Tax Guide for UK Second Homes

Second homes are subject to different taxes when you buy, own and sell them. It is important to understand these for the purposes of informed decision making and effective financial planning.

Stamp duty Land Tax for Second Homes

When buying a second home, aside from the purchase price itself, one of the first significant costs you will encounter is the Stamp Duty Land Tax (SDLT). This tax applies to property purchases over a certain value and includes an additional surcharge for second homes.

Current SDLT Rates for Second Homes:

• Up to £250,000 purchase price: 3% of the purchase price

• £250,001 to £925,000: 8% (5% standard rate + 3% additional surcharge)

• £925,001 to £1.5 million: 13% (10% standard rate + 3% additional surcharge)

• Above £1.5 million: 15% (12% standard rate + 3% additional surcharge)

Example Calculation:

If you purchase a second home for £400,000:

• 3% on the first £250,000 = £7,500

• 8% on the next £150,000 = £12,000

• Total SDLT = £19,500

Using SDLT Calculators:

To accurately calculate SDLT for your second home purchase, you can use online tools such as the HMRC SDLT calculator.

Key Points to remember about SDLT Payment

1. ‍Completion Date:
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   ‍SDLT becomes due on the completion date of the property purchase. This is the date when the property officially changes ownership from the seller to the buyer.
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2. Payment Deadline:
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   The SDLT payment must be made by the buyer within 14 days of the completion date. Failing to meet this deadline can result in penalties and interest charges. Interest charges for late payment are applicable to SDLT at a rate of 7.75% per year. This rate is calculated using the Bank of England base rate plus 2.5%.  
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3. Filing an SDLT Return:
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   Alongside making the payment, you must also file an SDLT return to HMRC. This return includes details about the property transaction and the amount of SDLT due.

Process for Paying SDLT

Solicitor or Conveyancer Role:  

Typically, your solicitor or conveyancer will handle the SDLT return and payment process on your behalf. They will calculate the amount of SDLT due, complete the necessary forms and submit both the payment and the return to HMRC.

Preparation:

Ensure that your solicitor or conveyancer has all the necessary information and funds to make the SDLT payment promptly.

Confirmation:

After the SDLT payment is made, you will receive a confirmation receipt. Keep this receipt for your records, as it serves as proof of payment.

Exceptions and Reliefs:

Certain reliefs and exemptions may apply, reducing the amount of SDLT payable. Ensure you discuss these with your solicitor or conveyancer.

Key Considerations for Second Home Buyers:

Replacing Your Main Residence:

If you are purchasing a new main residence while selling your old one, you will not have to pay the additional 3% SDLT surcharge. If your previous main residence is not sold on the date of your new purchase, you will be required to pay the higher rate. However, you can apply for a refund if the previous home is sold within 36 months.

Owning Property Abroad:

Owning a property abroad counts towards the additional SDLT rate. For example, owning a holiday home in another country will mean you pay the higher rate on a new UK property.

Married Couples and Civil Partners:

HMRC treats married couples and civil partners as one unit. Therefore, if one partner already owns a property, the higher SDLT rate applies to the purchase of a second property by either partner.

Inheriting Property:

Inheriting a property can also affect SDLT calculations. If you inherit more than 50% of a property, you may be liable for the additional 3% surcharge when buying another property.

Council Tax on Second Homes:

Council tax is a local tax on domestic properties, which helps fund local services such as rubbish collection, policing, and street maintenance. Each property is placed in one of eight council tax bands (A to H) based on its value.

Council Tax Rates:

You will generally pay the full council tax rate for a second home. Additionally, many local councils charge a premium on second homes to discourage leaving properties empty. This premium can be up to 100% of the standard council tax rate, effectively doubling the amount payable.

