What are the legal expenses when buying a second property?

Thinking of buying a second home? Maybe you want to purchase a second property as a rental to top-up your income? Maybe you’d prefer a holiday home by the coast instead? Or perhaps you’ve inherited a second property that needs some TLC. Whatever the reason, a second property can be a costly undertaking, as mortgages, taxes, and stamp duty for a second home are often more expensive than a first home purchase. 

We’ve highlighted some of the legal expenses you come across when purchasing a second property.

Second mortgages

When it comes to buying a second property, the criteria for mortgage applications is often stringent, as tougher restrictions are usually placed on second mortgage applications - especially for applicants that may already have a mortgage on their first home.

Second mortgages usually require a larger deposit than what may have been required for your first mortgage, with interest rates also higher than standard.

It is always worth contacting your current mortgage lender so see if they are willing to offer you a second mortgage, but note, lenders will be more cautious of applicants applying for second mortgages as the risk of lending is much greater.

There is also a difference in the type of mortgages used for properties you intend to live in and properties you intend to use for buy to let purposes. If you are looking at renting out your second property, then you will need to apply for a buy to let mortgage as opposed to a second mortgage.

Council Tax

If you have a second property that is not your main residence, then you may have to pay council tax for both properties.

However, depending on your council, you may be eligible for discounted council tax on your second home or unoccupied property, with some furnished second homes and holidays homes receiving up to a 50% discount. You will have to contact your local council to find out if you can apply, as it is often down to their discretion.

If you have inherited a second property and have decided to sell it, you will not have to pay council tax if you obtain probate and the property remains vacant. Once probate has been granted, you may still be exempt from having to pay council tax for up to 6 months if the property remains vacant and is still owned by the previous owner.

Properties that are derelict or that are undergoing major renovations may also be exempt from having to pay council tax. More information on the requirements can be found here.

Stamp Duty

Similar to when purchasing your first property, you will be required to pay Stamp Duty on a second property and certain buy to let properties. However, Stamp Duty on second properties will increase by an additional 3% if the property costs £40,000 or more, which applies to both Freehold and Leasehold and even if you have bought the property outright or with a mortgage.

However, residential properties purchased between 8th July 2020 and 31st March 2021, will be eligible for reduced Stamp Duty Land Tax rates due to the COVID-19 outbreak. These reduced rates will apply to those buying first homes and to those who have owned property before, with those purchasing a property up to £500,000 paying no Stamp Duty Tax at all.

More information on rates can be found on the Government website here.

Capital Gains Tax (CGT)

Capital Gains Tax does not have to be paid on your main residence, but bear in mind that if you do have a second property and wish to sell it down the line, you will have to pay Capital Gains Tax. The cost will of course depend of what you bought and sold the property for.

Remember; there are two bands for Capital Gains Tax depending on if you are a basic-rate taxpayer or a higher- rate taxpayer. Basic-rate taxpayers will pay a Capital Gains Tax on property of 18% whereas for the latter it comes in at 28%.