When someone owns a second property, especially one used as a buy-to-let, it can have a big impact on their inheritance tax (IHT) liability. Buy-to-let portfolios and other second homes are often included in the value of an estate, which means they could increase the amount of tax owed when passing wealth to heirs. Understanding how IHT works with these properties is important for effective financial planning.
Managing a second home or buy-to-let property involves more than just rental income or holiday use. The value of these properties adds to the overall estate, and without proper planning, it may trigger higher tax charges. This makes knowing the rules around second properties and IHT essential for anyone with a growing property portfolio.
By learning how inheritance tax applies to second homes and buy-to-let properties, individuals can make informed choices to protect their assets. This guide will explain what counts as part of the taxable estate and outline key considerations for those who own or plan to buy a second property. More detail on these matters is available in the guide to buying a second home.
Second properties can serve different purposes, from personal use to generating rental income. Knowing how these types differ is key to managing ownership, tax, and potential returns effectively.
A second home is mainly used for personal enjoyment, such as a holiday home or a spare family residence. It is not rented out regularly and is maintained for occasional use.
Buy-to-let properties are residential properties purchased specifically to rent out to tenants. The primary goal is to earn rental income and benefit from capital growth over time.
Ownership of a second home usually results in paying council tax, but no income tax since it is not rented. Buy-to-let investors must handle rental income tax, landlord responsibilities, and other specific costs.
Holiday homes are often located in popular tourist areas. Owners use them for breaks but rarely as a main address. They may be rented out occasionally, subject to specific tax rules.
Secondary residences are extra homes kept for family use or future plans. They differ from holiday homes by often being closer to the main residence and used more regularly.
Rental properties, or buy-to-let homes, are purchased mainly for tenants. These can range from single flats to large portfolios and typically fall under stricter landlord regulations.
| Property Type | Use Case | Tax Implications |
|---|---|---|
| Holiday Home | Personal, occasional | No rental income tax if not rented |
| Secondary Residence | Regular family use | No rental income tax |
| Buy-to-Let Property | Rental income | Income tax on rent plus other costs |
Investors are attracted to buy-to-let properties because of steady rental income and potential capital growth. It can diversify their investment portfolio beyond stocks and savings.
Second homes offer lifestyle benefits, such as a holiday base or future retirement plan. Some see these properties as a long-term asset to pass on to family.
Tax planning is crucial. Buy-to-let owners often consider forming limited companies to reduce income tax impacts. Second home owners must balance upkeep costs, taxes like council tax, and potential capital gains tax when selling.
For those seeking financial or practical benefits, understanding the role of each type of second property is important when building or managing a property portfolio.
Owning second properties or buy-to-let portfolios carries specific tax responsibilities. These include upfront costs like Stamp Duty Land Tax (SDLT), ongoing income tax on rental payments, and potential Capital Gains Tax (CGT) when selling. Understanding allowable expenses and reliefs is key to reducing overall tax liabilities.
When purchasing a second property, buyers face higher Stamp Duty Land Tax rates than for a main residence. From April 2025, a 7% stamp duty surcharge applies on top of the standard SDLT rates for second homes and buy-to-let properties in England and Northern Ireland.
The SDLT rates range from 0% to 12%, based on the property price, but the surcharge creates a bigger upfront cost. First-time buyers do not receive relief on second properties. Small discounts or refunds may be available if the buyer sells their previous main home within a certain period.
The rules are strict, and failure to pay the announced SDLT surcharge could result in penalties. Buyers should budget carefully for this additional cost when investing in second properties.
Rental income from second homes or buy-to-let properties must be declared on a self-assessment tax return. This income is added to other earnings and taxed at the individual’s marginal income tax rate, between 20% and 45%.
Landlords must keep records of all rental income and expenses. Failure to declare rental income can lead to fines and interest on unpaid tax. Some reliefs exist for joint owners, as rental income is split based on ownership share.
It is important for landlords to understand their tax liabilities early in the rental process to ensure timely payment and minimise the risk of penalties or investigations.
Capital Gains Tax applies when selling a second property or buy-to-let asset that has increased in value. The gain is calculated by subtracting the original purchase price and certain allowable costs from the sale price.
CGT rates for residential property are 18% for basic rate taxpayers and 28% for higher or additional rate taxpayers. All taxpayers have an annual CGT allowance (£6,000 in 2025/26), which can reduce the taxable gain.
