The hidden costs of buying a second home

Primary residence

When you buy a property, you will need to pay Stamp Duty Land Tax (SDLT) – usually referred to as ‘Stamp Duty’ – on the purchase price. This tax is known as Land Transaction Tax (LTT) in Wales, and Land and Buildings Transaction Tax (LBTT) in Scotland. The amount of tax due depends on where you live, whether you’re a first-time buyer, the purchase price of your property, and whether or not the property is your primary residence.

In England and Northern Ireland, for example, first-time buyers are currently exempt from paying stamp duty on purchases up to £425,000, then taxed 5% for purchases above that figure (up to £625,000). If the purchase price is over £625,000, you’re not eligible for the exemption and will be taxed as if you had previously owned a property.

If you’re not a first-time buyer and selling your primary residence and buying another, there’s a £250,000 exemption before a sliding scale of increasing tax rates kicks in.

Secondary residence

A second home buyer, though, will have to pay an additional surcharge over and above the rate of a primary residence for the entire purchase price. The amount you pay varies depending on whether the property is in England and Northern Ireland, Scotland or Wales.

Stamp Duty taxes, including those for second homes, vary across the UK and are subject to change. Exemption rates, for example, will significantly reduce from 31 March 2025. You can discover the current rates for England and Northern Ireland, Scotland, and Wales.

If you’re buying abroad, local country taxes will apply. For instance, in France, you’ll need to pay a notary fee, stamp duty, and in some instances, VAT, so it’s important to do your research.

Because Stamp Duty charges on a second home will take a large chunk out of your initial investment, you’ll need to do your sums carefully to ensure a second home still makes financial sense.

Unlike a primary residence, when you sell a second home, any increase in its value will be subject to capital gains tax (CGT).

Although your personal CGT allowance reduces the amount you’ll have to pay tax on, these allowances are set to be slashed in April 2023 to just £6,000, and halved again to £3,000 from April 2024. This could mean those allowances offer only limited benefit, if you were to make a significant gain on the sale of your second property in the future.

There is further CGT challenge, too. With other investments, you have scope to mitigate your CGT bill by selling parts of your portfolio in different tax years, to make the most of your annual CGT allowances. That doesn’t work with property, which is an ‘all or nothing’ sale in a single tax year.

That said, you might also be able to offset other costs to reduce your CGT charges. These costs might include stamp duty paid, conveyancing fees when you purchased the property, and any capital improvements you’ve made (such as an extension or new kitchen).

Because the rules relating to tax are complex and subject to change, it’s essential to seek professional advice to ensure you know where you stand before making any decisions.

You will likely need a mortgage to fund your property unless you’re a cash buyer. And while it’s not exactly a hidden cost, it might cost you more than you’d anticipated:

• A higher deposit is required. Most lenders will only offer a maximum of 75% loan-to-value (LTV) deals on a ‘buy-to-let’ second mortgage, which means you’ll need to put down a minimum of a 25% deposit. A 40% deposit will typically unlock better interest rates. Similarly, even if you’re not planning to let out your second home, if the purchase requires you to take out a second mortgage, paying two mortgages makes you a higher risk to a lender. As a result, any lender is likely to be more cautious and therefore might require a larger deposit.
• Higher interest rates. Interest rates are usually higher on a buy-to-let or second mortgage for precisely the same reasons. But rates and lending criteria vary from lender to lender, so it’s essential to get advice from an independent adviser who can access the entire market to source the right deal for you.

Many people, planning to let their property, opt for an interest-only mortgage rather than a repayment mortgage. They aim to generate an income from the rental and, hopefully, benefit from an increase in market value when the property is sold (rather than reducing or paying off the amount they borrowed).

If you’re mortgaging a second property for your own use and don’t have an existing mortgage on your primary residence, you’ll generally have access to better rates and lower deposit criteria.

However, it’s worth pointing out that, as with all investments, the value of a property can go down as well as up – something that’s easy to forget following the continuous hike in house prices over the last few years. Your property may be repossessed, or a receiver of rent appointed if you don’t keep up payments on your mortgage.

Some people don’t start with the intention of renting out their second home. But rather than the property standing empty when not in use, they find it’s a cost-effective way to generate an income and cover the costs of maintaining the property.

However, if the property has an outstanding mortgage and you didn’t initially take out a ‘buy-to-let’ mortgage, you will need to notify your lender. They may require you to switch to a more suitable mortgage product, which may raise additional costs and a higher interest rate.

Aside from mortgage fees and repayments, there are other costs associated with letting your second property.

You will have to pay tax on your rental income, which will be 20%, 40% or 45%, depending on which income bracket you fall into.

You can deduct expenses you incur from letting the property, like letting agent fees, buildings insurance, maintenance and repairs and service charges. But you can no longer deduct mortgage interest payments from your rental income before paying tax. Instead, you can claim 20% tax relief on your total mortgage interest payments.

The rules are complex and subject to change, so check out the latest government guidance renting out your property.

As a landlord, you are responsible for the maintenance and upkeep of the property. If you don’t have accessible savings, you should aim to set aside at least 5% of the income generated from the property to pay for unexpected costs.

If you’re renting out a property as a holiday let or Airbnb, you’ll need to invest time and money to market the property, manage the bookings and deal with visitor enquiries. You’ll also need to arrange to have the property cleaned between guests with new bedding and towels – all of which must be factored into your costs.

Are you prepared for a tenant that fails to pay their rent, or guests that cause damage to your property? Renting out a property comes with its own risks – and there are some things you won’t be able to fully protect yourself against, no matter how much insurance you have.

Before you embark on this endeavour, make sure you understand what those risks are. If they were to happen, you must have the means to withstand the situation financially until it can be resolved.

If you’re thinking of taking the plunge and investing in a second home, it’s well worth seeking advice from an independent financial planner. They’ll take a holistic view of your current financial circumstances and personal goals and help you decide if a second home is the right thing for you to invest in.