Tax implications of owning a second home

As data reveals the areas where one in 10 properties are holiday homes, interactive investor examines 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, 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 the following:

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

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

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

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

The peak age for staying in a holiday home is 73 years in 2021 compared to 64 in 2011, suggesting that perhaps holiday home ownership will decline in the years to come. Over three-quarters of people who stayed at a holiday home for more than 30 days were aged 50 years and over.

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 the following:

• Council tax is usually payable unless holiday homes are rented out for at least 70 days each year, in which case they may qualify for business rates (see full rules)
• Maintenance, repairs, decorating and furniture costs
• Utilities bills
• Cleaning and gardening costs
• Income tax – if you rent out your holiday home you’ll need to fill in a tax return and pay tax on your earnings.
• 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 – the rules only apply if the holiday home is commercially let as to the public for at least 105 days in the tax year (see full rules).

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

• Capital gains tax – CGT is payable on second homes and the rates are high - 28% for higher-rate taxpayers and 18% for basic-rate taxpayers. The annual exemption is currently £6,000, meaning that a £100,000 gain would result in £26,320 tax if you’re a higher-rate taxpayer. The annual exemption is due to reduce to £3,000 in April 2024. Your tax bill could be reduced if your holiday home counts as a furnished holiday letting.
• Inheritance tax – IHT is potentially payable on second homes. There is an additional residence nil rate band for your main residence but not a second home. Depending on your other assets your estate could end up with a big bill.
• Stamp duty – If you’re buying a second home you will have to pay an additional 3% stamp duty on top of normal rates when you buy.

Alice Guy,Head of Pensions and Savings at interactive investor says: “An amazing 447,000 people are living the dream and staying away in a holiday home for at least 30 days each year.

“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. Wages are often lower than average in coastal areas so it can be especially tough for locals to afford to get on the housing ladder.

“Buying a second home is a dream retirement goal for many, but it’s jolly hard work and not necessarily relaxing. Maintaining and renting out a second home is like having a part-time job as many owners spend around 12 hours a week maintaining their holiday home. Cleaning a holiday home until its spick and span can easily take five hours and it can be a bind to do it yourself. One missed dirty tea towel and you can end up with negative online reviews and fewer booking.

“Tax rules for second homeowners have also become less generous, as the government recently closed the loophole that allowed some holiday homeowners to claim council tax relief when they weren’t really renting out their holiday home.

“Older buyers also need to think about increasing maintenance costs as they get older and perhaps can’t do jobs on the house themselves. Finding tradespeople and keeping an eye on jobs when you’re miles away can be tricky and stressful.

“For most of us, it’s probably cheaper and easier to rent a holiday home for a few weeks a year than to buy a dedicated holiday home. Not buying a holiday home has the added advantage that you’ll be free to explore the country rather than sticking to one place.

“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.”