Owners must report the sale and any CGT due on their self-assessment tax return, often within 60 days for residential property disposals. Managing CGT effectively requires good record keeping from purchase through to sale. More guidance can be found on Capital Gains Tax on second homes.
Landlords can reduce taxable rental income by deducting allowable expenses directly related to the property. These include maintenance, repairs (not improvements), insurance, letting agent fees, and council tax paid by the landlord.
Mortgage interest relief has changed. Since 2020, landlords receive a basic rate (20%) tax credit on mortgage interest, which replaces the full deduction previously allowed. This means higher-rate taxpayers might pay more income tax than before.
Other tax credits, such as those for capital allowances on furnishings, may also be claimed. Keeping detailed expense records is vital to maximise these reliefs and minimise tax liability on rental income. Further details are explained under tax on second property.
Buy-to-let portfolios can significantly affect an individual's estate value and the IHT due on death. Proper planning helps manage the tax liability while maintaining income from these properties. Understanding how IHT applies and available strategies supports better financial decisions for UK taxpayers with second properties.
Buy-to-let properties form part of an individual's estate and are subject to the standard 40% IHT rate on any value exceeding the nil-rate band (£325,000 as of 2025). Income generated from rental properties continues during the owner’s lifetime but does not reduce the estate’s overall tax exposure.
Properties owned outright increase the estate’s value directly. If held within a company, shares in that company are included in the estate instead, which can complicate valuations. Rent from these properties is taxable separately, but rental income does not reduce the IHT payable on the property’s value.
Several methods help reduce IHT on buy-to-let portfolios. Common approaches include:
Gifting: Transferring property or shares to family members during lifetime. Gifts may become exempt if the owner survives at least seven years.
Trusts: Placing properties in trusts can protect assets but may have complex rules and possible tax charges.
Life Assurance Policies: Using life insurance to cover expected IHT bills ensures funds are available without forcing sales.
Financial planning should balance preserving income from properties against reducing future tax. Many buy-to-let investors find selling part of their portfolio can provide cash for tax-planning purposes but may affect rental income.
Passing buy-to-let properties requires clear plans to avoid disputes and unnecessary tax. Direct transfers via wills can trigger IHT immediately on death unless mitigated by planning.
Using trusts or lifetime gifts helps transfer assets gradually. However, landlords must consider control and income loss before transferring ownership.
Transferring shares in companies that hold multiple buy-to-let properties differs from transferring individual properties, often requiring professional valuation and legal advice.
Elevate your estate planning with Assured Private Wealth! We offer will writing for high net worth individuals, business lpa, and specialized retirement planning for married couples. Prepare for the future with our trust succession planning and LPA for health. Click to secure your legacy today!
Financing a second property or expanding a buy-to-let portfolio involves careful planning around deposits, mortgage types, and creditworthiness. Knowing the differences between mortgage options and working with experts can help secure better rates and suitable lending terms.
For a second property, a deposit is typically higher than for a main home. Lenders usually require at least 15% to 25% of the property’s value upfront. The exact amount depends on whether the property is a second home, a buy-to-let, or a holiday let.
A good credit score is essential. Lenders look for scores that show reliable financial behaviour, often 700 or above. Low credit scores may lead to higher interest rates or mortgage denials.
Mortgage rates for second properties tend to be higher than for primary residences. This reflects the increased risk lenders see in lending against properties not used as main homes. Planning finances carefully and budgeting for fees and taxes is important.
Buy-to-let mortgages are designed for rental properties. Lenders assess the property’s rental income to decide how much they will lend. The interest rates are often higher than for standard mortgages but lower than holiday-let mortgages.
Second home loans are for properties not rented out, like holiday homes or weekend retreats. These usually have stricter deposit requirements and might come with higher rates to cover lender risk.
Holiday-let mortgages are a specialised category that sits between buy-to-let and second home loans. They require proof of income from holiday rentals and tend to have complex restrictions on usage and financing.
Mortgage advisers and brokers play a key role in navigating second property finance. They compare deals from multiple lenders to find suitable mortgage rates and terms.
Brokers often have access to exclusive deals not available to the public. They help clients understand the differences between mortgage types, deposit needs, and credit requirements.
Working with a qualified adviser reduces the risk of application errors and improves chances of approval. They also assist in organising paperwork, checking affordability, and explaining tax implications linked to buy-to-let portfolios.
Owning a second property means dealing with various ongoing expenses and legal obligations. Managing these properly helps protect investment value and ensures compliance with regulations. It also involves understanding which costs are tax deductible and when professional help is needed.
