As the chancellor continues to remain tight-lipped about the tax changes likely to be included in the first budget of a Labour government, second homeowners across the country will be weighing up their options.
Firstly, the proposition of owning a holiday let has already become much less attractive from a tax perspective with the removal of the furnished holiday lettings allowance, announced in the last budget, coming into force in April 2025. Secondly, combined with rumours of a Capital Gains Tax (CGT) increase, it could see many second homeowners opting for a change of their own.
William Stevens, head of financial planning, and Sarah Hollowell, tax and trustees services director at Killik & Co, outline what second homeowners should be aware of heading into the autumn budget.
Capital Gains Tax
There are a few factors that might prompt a second homeowner to decide that now is the time to sell. Firstly, there is the possibility of a CGT increase. The current rates of CGT on gains following disposals of residential property are 18% (basic rate) and 24% (higher and additional rates).
One possibility is for the higher rate to be increased back up to 28% (which was the rate before the previous government reduced it in 2024). Another is for CGT rates to be brought in line with income tax rates which would result in larger increases:
- Basic rate – from 18% to 20% (2% increase)
- Higher rate – from 24% to 40% (16% increase)
- Additional rate – 24% to 45% (21% increase)
The calculation below shows the effect of these potential increases in real terms:
An individual buys a second property in 2012 for £250,000 which they sell for £375,000. Excluding costs and expenses the gain is £125,000. Assuming they have an annual income of £60,000 (meaning they are already a higher rate taxpayer), the tax due would be:
Removal of Furnished Holiday Lettings Regime
Some owners of second homes are currently able to treat the rental income as trading income. Strict conditions apply (such as the property being in the UK/EEA, being available to let and actually let for a certain number of days and not to the same person for more than a month) but if all conditions are met, there are benefits such as:
- Mortgage interest may be deducted as an expense from rental income. (This is a flat rate 20% deduction for non FHL lettings),
- Capital allowances may be claimed on furnishing the property,
- Income is classified as relevant earnings for the purposes of making pension contributions,
- Certain CGT reliefs are available when the FHL is sold.
It was first mentioned in the Spring Budget by the previous government that the furnished holiday lettings regime would be abolished from April 2025. As well as losing the benefits above, after April, it will only be possible to set losses made from this type of letting against other letting income.
Weighing up ongoing tax charges vs the loss of selling
When deciding what to do next, it is important to weigh up all options including if it makes sense to hold onto the asset. Even though changes to the taxation of holiday lets are changing, for some individuals it might make sense to hold onto these. For those considering disposing of the second home, it is worth looking at how much ongoing tax you’d pay vs how much CGT would be due on any sale.
Keep the receipts
For those thinking of selling, it's important to keep receipts and make sure you are accounting for all money spent on improving the property. For those who’ve owned a property for a long time, it could be easy to forget some improvements made that could count for CGT purposes. In addition to the more obvious ones such as extensions and renovating a kitchen, some might be less thought of, for example, landscaping work on a garden (adding a shed for an office or a patio area), energy efficiency upgrades (a new boiler or double glazing) and finally any legal costs for the sale including estate agent or letting agent fees throughout the ownership.
Even though some of these might not amount to a large amount of money in the grand scheme of things, they can all add up and help to reduce the overall tax on the sale.
