Investing in a second home in Scotland has long been attractive due to its scenic landscapes and vibrant cities. However, recent tax increases and holiday let restrictions have raised questions about the viability of such investments.
Increased taxation on second homes
The Scottish Government has implemented several measures affecting second-home ownership:
Additional Dwelling Supplement (ADS): As part of the Land and Buildings Transaction Tax (LBTT), the ADS rate increased from 6% to 8% on 5 December 2024. This surcharge applies to purchases of additional residential properties, including second homes and buy-to-let investments.
Council tax premiums: From 1 April 2025, local authorities can charge up to double the standard council tax rate on second homes. Glasgow City Council, for example, will implement this 100% premium, effectively doubling the council tax for second-home owners.
These tax increases aim to address housing shortages and make homeownership more accessible to local residents.
Holiday let regulations
New regulations have been introduced to oversee short-term lets:
Licensing requirements: Since October 2022, all short-term let properties in Scotland must obtain a licence to operate legally. This includes both entire properties and individual rooms offered to guests. Operating without a licence is a criminal offence, punishable by fines of up to £2,500 and a one-year ban on licence applications.
Abolition of Furnished Holiday Lettings (FHL) tax regime: Effective from 6 April 2025, the FHL tax advantages will be removed. This change means that income from holiday lets will be taxed similarly to other residential property income, affecting deductions and reliefs previously available to landlords.
Implications for investors
Prospective second-home buyers should consider the following:
Increased upfront costs: The higher ADS rate elevates the initial expense of purchasing a second property. For instance, on a £300,000 property, the ADS would amount to £24,000, up from the previous £18,000.
Ongoing expenses: Enhanced council tax premiums will increase annual holding costs, impacting the overall profitability of the investment.
Operational compliance: Strict licensing requirements necessitate adherence to safety and quality standards, potentially incurring additional costs for property modifications and administrative processes.
Tax treatment changes: The abolition of the FHL tax regime will alter the financial landscape for holiday let owners, reducing certain tax benefits and possibly affecting net returns.
While Scotland's natural beauty and cultural richness continue to make it an appealing location for second-home investments, recent policy changes have introduced new financial and regulatory considerations. Prospective buyers should conduct thorough due diligence, factoring in increased taxes and compliance obligations, to assess the viability of their investment plans.
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