target tenant market allows landlords to tailor the space to their needs and set an optimal rent level. For example, renting to students or young professionals may require furnishings and all-inclusive bills, allowing for a higher rent; renting to families may require more bedrooms and outdoor space. A vacation property for holidaymakers can also generate high yields if the location and amenities are right.
We recommend speaking with a wealth advisor for expert insights.
2. Provide extra amenities and facilities.
Providing amenities and facilities beyond the basics increases a property’s desirability and the rent that can be charged. En-suite bathrooms, outdoor spaces like balconies or gardens, parking, gyms, and community spaces are all features that tenants will pay more for. Smart technology like thermostats and security systems also add value. In essence, the more amenities a property has, the higher the achievable rent.
3. Set competitive and fair pricing.
Researching the local rental market and comparable properties helps determine a competitive yet fair rent for a second home. According to the 1% rule, the monthly rent should be at least 1% of the total purchase price of the property to make the investment worthwhile. Landlords should factor in all costs like furnishings, bills, and management fees when setting rent to ensure a good profit margin. It’s equally important not to price too high to avoid long vacancy periods.
While a second home can prove an extremely lucrative investment and income-generating asset, buyers must be aware of all the responsibilities and expenses that come with managing a rental property to realise decent rewards. Keep reading as we break down these responsibilities and helpful tips in the following section.
What to Consider When Managing 2 Properties
A key aspect of what to know when buying a second home is the hassle of managing more than one property. Investors should understand the financial decisions and responsibilities that come with owning additional homes before moving forward with a purchase. The following sections address these responsibilities and offer helpful suggestions to help manage them.
Responsibilities of Landlords
Managing a rental property requires time and resources. Landlords handle tenant issues, repairs and maintenance, insurance claims, and property taxes while ensuring regulatory compliance. However, there are certain tools and services landlords can opt for to help reduce the stress.
Investors should consider using property management software.
Software like Rentila can help streamline the responsibilities of managing multiple rentals. These platforms advertise vacancies, screen tenants, collect rent, and store property information and legal documents in one place. They save time so landlords can focus on other areas of their business.
Investors should consider hiring a property manager.
For investors with limited property management experience or those with several properties, hiring a property management company may be worthwhile. Property managers handle the day-to-day management of rentals for a percentage of the rent — Redstone charges only 10%. They deal with tenants, emergencies, maintenance, and administration so the investor can take a more hands-off approach. This allows more time to source and acquire additional investment properties.
In summary, owning multiple rental properties requires in-depth planning and ongoing effort. By understanding the challenges involved before purchasing a second home and putting systems in place to minimise hassle, investors can build a portfolio of rentals that generates income with less stress.
Frequently Asked Questions
What are the pitfalls of buying a second home?
The pitfalls of buying a second home include the following:
- Mortgage interest rates for second homes are typically higher, increasing the overall cost of the property.
- Owning a second home means dealing with ongoing property maintenance costs, which can add up over time.
- If an investor decides to sell the property, they may be liable for capital gains tax on any profit they make, which can significantly reduce their overall returns.
- There’s the risk of the property being vacant during off-peak seasons or economic downturns, resulting in a potential loss of rental income.
Therefore, it’s essential to evaluate these factors before investing in a second home.
What to know when buying a house for the second time?
Buying a house for the second time can present unique challenges. If moving to a higher-priced property, be prepared for costly fees and potentially increased interest rates. Early repayment charges—as high as 5% or more of the remaining debt owed—can also apply if investors can’t port their existing mortgage to the new property.
Therefore, it’s crucial to thoroughly review the current mortgage agreement and consult with a financial advisor. Additionally, investors should consider the ongoing costs of maintaining two properties and potential market fluctuations that can impact property values.
How much deposit do I need for a second home?
Typically, investors should expect to raise a deposit of around 20% of the property’s value. Some lenders might consider a lower deposit, but in such cases, investors would need to meet other stringent criteria, which could include having a strong credit history, stable income, and a low debt-to-income ratio.
Remember, the size of the deposit can significantly influence the mortgage interest rate and monthly payments, so it’s crucial investors plan their finances accordingly when considering buying a second home.
Do you pay stamp duty on a second house?
Yes, investors typically have to pay higher stamp duty rates when purchasing a second property. This 3% surcharge on the standard SDLT rates applies to all properties owned that are not the investor’s main residence. An investor’s main residence is determined by HM Revenue and Customs (HMRC) based on factors such as where the investor is registered to vote and where they work.
Therefore, investors considering buying a second home should factor in the extra cost of stamp duty, as it can significantly impact the total cost of the property and the overall budget.
How can I avoid stamp duty on my second home?
Avoiding stamp duty on a second home can be challenging, but here are a few potential strategies:
- Gifting the deposit money to the prospective homeowner and allowing them to apply for a mortgage entirely in their name.
- Acting as a guarantor rather than a co-owner; that way, the property won’t be legally classified as your second home.
- Applying for a family offset mortgage.
- Finally, while it won’t prevent you from paying SDLT, buying your second home and selling the first ensure you don’t pay the 3% surcharge on stamp duty land tax.
However, it’s vital to consult with a financial advisor or legal professional before proceeding with these strategies, as there can be other financial and legal implications to consider.
How do I avoid capital gains tax on a second property?
Avoiding capital gains tax on a second property can be achievable through these strategies:
- Investors should utilise the tax-free allowance available to them and their spouse or civil partner. This can significantly reduce the taxable amount.
- Meticulously recording all costs associated with the sale of the property. These expenses, which can include selling agent fees and legal costs, can be deducted from the profit, further reducing the capital gains tax payable.
However, tax laws can be complex, and it’s essential to consult with a tax advisor or financial expert for personalised advice.
We’ve explored what to know when buying a second home. This is a big financial decision that requires careful planning and consideration of key factors like financing, taxes, and investment goals. Doing thorough research on the current real estate market, mortgage options, and tax implications for second homeowners is critical to finding an affordable property with a strong potential for healthy returns.
For investors seeking rental income and long-term capital growth, identifying up-and-coming neighbourhoods is key. An excellent way to get started is by contacting a wealth manager.
Disclaimer: Any information API Global provides does not constitute financial advice and is for educational purposes only.