Discounts and Exemptions:

Some councils provide discounts for unoccupied second homes, but these discounts are becoming less common. The amount of discount may vary based on whether the second home is furnished or unfurnished, with unfurnished properties generally receiving lower rates for a limited time. Additionally, properties utilized as holiday lets or rentals may qualify for business rates instead of council tax if they meet certain criteria, such as being available for short-term lets for at least 140 days per year.

To check the exact council tax rates and any applicable discounts, you should contact the local council where the property is located or visit their website.

Other Taxes on Second Homes:

If you rent out your second home, the rental income is subject to income tax. Here are the key points to remember:

1. Taxable Income: You must declare your rental income on your self-assessment tax return.

2. Allowable Expenses: You can deduct certain expenses from your rental income, including, for example:  

• Buildings and contents insurance
• Ground rent and service charges
• Legal and professional fees
• Letting agent fees
• Property repairs and maintenance
• Utility bills if paid by the landlord
• Mortgage interest cannot be deducted buy you can get a tax credit for 20% of the interest

3. Tax Bands: The rental income is taxed at your marginal tax rate, which could be 20%, 40%, or 45%, depending on your total income.

Capital Gains Tax (CGT)

When you sell a second home, any profit made is subject to CGT. Important aspects include:

Rates:  

CGT rates for residential property are 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers.

Allowance:  

Everyone has an annual CGT allowance (£3,000 for the 2024/25 tax year), which reduces the taxable gain.

Calculation:  

CGT is calculated based on the difference between the purchase price (including costs) and the sale price (minus allowable expenses).

Business Rates:

If your second home is used as a holiday let and meets specific criteria, it might be subject to business rates rather than council tax. In order to qualify for certain benefits, a property must meet specific criteria. Firstly, the property should be available for short-term lets for a minimum of 140 days per year. Additionally, it must be actually let out for at least 70 days in a year to meet the standards. Additionally, properties that qualify for business rates may also be eligible for small business rate relief, which can help reduce the overall tax burden.

Conclusion

Owning a second home in the UK involves various taxes that can significantly impact your finances. Understanding these taxes, from council tax and SDLT to income tax on rental income and CGT, is crucial for effective financial planning. Consulting a financial advisor or tax professional can provide greater insight into your specific situation. By understanding these points and planning accordingly, you can help optimise owning a second home is from a financial perspective.

FAQs

Q. Are there any tax reliefs available for landlords on rental income from a second home?

A. Landlords can claim several tax reliefs on rental income. Allowable expenses include property repairs and maintenance, letting agent fees, legal and professional fees, buildings and contents insurance, utility bills if paid by the landlord, and ground rent and service charges. In addition, a tax credit for mortgage interest is available and now capped at 20%.

Q. How are capital gains calculated when selling a second home, and what are the rates?

A. When you sell a second home, any profit made is subject to Capital Gains Tax (CGT). The rates are 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers. Each individual has an annual CGT allowance (£3,000 for the 2024/25 tax year), which reduces the taxable gain. CGT is calculated based on the difference between the purchase price (including costs) and the sale price (minus allowable expenses).

Q. What happens if you don't pay Stamp Duty Land Tax (SDLT) within the required timeframe?

A. If SDLT is not paid within 14 days of the completion date, HMRC will impose interest charges on the overdue amount. The interest rate for late payments is 7.75% per year. Additionally, penalties for late payment include an initial £100 penalty if late by up to three months and £200 if late by more than three months. Further penalties may apply for extended delays.

Q. Can you switch from paying council tax to business rates for a second home?

A. If your second home is used as a holiday let and meets specific criteria, it might be subject to business rates instead of council tax. To qualify, the property must be available for short-term lets for at least 140 days a year and actually let for at least 70 days a year. Properties qualifying for business rates may also be eligible for small business rate relief.

References:

Stamp Duty Land Tax: Residential property rates | GOV.UK

Rates and Allowances | GOV.UK

Council Tax - Second homes and empty properties | GOV.UK

CGT rate on disposals of residential property | GOV.UK | Published 6th Apr 2024