Local Tax Implications
When you purchase a second home, as a UK citizen, you're likely to be concerned about what taxes you're liable to pay over the period of owning your home. Many people don't take into account taxes when they plan their second home budget and can be in for a bit of a shock when they realise that not only may they owe taxes on it during the period they own it, but also owe taxes when they go to sell it.
Capital Gains TaxCapital Gains Tax (CGT) is one of the most irritating taxes for anyone who owns a second home. Each person is only able to claim exemption from CGT on one home, normally their primary residence. As a married couple or a couple who live together in a civil partnership, by law you are only entitled to have one main residence between you both. If you do purchase a second home, you will most likely have to pay CGT should you decide to sell it in the future.
If you use your second home for personal reasons, you are able to reduce some of the Capital Gains Tax, however this is only available for a limited time. The government have imposed a 2 year limit on the length of time you have to elect which home is your primary residence. If you fail to do this, they have the right to decide for you and you can lose out on a significant tax break when you sell your second home. The good news about this 'main residence election' is that it is available for homes you purchase in the UK or abroad.
Tax Implications When Letting and When Owning a Holiday HomeIf you decide to let your second home out, you will be liable to pay income tax on any rental income you make from it - you will be taxed just as investors who purchase buy-to-let properties or normal rentals. You will normally not be able to claim a significant relief in capital gains tax on your second home when you sell it if you decide to let it out.
If you decide to buy a second property as a holiday home you must also consider foreign tax situations before agreeing to purchase. You'll need to pay CGT on a holiday home if you sell it and it is your secondary residence and on top of that you may have to pay foreign capital taxes. Always seek out professional advice in this situation as you may not be aware of foreign income taxes and even inheritance tax.
Possible Lower Tax AlternativesIf you are able to purchase a property abroad through a company, of which you are either a director or an employee, you may be able to reduce your tax outgoings significantly. There is a law in existence where there is no tax charge on individuals who buy a property abroad this way and this helps to avoid inheritance tax.
If it sounds too good to be true, it just may be. Often the government develop other ways of obtaining taxes and they aren't very keen on providing relief on foreign taxes that are not similar in standing to the UK.
Regardless of where you buy your property, you're still going to be liable to some kind of taxation, so research this as much as possible before buying and always seek advice from the tax office so you're fully aware of what type of monetary demands they may make on you.