How to fight back and avoid tax on your second home
From stamp duty to tax reliefs and council tax, shield your wealth from Labour’s tightening net
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In the Conservatives’ last Budget a year ago, then chancellor Jeremy Hunt cut capital gains tax for higher-rate payers from 28pc to 24pc to encourage people with multiple homes to sell up.
The tax cut, which was not reversed by the new Labour Government, came after years in which property investors have been squeezed ever more tightly.
In October, Rachel Reeves used Labour’s first Budget to increase the stamp duty “surcharge” on second properties.
And with the Chancellor under increasing pressure to improve the public finances, more pain for second home owners could be on the way.
However, there are ways to protect your investment.
Here, Telegraph Money takes a look at where the risks are, and how you could shield yourself from a looming tax grab. We will cover:
Tax is due on the gains you make from the sale of a second home, which exceed your annual capital gains tax allowance.
For property, CGT is set at 24pc for higher-rate taxpayers and 18pc for basic-rate taxpayers. Prior to April 6 2024 the higher rate was charged at 28pc.
There is nothing that dictates how you should own property after marriage. You may decide to own properties jointly or separately – but the rules are complicated. For capital gains tax purposes a married couple can only have one primary residence, says Roger Holman, of tax firm Blick Rothenberg. So a second property will be counted as such at the point of sale.
If you and your partner are unmarried but both own a property separately, tying the knot could result in an increased tax bill, as one of the homes could be classed as a second property.
So it may be simpler to not get married if you want to be sure you remain outside of any tax changes. Mr Holman, of accountancy Blick Rothenberg said: “As a non-married couple you are allowed two main residences, as long as you are not doing something silly like renting out one of the properties.”
If you are married but want to avoid the capital gains bill from transferring the properties to be held individually, you could split the ownership of the property between you, with the partner in the lowest tax bracket holding the larger amount.
Therefore, when the time comes to sell, the largest proportion of capital gains tax will be charged to the partner who incurs the lowest tax rate.
Mike Warburton, The Telegraph’s tax columnist, said: “The same applies with rental income – the name of the game is to own the property together in the beneficial ownership that gives the most advantage of the lower tax rate band, but remember to complete a Form 17 for HMRC.”
For divorcing couples or those who separate in circumstances likely to be permanent, there is a three-year window for transferring properties and other assets before you have to worry about paying capital gains tax.
This means that if you jointly own two properties, once divorced each can be transferred into your names without triggering a tax bill, although this may be viewed as a drastic solution.
Mr Warburton said: “For transfers of assets taking place on or after April 6 2023, separating married couples or civil partners continue to have ‘no gain no loss’ capital gains tax treatment applied on transfers of assets to each other for up to three years from the end of the tax year of separation.”
A property is considered to be a second home for council tax if it’s not your sole or main residence.
You usually have to pay council tax on properties you own that aren’t your main residence – whether they’re used as holiday homes, rented out or sitting empty.
Some councils impose council tax premiums on properties that have been empty for more than a year and this charge is set to rise. From April 2025 a new “second homes premium” of up to 100pc additional council tax can be charged by councils.
Several local authorities have already voted to implement these changes, including Cornwall council and The City of London.
Some properties are exempt from paying extra council tax, even though they are not main residences. They include:
An increasing number of second home owners are registering their holiday lets as businesses in a bid to reduce extra council tax charges. Doing this means you pay business rates, instead of council tax.
The main benefit of switching from paying council tax to business rates, is that holiday let owners may be able to claim “small business rate relief” and reduce their annual tax bill by up to 100pc.
The relief is for those who only let one property in England with a rateable value – an estimate of the annual rent the property could earn – of less than £15,000. For properties with a rateable value of between £12,001 and £15,000, the rate of relief will reduce gradually from 100pc to 0pc.
However, there are conditions. In order to claim business rate relief in England you need to have let out your second property commercially for at least 70 days of the previous year, while continuing to advertise it for at least 140 days a year. The lettings need to be short term, with frequent changes of tenant. In Wales the threshold is higher, with 182 days of actual lettings in the last year, and 252 days of availability.
Mark Drakeford, the Welsh secretary for finance, faced criticism after it was revealed he is exempt from Wales’s second home council tax raid despite owners of similar properties being forced to pay thousands of pounds more.
The former first minister said his “chalet” in Pembrokeshire was spared from the council tax surcharge, as it can only be occupied for nine months of the year under the holiday park licence.
This is a very specific rule that will apply to few properties, but it is still worth checking whether your property could be exempt for a similar reason.
English councils have already been given powers to charge a 100pc council tax premium on certain unoccupied second homes.
