Many people dream of moving nearer the coast or overseas. However, if you’re thinking of buying a second home or a vacation property, this can come at a cost. Before you go ahead and make an offer, make sure you’re fully aware of financing, tax implications and estate considerations. We look at the pros and cons of purchasing additional property in the UK.
Financial tips for the spring home buyer
Buying a second property or a holiday home can involve a myriad of upfront and ongoing costs. You’ll need to be comfortable paying additional tax surcharges and higher mortgage rates, especially if you’re looking for a future return on investment. However, with the right approach and circumstances, property purchases could be a profitable opportunity for some people. The key is understanding the implications for your tax position and your estate.
Property investing has been impacted in recent years by various legislation changes, such as the Renters’ Rights Act. Over the past few years, several major changes in law have led to volatility in the rental market, including holiday lettings. So, it’s worth being aware of the risk that your property investment might not perform as well as other investment options.
If you’re looking to buy a property as a second residence, then you’ll also need to factor in ongoing running costs, maintenance and repairs.
Mortgage finance and Stamp Duty Land Tax
When you buy any type of additional residential property, you’ll have to pay higher Stamp Duty Land Tax (SDLT). There’s an extra 5% surcharge on top of the standard SDLT band for the property price.
Mortgage rates for both holiday lets and second homes are often higher than rates for main residences, and the choice of lenders is narrower. Mortgage lenders usually require a larger deposit for second homes and holiday lets. They may stress‑test your affordability more tightly than for a main residence, especially if you’ll earn rental income.
Income tax on furnished holiday lets
From April 2025, the special ‘furnished holiday let’ (FHL) tax regime was abolished, which means that holiday lets are now taxed like ordinary residential lets. Any rental profits will be added to your income and taxed at your marginal rate.
You can no longer fully deduct mortgage interest from your rental profits. Instead, you get a 20% tax credit against the interest (this is the same as standard buy‑to‑let rules for individuals). However, this can lead to higher tax bills for higher-rate taxpayers.
Capital allowances on furniture and fixtures for holiday lets have also been removed. You would need to claim ‘Replacement of domestic items relief’ for expenses incurred when buying certain household goods or carrying out repairs.
Inheritance tax and estate planning for second homes
Second homes form part of your taxable estate with inheritance tax (IHT) at 40% on the value above the nil‑rate band. Currently, this is £325,000 per person, and any unused allowance can usually be transferred to a spouse/civil partner, potentially giving a couple £650,000.
It’s worth noting that the residence nil‑rate band for your ‘main residence’ does not normally apply to second homes. Therefore, owning multiple properties could push your total estate well above the combined IHT thresholds. Therefore, you may need to consider IHT strategies such as gifting, trusts or insurance to help your family manage a future tax bill.
Investment property vs personal use
Properties used solely for personal use won’t change the SDLT surcharge. You’ll need to be comfortable paying the higher surcharge, along with ongoing running costs and potential interest rate rises. Council tax for a second home can be proportionally higher in coastal or tourist areas, due to issues with local affordability.
Even if you plan to sell the property at a later stage, it’s recommended to view it as a lifestyle asset, rather than an investment. Once you factor in SDLT, mortgage costs, utilities, maintenance, and insurance, a second home rarely yields a strong net return.
For holiday lets, you’ll need to be prepared for local market risk such as tourist demand, flooding or coastal erosion. Also, changes in planning or licensing rules for short‑term lets can have an impact on your returns and the property’s resale value.
One of the biggest issues with holiday rentals is ‘void periods’ when you have low bookings. You will still need to pay all of the associated costs without offsetting with rental income.
However, if you plan to use your holiday let frequently, you might value this as a lifestyle benefit, rather than focusing on financial returns.
Financial Adviser, Nottingham and Lincoln
Buying a second property or a holiday home can be worthwhile as long as you understand all the risks and financial implications. When you’ve worked hard all your life, you’ll want to protect your wealth, so you can look forward to a secure financial future.
As with any large spend, make sure you have a sensible financial plan in place before you commit to a property purchase. You’ll need to understand how this will affect your estate value and IHT liabilities. At Balance: Wealth Planning, we can help you to create a sensible financial plan that minimises your inheritance tax liability, while protecting your legacy.
Are you planning to buy a second home and need a financial plan? Get in touch to book a review with our financial planning team.
Sources:
https://www.coveneynicholls.co.uk/news/blog/tax-planning-for-furnished-holiday-lettings/
https://www.cribsestates.co.uk/blog/stamp-duty-changes
