There are many reasons why you may want to buy a second home and before you commit to purchasing a second home it’s important to know the most cost-effective options for financing your purchase. Following on from last week’s Law Society Solicitor Chat, Pauline Hodgson, Senior Associate within our Residential Property team outlines some key risks and considerations you need to be aware of.
1. How does the process of buying a second home differ to buying a main residence?
From a solicitor’s point of view the conveyancing process is the same. The differences lie in the type of mortgage offer the buyer receives (if they are having one) and the amount of the SDLT payable. Therefore the advice on these will differ. The amount that lenders are prepared to lend in relation to loan to value will be less as well so buyers will need a larger sum towards the purchase price than if it were their principal residence. Buyers should speak to a mortgage adviser in this regard. There are also tax implications that the buyer will need to consider before making the decision to purchase.
2. Is this the same process for buy-to-let properties?
The conveyancing process from the solicitor’s point of view is similar with the addition of investigating any current tenancy and advising the buyer in respect of the same. If there is an existing tenant in the property being purchased that will be remaining then there are additional checks that must be made on any lender’s behalf in relation to the tenancy agreement. The advice that will be given in relation to the mortgage offer the buyer receives will differ from a purchase of a principal residence as well. Advice on new tenancy agreements should also be sought by the buyer.
3. What are the tax implications of buying a second home?
There will be higher rate Stamp Duty Land Tax payable on any property that is not your principal residence. Currently this is a 3% surcharge on top of the usual stamp duty payable. There is also Capital Gains Tax to consider when you come to sell your second home if the value of the property has increased. For buy-to-let properties there is also income tax to consider which will be payable on any profit made form renting out the property. A buyer may also need to consider the impact of owning an additional property on their Estate on their death and Inheritance Tax. Buyers of second homes or buy-to-let properties should seek tax advice and wealth planning from their financial adviser or accountant in this regard.
4. How does the process of buying a second home abroad differ?
As the legal system and language in the buyer’s chosen country will be different from England and Wales it is important that a buyer seeks advice from a solicitor that specialises in this area or a local independent solicitor. There will also be additional tax implications to consider including Stamp Duty Land Tax, Inheritance Tax liability in the country that the additional property is situated and other local taxes. The planning laws and even laws relating to pensions and retirement in some countries will also need to be considered. The overall transaction costs are also likely to be higher, the main additional costs abroad being agents and notary fees and higher stamp duty. There is so much more to consider when purchasing a property and this will all be dependent on where the buyer is purchasing. Any buyer considering such a purchase should speak to an expert at dealing with such transactions in the country of their choice to ensure they can make a fully informed decision.
5. What are the key factors you should be aware of when buying a second home?
There are many factors that a buyer should consider when buying a second home, especially if that home is to be abroad. As mentioned above the main ones relate to taxes and costs – not only in relation to the transaction itself but also ongoing maintenance of the property and the additional running costs. Anyone considering buying an additional property should seek independent high quality legal and financial advice before making their decision to purchase.