Furnished properties have so far been exempt, but they are due to come under the scope of the rules from April 2025.
In Wales, councils already have the option to increase the tax to 300pc for second home owners, forcing some to sell up to avoid the increase. Ms Reeves could look at further increasing the power of local councils in England.
One way to minimise these changes is switching to pay business rates, rather than council tax, which can reduce the annual bill by up to 100pc. Our guide to avoiding second home council tax can tell you how to make the switch, step-by-step.
Currently, owners with eligible furnished holiday lets can also save on income tax and capital gains tax if they meet the qualifying criteria. However, these benefits could also be watered down as Reeves looks to boost Treasury income.
For furnished holiday lets, the property must be commercially let as holiday accommodation to the public for at least 105 days of the year, and available as a furnished holiday let for at least 210 days in the year.
Qualifying for this means you can claim capital gains tax relief for traders, which can cut the rate you’ll pay to just 10pc when you sell. Unfortunately, this relief is due to be abolished from April 2025 when holiday lets will be brought into line with standard rental properties.
In order to receive business rates relief you need to have let out your second property commercially for at least 70 days of the previous year, while continuing to advertise it for at least 140 days a year.
In both cases the lettings need to be short term, with frequent changes of tenant.
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One option is to put the property in a trust for the benefit of someone else, such as a child or grandchild, while remaining as the trustee.
However, Mr Warburton warns that the interaction between trusts and tax is complex and there can be inheritance tax complications, so you need to get advice on the best way to use them.
In addition, Mr Holman said that capital gains tax may ultimately be due on the transfer of the property as a trust allows for it to be deferred but not exempt.
“The property is taxable based on the original cost of it when it went into the trust,” he said.
The bigger exemption from possible tax on second homes is the careful use of primary residence relief.
When you buy your second home, you have two years in which to designate which property is your primary residence with HMRC, which attracts no capital gains tax on sale.
Once made, you can change this designation further down the line, with the benefit being that whenever you come to sell, you’ll receive primary residence relief for the final nine months you owned the property if it’s served as your main residence at some point – regardless of how it’s used at the time of being sold.
However, Toby Tallon, of wealth manager Evelyn Partners, said this relief could be minor or substantial depending on the amount of time the property was elected for or actually used as a main residence, including the final nine months of ownership.
So, if the property has been held for a long time as a second home it may not offer much of a saving.
It’s a complex area, and therefore it’s important to get the right advice when buying or selling a property to ensure you are making the most of the available tax relief.
For capital gains tax purposes a disposal to children at an “undervalue” will be treated as if transferred at market value triggering a tax liability, says Matthew Spencer partner at law firm Kingsley Napley.
If private residence relief applies however, this doesn’t create any tax liability. However, it’s worth considering that the child will also not be able to claim first time buyer relief in the future.
Furthermore, the gift could create an additional inheritance tax bill if the parent making the gift does not survive the gift by seven years, warns Chris Etherington of tax firm RSM.
“Parents might think they are solving a problem by gifting a property but could end up creating larger ones if they don’t look at the whole picture,” he said.
“Homeowners could trigger a series of tax headaches if they fail to consider the wider implications of transferring a property,” Mr Etherington added.
For example, if there is a mortgage on the property when the child takes over in return for the gift then there may be a stamp duty liability.
Buying a second home already means you pay an additional 3 percentage points in stamp duty but from next April it is likely investors will have to hand over more to the taxman as the thresholds for the levy are falling, reversing a Tory tax cut.
As it stands, there is relief for those who receive property as an outright gift (without a mortgage) and they do not have to pay stamp duty.
So if a second homeowner were to gift the home in its entirety – say, to an heir – it would not attract the tax (but it may well attract inheritance tax, more on this below).
Ms Reeves could make it harder to pass on a second home by tightening inheritance tax rules.
Currently, if you gift a property in full it will be exempt from inheritance tax as a potentially exempt transfer unless you pass away within the following seven years, said Mr Tallon at Evelyn Partners.
If these rules are changed – for example, by increasing the seven-year limit so more gifts fall into an estate for inheritance tax purposes – more second home owners and their beneficiaries would face a looming tax bill.
Another possibility is that Labour opts for more radical reform and introduces a land tax wrapping together all property tax, council tax, stamp duty and business rates.
Such a levy might be a flat tax charged annually based on the value of people’s land and, potentially, the buildings on top of it.
The idea has support from the centrist Tony Blair Institute, as well as Tom Clougherty, executive director of the right-wing Institute of Economic Affairs.
Mr Holman said: “There could be some form of land value tax. I don’t think so at this point, but it has been mooted around the tax profession that it could be quite a good way of dealing with the current property tax issues.”
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