A home away from home

Published 06th Sep 2007

Second homes are not solely the preserve of the rich as increasing numbers of Brits look for a holiday home in the Mediterranean sunshine or a bolthole in the country
Taking into account the attractive returns on today’s buy-to-let properties, it begs the question as to why a growing number of Brits prefer to pump their extra cash into a holiday home than buy a property for purely rental purposes.

For some it is the freedom of ‘getting away from it all’ for a long weekend at the drop of a hat, the chance to have both a city pad and a country cottage, however for others it can be the desire to use the property for their pension or indeed the increasing popularity of holidaying in the UK to minimise their carbon footprint.

Whatever the catalyst for seeking a second home, most Brits know instinctively where they want to be. Previous holiday destinations are a big attraction, in part proving why there are a good proportion of second homeowners hanker for the coast, after they fell in love with an area whilst on a summer break.

Oh I do like to be beside the seaside
Indeed, coastal towns draw in more second-home owners than anywhere else in the UK. Unfortunately though it hasn’t taken long for this to be reflected in the house prices.
More than a third of the nation’s seaside towns have seen at least a 10 per cent increase on their average house prices, with those in Scotland bearing the brunt. One example being Girvan in Ayrshire where the average price is now £131,512 after a 41 per cent increase.

Six per cent of all houses in the Welsh county of Pembrokeshire are second homes – a figure which shoots up to 50 per cent in some coastal areas – whilst average property prices currently tip the scales at almost seven times the average wage. Whilst properties in 24 British seaside towns are now selling at a huge 20 per cent premium to the county’s average price.

Holiday homes may not be the sole reason for this surge in property prices, but they are definitely fuelling the dramatic increases in some areas of the country – good for the buyer but not for the locals unless the property is rented out when unoccupied.

With this in mind, it is understandable that there is a degree of animosity amongst locals who are being forced off the property ladder by affluent Brits hunting for a ‘bargain’ holiday home, however the local economy has taken a hit too. Summer’s bustling hotspots turn into ghost towns during the winter months, and the void in income this brings sees a large number of local businesses struggling to survive.

Although there is a high degree of saturation in some areas of the country, Wales is still the frontrunner for second homes with investment potential. John Heron, director of mortgages at Paragon reflected: “While the national picture remains strong, residential property investment looks particularly attractive in Wales – rents are rising strongly but so are property values.”

This means investors can have their cake and eat it should they so choose, renting the property out whilst vacant but at the same time securing the capital appreciation every homeowner so craves.

Spare a thought for the finer details
Before getting caught up in the romanticism of having a country retreat though, it is worth taking a moment to assess the impact a second home will have on your finances. Owning two or more properties means that you are liable for Capital Gains Tax when selling up, but by making one of these residences into your Principal Private Residence (PPR) you could help to reduce the amount you end up paying.
Having a PPR renders that property exempt from taxable gains so switching which property this applies to before you sell could help mitigate against the total amount of tax you will pay, however only one PPR is permitted per married couple or civil partnership at any given time.

Ronnie Ludwig, partner in the private wealth team at chartered accountants Saffery Champness believes that everyone should make the most of this opportunity. “Anyone buying a second home has a window of two years from the date of acquisition, or the date at which the second property becomes habitable, to make an election selecting which home is to be treated as the PPR for capital gains tax (CGT) purposes. If no election is made within this time limit then the Revenue will decide which is PPR based on the facts.”
Once an election has been made, the PPR can be changed at any time in favour of another property – at home or overseas – which has been available to occupy, even if only for a short period, as long as it was actually occupied by the owner.

Ludwig continues: “Homeowners should also consider making the election in favour of the main home within two years of purchasing the second home. They should then vary the election at any time thereafter in favour of the second home for a short period, then vary it back again in favour of the main home. By doing this, the gain pertaining to the last 36 months of ownership drops out of account for CGT purposes when the second home is sold.”

Another property could also cause issues for heirs upon death if it is not planned for accordingly. The individual inheritance tax (IHT) allowance for a Brit is £300,000, meaning a couple have a potential nil band rate of £600,000 as long as each allocate the properties between them. This might cause issues in Greater London where the average property price has now risen above the nil band rate, however elsewhere in the country it could be worth transferring the property over if both homes are under one name.

Totting it up
Other than the added burdens of CGT, IHT and annual council tax, buyers should also remember that the usual costs apply; all mortgage costs, legal fees etc.

Second-homebuyers should be wary of taking their new mortgage out with their existing lender unless they can secure themselves preferential terms, as there are bound to be more favourable deals in the market place. Most second-home buyers use savings or inheritance to pay off a chunk of the mortgage at the outset so the deal itself is also likely to differ.

Finally you must take into account that unless you are letting the property out when not using it, it will be empty for long periods of time. Certain insurers might insist on installing extra security measures before they agree to give you a quote, and you may want to employ a gardener and/or ask your new neighbours to check in from time to time to keep things in order whilst you are away so that you get less grief and more enjoyment out of your holiday home.
By Ariane Buteux

Source: ' Personal Finance & Savings '

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