Tax implications of owning a second home

While holidaying this summer, your thoughts may have turned to owning your own holiday home – especially with 1 in 10 properties now holiday homes in some areas of the UK. Before making any big decisions, it’s vital to be aware of the tax implications of second home ownership.

In some coastal hotspots like Padstow in Cornwall and Blakeney in North Norfolk, more than one in 10 homes were used as holiday homes in 2021, potentially stoking an already red-hot housing market and making it more difficult for local residents to get on the property ladder. (ONS data)

Property hotspots where more than one in 10 homes are holiday homes include:

Cornwall:

Trebetherick and Whitecross (139.5 per 1,000 homes)
Padstow and St Issey (120.5 per 1,000)

Norfolk:

Brancaster, Burnham Market and Docking (130.4 per 1,000 homes)
Hunstanton (103.8 per 1,000) near King's Lynn
Wells and Blakeney (109.1 per 1,000 homes)

According to ONS data, 447,000 now stay away in a holiday home for more than 30 days a year, up from 426,000 in 2011.

Most people are staying fairly local, with 4 in 10 of those who used holiday homes travelling less than 100 kilometres from their home and 7 in 10 (78%) staying within 200 kilometres of their home.

Taxes and costs of a holiday home

Having a holiday home can provide a valuable second income if you rent it out, but servicing and maintaining it can be hard work as well as expensive.

Extra day-to-day costs to be aware of include:

Council tax, which is usually payable unless you rent out your holiday home for at least 70 days each year, in which case they may qualify for business rates (*1)
Maintenance, repairs, decorating and furniture costs
Utility bills
Cleaning and gardening costs
Income tax – if you rent out your holiday home, only the first £1,000 of rental income is tax free. If your rental income is more than that, you’ll need to let HMRC know and may need to fill in a tax return so that you can pay the required tax
Admin costs – you may need to use an accountant for tax advice and a letting agent to manage your bookings
Some holiday homes that are classed as furnished holiday lettings have more generous tax rules but there are lots of tests to meet in order to qualify (*2)

And then there’s a potential tax bill when you sell your holiday home:

Capital gains tax – this is payable if you make a gain or profit when you sell a second home and the bill can come as a shock. The rates are 28% for higher-rate taxpayers and 18% for basic-rate taxpayers and the annual exemption is currently £6,000. This means that a £100,000 gain would result in a £26,320 tax bill if you’re a higher-rate taxpayer. This annual exemption is due to reduce to £3,000 in April 2024. Your tax bill could be less if your holiday home counts as a furnished holiday letting. And it might not just be the amount of the bill itself that comes as a shock – you only have 60 days from the date of completion to report the sale to HMRC and pay the tax bill. Failing to meet this can result in filing penalties and interest.
Inheritance tax – this is potentially payable on second homes. When calculating the value of your estate, your share of any holiday homes will need to be included. Whilst there can be some tax relief when you pass on your main residence, this doesn’t apply to second homes. If you’ve used up all your allowances, 40% of the value of the holiday home may have to be paid in inheritance tax.
Stamp duty – if you’re buying a second home you’ll have to pay an additional 3% stamp duty on top of normal rates when you buy.

Shona Lowe, financial planning expert at abrdn, says: “An amazing 447,000 people are living the dream and staying away in a holiday home for at least 30 days each year. This might deliver investment returns and could provide a valuable income if you rent it out.

“But it's a dream that can come at a cost to local communities as second home ownership drives up property prices, pricing out locals and can be hard work unless you can also afford to bring in letting agents and service providers.

“Tax rules for second homeowners can be complicated and have also become less generous, so making sure it’s part of a considered financial plan is really important.

“And if you’re thinking of withdrawing money from your pension to buy a holiday home, be careful and take advice. Pensions get extremely tax-favourable treatment as any investment growth is sheltered from capital gains tax and they’re also completely free from inheritance tax – that treatment will stop once the money is no longer in your pension. How you fund the purchase may well be just as important as how you manage the property once you own it.”