Buying and Selling a Second Home

Milestones: Buying and Selling a Second Home

Do you dream of owning a holiday cottage in the Cotswolds? Maybe a seaside villa is more your style. Or, you could be after a flat in the city to save a long commute a few times a week. Whatever your preference, a second home is something that many people have on their wish list.

Today we will outline the costs involved with buying and selling a second home in the UK or overseas.

Buying your second home

Buying a second home is very much like buying your primary residence (rather unsurprising). However, there is one main difference. On a second home you will pay a 3% surcharge on stamp duty. Including properties under the value of £125,000 which are usually excluded from stamp duty.

How much stamp duty will you have to pay?

Property value Primary residence stamp duty Second home stamp duty
£0 – £125k 0% 3%
£125k – £250k 2% 5%
£250k – £925k 5% 8%
£925k – £1.5m 10% 13%
£1.5m + 12% 15%

The cost of running a second home

Taking on a second home can be a big expense. You need to make sure you are prepared and have budgeted for all the extra outgoings you will have to cover.

  • You will need to furnish an entire home top to bottom. When you buy a new home, you can just take your furniture with you. When you buy a second home, this may not be an option.

    Consider that you may need to decorate and furnish an entire house. Make sure to include this cost into your budget. Otherwise you may be sitting on plastic garden furniture.
  • How will you manage maintenance? Even though you are not there all the time, you will still need to stay on top of the upkeep. Things like keeping the garden tidy, washing the windows and making sure the gutters are clear are all still going to have to be done.

    If your second home is your holiday home, are you going to want to spend time on maintenance when you visit? Or are you willing to pay someone to do it for you? Another expense to budget in when planning your purchase.
  • Make sure you have good insurance. Naturally, second homes can be higher risk than primary residence as they may be empty a lot of the time. They could be an easy target for burglars. Or if a minor problem occurs when you are not there, it could turn into a major issue by the time you visit again.

    For example, if you spot a leaking pipe in the bathroom of your home you can get it fixed before any further damage is done. If there’s a leaking pipe in the bathroom of your second home, however, the situation could become a bit more serious. By the time you visit again the leak could have soaked through the floor boards, saturated the ceiling of the room below and, worst case scenario, the ceiling could collapse. Not the relaxing holiday home you had in mind! 

    As with your first home, you will need both building insurance and contents insurance. Be sure to do your research before choosing your second home insurance. Some policies will require you to use your second home at least once every two weeks. In which case, you may need to get a holiday home policy or unoccupied home cover instead.

    There may also be additional cover required if you are going to be renting your home out, such as public liability cover. This could protect you if someone has an accident in your property. 
  • Will you need to pay more tax? Are you planning on renting it out? If so, there may be tax considerations. The first £1,000 you earn from rent is tax free, known as your ‘property allowance’. After that you will have to pay.

    If your income is between £2,500 and £9,999 after allowable expenses, or £10,000 or more before allowable expenses, you will need to report it on a self-assessment tax return.

    Contact HMRC if your rental income is between £1,000 and £2,500 a year.

    There is further information on the government website.
  • Find out your Council Tax charges. Different councils have different rules on how much council tax is charged on a second home.

Some may offer a discount on your council tax if there isn’t someone living in the property permanently. Some, however, may charge more if it’s not occupied for at least 6 months of the year.

Buying a second home abroad

Buying a second home abroad requires a lot of research. We strongly advise that you get independent advice when planning a purchase abroad. There is more to think about than simply choosing the best place to live.

What to consider

Having a home in the sun to jet off to at a moment’s notice is a dream that a lot of people strive for. Before you get carried away with your jet setting dream, here are a few practical realities to consider:

  • How much is it going to cost to get there? What is the price of plane or train tickets? If you are going to drive, you need to have the right insurance and calculate the cost of petrol along the way. Having these figures in mind will allow you to see if jetting off every other weekend is realistic with your income.
  • What additional costs will you have to pay? In the UK we don’t tend to have the expense of heating the pool or running air conditioning. These are costs you should be sure to budget for.
  • Be aware of local taxes. As we have mentioned, buying abroad takes a lot of research. Find out what local taxes or community charges there may be to pay.
  • How are you going to maintain your property? As with a second home in this country, how are you planning on maintaining it?  A task that becomes particularly tricky to stay on top of when your second home is in a different country! It makes sense to employ someone to look after your place whilst you are away so allow for that in your budget.

    Alternatively, choose a property on a development where this is covered by a service charge.  
  • Don’t forget about exchange rates. We all know how it is, exchange rates are pretty fluid things. It is unlikely that you are going to pay exactly the same price for running costs and mortgage payments thanks to currency fluctuations.

    If this is a concern, consider using a currency specialist to fix your exchange rate. This way you know what to expect in spite of currency unpredictability.

Selling your second home

If you decide it’s time to sell up, the process is no different to selling your primary residence. You will have to pay the usual costs associated with selling a house.

The difference is that you may have to pay some capital gains tax (CGT) on the profit you make from the sale if it is over the capital gains tax allowance.

How much capital gains tax will I pay if I sell my second home?

The CGT you pay on profits from a second home sale is charged at a higher rate compared to CGT paid on other assets.

  • 18% for basic rate payers.
  • 28% for higher rate payers.

You can, however, deduct certain expenses from your profits. These include:

  • Stamp duty.
  • Legal fees.
  • Estate agent’s fees.
  • Any money you may spent improving the property. By building an extension for example.

Once you have deducted the above expenses from the money you made on selling your second home, you will be left with the figure which is subject to CGT.

Remember: each person gets an annual tax-free personal allowance of £11,700

If you are using your entire tax-free allowance, deduct it from the money you have left after expenses. Whatever you have left in your pot is subject to the 18% or 28% CGT.

For Example:

You bought a property for £180,000 and are sold it for £220,000. You have made £40,000 profit. Your taxable income for the year is £25,000.

You paid a 2% stamp duty when you purchased the house – £2,600

You also paid £2,000 solicitors fees.

You did no work to the property whilst you owned it.

When you sold the house you had to pay £5,000 solicitors and estate agent fees.

The expenses total £9,600 which can be deducted from your £40,000 profit.

Leaving you a new total of £30,400.

You are using your full £11,700 tax-free personal allowance as you have no other gains or losses, This is deducted from the £30,400 total leaving £18,700.

Bearing in mind the higher rate threshold is £46,351. You have used £25,000 from your annual income, this leaves £21,351 in your allowance to be charged at the 18% basic rate. As your profit is £18,700 the entire amount is charged at 18%.

CGT to pay: 18% of £18,700 = £3,366

If your profit was £28,700 rather than £18,700 for example, the first £21,351 would have been charged at 18% with the further £7,349 being charged at 28% as you would have pushed into the higher rate threshold.

18% of £21,351= £3,843.18

28% of £7,349= £2,057.72

Total CGT to pay: £5,900.90

What if I don’t make a profit?

If you don’t make a profit from selling on your second home, these losses can be knocked off your CGT bills in the future. Losses from up to four years ago can be offset against the capital gain.

Before you take the leap…

Always get advice from an independent financial advisor if you are considering buying or selling a second home.

Get in touch with us today if you would like to discuss buying or selling a second home. We can even help with cashflow planning to get you in a suitable financial position where you can afford your dream second home.

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