Benefits & Costs of Owning a Second Home
The concept of purchasing a second home is an exciting one. But it can also be quite daunting.
If you’re thinking about buying a second home, it’s important to weigh up the pros and cons of the adventure before setting off. By doing so, you’ll be able to confirm whether or not it’s the right move for you.
Here, we take a look at the key considerations when it comes to buying a second home – including the potential benefits and additional costs.
Note – as a home insurer, Homeprotect doesn’t offer tax or investment advice.
What is a second home?
A second home is simply one which is owned in addition to a person’s primary residence.
They are typically used as a holiday home or future retirement property, as a part-time investment or both.
Second homes come with unique financial implications – including requiring a larger deposit and additional taxes not applicable to primary homes – however, these are often balanced by the potential to earn money through the property as an investment or buy-to-let.
is purchasing a second home the right move?
There are several reasons why people decide to buy a second home.
You might buy-to-let as a tangible investment for your future – with many people using rental income to augment their pension in retirement.
Some choose to purchase a second house as a holiday or weekend home, providing an escape to the countryside whenever the mood takes them.
Others might buy to renovate and sell, offering an opportunity for a quick payday, before reinvesting elsewhere.
However, buying a second home is not always straightforward, and it’s important to weigh up the potential pros and cons before choosing to invest in a second property.
how to earn money from your second home
There are two main ways that people might benefit financially from second home ownership – one being long-term investment and the other short-term.
Long-term investments include buy-to-lets and holiday lets, while ‘fixer-uppers’ are (ideally) taken up on a short-term basis.
long term investment
When it comes to buying a second home, a long-term investment approach typically involves using lets to earn some extra pocket money, while the property continues to increase in value over the years.
There are several mortgage options available when buying-to-let that might help you to get the most from your investment and are worth investigating.
short term investment
A short-term second home investment depends almost entirely on your ability to:
a) spot a bargain, and
b) make sufficient improvements to raise the value enough to turn an immediate profit.
The risk element with this kind of purchase is much greater than a long-term investment, as you are unlikely to see a particularly beneficial fluctuation in house prices over such a short period.
If you are going to attempt to fix up a property, it helps to have contacts in the building trade to minimise construction costs, and you must have the level of commitment required to see a project through.
seasonal trade
Unlike a full-time rental, holiday home letting rates are dependent on seasonal trade and are also completely reliant on the potential of their location as a draw for holidaymakers.
A house in an attractive countryside location – furnished with all mod-cons and breathtaking views – for example, can command high amounts in the holiday rental market. This is especially true as more people are looking to take a staycation at home while the economic climate levels out.
People who are being pushed into letting out of necessity rather than choice are finding they can generate enough to cover the cost of keeping their second home, and a lucky few are finding that they can make a little more on top.
short-term schemes
Some holiday letting agents are offering flexible, short-term schemes – allowing tenants to live in a property for between two and five months to bolster rentals during the off-season and to fill a niche in the tenancy market (where most landlords insist on a minimum six-month contract).
These schemes target specific groups that are usually unable to find short-term housing solutions, such as those temporarily between homes, having major renovations done on their main home, workers in a given area on a limited-time contract and people looking for an extended holiday.
non-financial benefits of owning a second home
Buying a second home for personal use can also be a fulfilling investment, as the benefits extend beyond the financial.
Having access to a holiday home can represent a positive lifestyle change. Your second home becomes your own private getaway, where you can escape the stress of work in more idyllic surroundings.
If you choose carefully, you might also be able to rent out your holiday home while you’re not using it. Holiday lettings may not generate as much income as longer-term rentals, but with luck, it will provide you with enough to maintain and manage your second home.
how to buy a second home
Buying a second home follows many of the same steps as buying a first or primary property – including applying and qualifying for a mortgage, paying a deposit and meeting the ongoing financial requirements to pay for the property.
However, as there are financial benefits in place to help homeowners access and afford a primary property, second homes come with some additional financial requirements and considerations.
For example, where many lenders will allow homeowners to qualify for a mortgage with around a 10-15% deposit, those applying for a second home mortgage will need around a minimum 25% deposit for an additional property.
Those looking to finance a second home must also be prepared to provide information on how they intend to use the property – for example, as a holiday home or buy-to-let – as this will impact the financial implications of any mortgage offers.
Rental properties, for example, require specialist buy-to-let mortgages and may be required to be rented out for an amount exceeding the monthly mortgage repayments.
There are also some additional tax considerations when buying a second home, which do not apply to a first home…
tax considerations for second home
There are several tax considerations to make if you own a second home, both in and outside of the UK.
