Buying a second or holiday home in the sun can prove far more costly than planned if purchasers don't organise their tax affairs properly says PKF accountants and business advisers.

The number of people owning holiday homes or second properties has rocketed in recent years, recent research suggests nearly 230,000 properties in England alone are now second or holiday homes, but many have failed to appreciate the tax implications of owning such properties, particularly when they are situated overseas.

James Welch, tax partner specialising in property and construction at PKF, says: "Whether it is a buy-to-let property or that dream holiday home, it could be subject to many different kinds of tax. For UK properties, income tax, capital gains tax (CGT) and inheritance tax (IHT) are the main worries."

Income tax

The idea of a substantial income from second properties, whether through the obvious buy-to-let route, or letting out the holiday home, is always one of the biggest attractions in buying a second property. But don't forget that lettings are treated as a business and any profit is taxable. Married couples should consider putting the property in the name of the spouse with the lowest income, or in joint names, so that less income tax is payable overall.

Capital Gains Tax (CGT)

If properties are sold, given to other members of the family, or transferred into trusts or companies, CGT will be payable on any rise in the value of the asset. There are ways of reducing a CGT bill but the right professional advice and action must be taken. James Welch said: "You can make substantial CGT savings through the use of trusts and gifts between husbands and wives before a sale is made."

Inheritance Tax (IHT)

With the starting point for IHT at only £275,000, more and more people have become caught in the IHT net as property values have risen. For UK domiciled individuals, IHT is charged on the total value of their assets anywhere in the world - so homes abroad would be taxed. There are still ways of reducing a family's IHT bill involving the creation of trusts to hold holiday homes and other assets. However, this kind of arrangement is becoming increasingly complex to put in place as the tax authorities continue to attack past and present IHT planning. For example, April this year saw the introduction of the pre-owned assets tax – an annual income tax on the use of assets that are no longer part of your estate for IHT purposes.

James Welch said: "Trusts can be created during someone's lifetime or in the event of their death but there are implications for other taxes and many detailed conditions to be met for the arrangements to save IHT".

Overseas properties – in addition to the above taxes, UK domiciled individuals will also have to consider the impact of overseas taxes. These can include: income tax on rents, CGT on sale of the property, IHT, an annual wealth tax on the value of the property, local stamp duty (which can be much higher than in the UK) and regional and local council taxes on the property.

James Welch said: "Where income tax, CGT or IHT is paid in more than one country, tax paid overseas is usually deductible from the UK tax bill. The direct cost of other taxes can sometimes be mitigated if you plan the purchase and ownership of the property carefully in advance. Such planning arrangements must address the tax and legal peculiarities of the country and must be analysed carefully to ensure they do not trigger further tax problems in the UK!"

"There are many kinds of tax to rain on your investment or holiday dreams, but it is not all bad news. If you can resist rushing into a purchase and take specialist advice in advance on all the related areas, including your will, you can map all the pitfalls to give you a worry free route to happy holidays for many years to come.