Second properties require regular maintenance to keep them in good condition and attractive to tenants or guests. Common expenses include plumbing or electrical repairs, roof upkeep, and garden maintenance. Unexpected repairs can arise, especially if the property has been empty for periods.
Renovations may be needed to improve the property's appeal or meet safety standards. These can include improvements such as new kitchens or bathrooms. Owners should budget for both planned and unplanned maintenance to avoid financial strain.
Empty properties often face increased risks of deterioration, so regular inspections are essential. This reduces the chance of major costs later.
Letting agents often manage second properties, especially buy-to-let homes. Their fees typically range from 8% to 15% of the monthly rent. These fees cover tenant sourcing, rent collection, and property management.
Many costs related to running a rental property count as allowable expenses. This includes agent fees, repairs (not improvements), utility bills paid by the landlord, and advertising costs. Keeping clear records of these expenses is vital for accurate tax returns.
Using a letting agent can save time but reduces overall rental income. Landlords must weigh the benefit of professional management against these ongoing fees.
Second property owners need suitable insurance, often separate from primary home policies. Second home insurance protects against theft, fire, and accidental damage. Policies may be more expensive if the property is let or left empty for long spells.
Council tax is payable on second homes and may include a council tax premium—a higher charge some local councils apply to discourage empty properties. This premium can be up to 100% extra in some areas.
Owners must also be aware of other local charges, such as waste disposal or water rates, which vary by location.
Short-term lets like Airbnb offer flexible income but bring unique demands. Properties used as holiday homes may face stricter licensing and safety requirements.
Managing short-term guests often means higher turnover, increased cleaning costs, and greater wear and tear. Compliance with local regulations and tax rules for holiday lets is essential to avoid penalties.
Insurance costs for holiday homes can be higher due to increased risks. Knowing the difference between holiday lets and longer-term rentals helps owners budget appropriately and meet legal obligations.
For more details on costs and taxes, see Buying a second home: What you need to know.
Investors should carefully assess their property status, legal obligations, and tax implications before expanding a buy-to-let portfolio. It is essential to understand the specific rules impacting first-time buyers and how owning multiple properties affects tax liabilities. Professional advice is crucial to navigate these complex areas effectively.
First-time buyers benefit from certain tax advantages that do not extend to second properties or buy-to-let homes. A primary residence usually qualifies for reliefs such as exemption from additional Stamp Duty Land Tax (SDLT) hikes applied to second homes. Once a property is designated as a second home or investment, these benefits disappear.
Buy-to-let investors must be aware that switching a former primary residence to a rental property will trigger additional taxes. For example, an extra 3% SDLT applies on top of the standard rate for additional residential properties. This charge can affect the upfront costs significantly.
For first-time buyers considering a second home, understanding whether the new purchase will affect their eligibility for any first-time buyer schemes or reliefs is important. It is also vital to review the criteria for primary residence status regularly, especially when the property’s use changes.
Buy-to-let properties and second homes are subject to specific legal and tax rules that differ from primary residences. Owners must comply with landlord regulations, health and safety standards, and local council requirements. Failure to meet these can result in fines or legal action.
Inheritance Tax (IHT) is a key consideration. Second properties and buy-to-let homes add complexity to estate planning. These assets are valued at their full market price when calculating IHT, which can increase the tax burden on an estate. Proper planning is necessary to minimise this risk.
Tax on rental income and capital gains must also be factored in. Landlords need to keep accurate records and file tax returns annually. Being aware of reliefs, allowable expenses, and deadlines is crucial to avoid penalties.
Property development and investment require expert advice due to the complexity of rules around second homes and buy-to-let portfolios. Professional guidance from accountants, solicitors, or tax advisors helps investors understand liabilities and plan appropriately.
Financial experts can assist with tax-efficient strategies, such as setting up trusts or using certain company structures to reduce IHT exposure. They can also provide clarity on compliance with evolving regulations.
Prospective buyers should always consult experts before purchasing to evaluate risks, costs, and potential returns. Early advice can prevent costly mistakes and improve long-term portfolio performance. Engaging specialists ensures decisions are well-informed and tailored to individual circumstances.
Plan for the future with Assured Private Wealth! Our retirement planning advisors specialize in strategies for doctors, ensuring your peace of mind. Benefit from our joint lasting power of attorney services, will writing for teachers and mirror will writing services. Click now to secure your legacy.
Call us for a friendly chat on 02380 661 166 or email: info@apw-ifa.co.uk