As a UK resident, you will become liable for Capital Gains Tax when selling your second home, unless you spend a certain amount of time living in it – after which you can declare it as your primary residence.
If you are a foreign national, or if your second home is outside of the UK, you will still have several tax issues that you will need to research thoroughly before you make any purchase.
Here, we take a look at the financial requirements and implications of the different taxes associated with second home ownership:
stamp duty
When buying a second home, your existing home becomes known as your ‘primary residence’, while the new home becomes an ‘additional property’. Stamp Duty rates are increased for additional properties.
For those valued between £40,000 and £250,000, Stamp Duty is calculated at 3% of the house price – increasing to 8% for properties valued between £250,001 and £925,000. Over £925,000, this rate increases to 13%, and rises again to 15% for properties valued over £1.5 million.
capital gains
If you come to sell your second home – for example, if you bought the property as a fixer-upper – you will also be subject to Capital Gains Tax. This tax is generally not applicable when selling a primary residence.
For basic rate taxpayers, the CGT charge is 18% of the gains made when selling a home – with higher taxpayers facing a 24% charge on these gains.
However, all taxpayers are eligible for an annual CGT allowance of £3,000 – so, if the gains from selling your property amount to lower than this allowance, you won’t have to pay a percentage of your profits (note that this allowance combines all income streams, so if you’ve already earned up to £3,000 in the same tax year, you’ll be expected to pay the CGT rate).
council tax
Homeowners are expected to pay council tax charges on any homes they own – although, the exact rate charged depends on the property and the local council.
The rate charged on a second home is typically dependent on the valuation band the property falls into – however, there are some other potential factors that might influence how much is charged.
For example, some councils may apply a second home surcharge to the standard rate, as well as an increased rate for empty homes (typically those unoccupied for over 2 years).
To calculate the exact council tax charge, homeowners should contact their local council. And for those looking to rent out their property, it’s possible to include these charges in rent payments to offset the additional costs.
income tax
Those looking to rent out a second home will also be expected to pay income tax on any money generated through the rental.
Any income received through renting out a second home must be declared on a Self-Assessment tax return.
inheritance tax
If the second homeowner passes away, the property will also be subject to Inheritance Tax.
While a person’s primary residence may qualify for the ‘main residence nil-rate band’ – designed to allow homeowners to leave properties to their family tax-free – a second home does not qualify for this benefit. However, the exact tax rate charged will come down to various factors, including property value and any applicable thresholds or reliefs.
second home insurance from homeprotect
Looking for second home insurance, designed to protect you against the unique risks facing your property?
Homeprotect second home insurance provides building and contents insurance tailored to the common use cases of second homes.
We cover properties that are used as holiday homes seasonally, rental properties, and even offer policies for weekday or weekend houses for those working away from home – as well as unoccupied properties left empty for over 30 days.
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Your Questions Answered
No, mobile homes – such as caravans and houseboats – are not counted as second homes when it comes to tax. Therefore, homeowners will not be subject to the additional Stamp Duty rates applied to second homes.
However, homeowners will still need to pay income tax if these are used to generate a rental income.
Homeprotect does not cover caravans or houseboats.
When it comes to Stamp Duty taxes, a second home is simply defined as any additional property owned alongside a primary residence.
Stamp Duty is also charged at a higher rate for additional properties, compared with a first home or primary residence. For second homes valued up to £250,000, Stamp Duty is charged at 3% of the house price – rising to 8% for properties valued between £250,001 and £925,000.
While it is possible for a second home to be used as a holiday home, this is not the only definition. A second home is simply an additional property purchased by a homeowner already living in a ‘primary residence’.
Therefore, second homeowners can use the property as a holiday home enjoyed seasonally – however, they may also use the property as a buy-to-let home, a holiday rental or even a combination of these uses.
While Council Tax is charged at a standard rate depending on the property and its location, some local councils to charge more for a second home than a primary residence.
Local council authorities may apply a second home surcharge to the property, as well as potentially adding an empty home surcharge on properties left empty for over two years.
However, the exact Council Tax charge applied depends on the local council, so homeowners are encouraged to contact them to find out how much they will be charged.
There are various taxes applied to second homes – some of which are applied to all properties and others that are unique or increased for second homes.
Some of the taxes you will be required to pay on a second property include Stamp Duty, Capital Gains Tax (if you decide to sell the home), Council Tax, Income Tax (if the property is rented out either short- or long-term) and Inheritance Tax (if the homeowner passes away).