UK Taxation on Second Homes
This article was written in 2010 and is now out of date
If you’re planning to buy a second home in the United Kingdom you need to be aware of the tax implications of doing so. Keeping up with the latest changes in tax laws related to assets or income generated from the second home can be irksome and complicated. Below we have summarised the key areas of taxation you’ll need to familiarise yourself with to explore the issues related to your own situation. We recommend you seek professional legal advice before making any tax decisions as well speak to a qualified tax accountant.
When buying your second home the first major tax you will pay is Stamp Duty. The properties between £175,000 and £225,000 you will pay 1% of the property’s purchase price or 3% of the properties over this value. As soon as the property is in your name you will become liable for local council tax. However discounts are offered by local authorities if you can demonstrate and register your property as a second home. Beware that recent political pressure from the coalition may eliminate this tax break meaning that you may become liable for council tax at the full rate.
If you choose to rent out your second home you will become liable for tax on the income you generate from letting it out. It’s important you contact your local tax office to advise them that this is your intention. As a result you will need to keep careful records of all expenses related to letting out your second home as a buy to let property (so these can be offset against your final income tax bill). Only ‘allowable’ expenses can be used to offset the tax bill. The largest by far will be the mortgage interest (which you can find on your mortgage statements). Similarly if you have successfully classed your second home as your primary residence (and you rent out one room in that second home) you may be entitled to the ‘rent a room’ scheme. This provides a tax-free income rental purposes of up to £4250 per year.
Most assets (including second homes) are liable to Capital Gains Tax at 18%, when you sell or dispose of it. However it is possible to cut capital gains bills by living in the second property for a period of time. Special rules apply to properties that have been a main residence. On the purchase of a second home, the owner has two years to elect which of their homes is their principle residence. This involves transferring bank, postal and electoral details for the period to prove that you were resident and perhaps even renting out your main home. After the two years, you would lose the right to make a nomination and the onus would fall on you to prove that you were living in the second property if you wanted to avoid CGT.
When you purchase a second home you will also need to take out second home insurance for the buildings and contents. You will notice on the insurance quotes you receive that insurance premium tax (IPT) of 6% will be added to the cost of your insurance policy. This is a form of taxation which was introduced following rulings regarding whether or not insurance should have VAT added. It was argued that insurance is a necessity and not a luxury item and therefore should not fall under the VAT regime. Your insurance broker or insurance company will be obliged to add-on and display IPT along with any administration charges.
Lastly if you are planning to buy a second property abroad to use as a holiday home, you may well fall into the local tax regime. Double tax treaties exist between UK and overseas countries involving agreed limits of taxation to be divided accordingly. The rules change by country but the principle is that you will be liable to pay local taxation on your second home and then that tax payment is usually reduced if there are any outstanding UK tax liabilities in excess of that payment.
This article was accurate when written, we recommend that you take prodfessional advise regarding the latest tax situation relative to you presonal circumsatances.
Contact Assetsure for a Second Home Insurance quote.