Tax Implications for buying, owning and selling Second Properties
Running and maintaining a second property comes with its own challenges. For this reason, it’s important to fully understand the rules on taxes relating to properties which are not your main residence, so that you can make the best decisions to reduce any charges. Take some time to look at these and how you can best arrange things to fit your circumstances.
Stamp duty for a second property
The first issue to consider when it comes to owning a second property is the higher rate Stamp Duty Land Tax. From April 2016 the rate of stamp duty payable on the purchase of a second residential property, priced above £40,000, is calculated at an additional 3% above the current rates for each band charged on a primary residence. The higher rate Stamp Duty Land Tax applies to properties purchased in England and Northern Ireland. Different rules apply to the purchase of a residence in Wales and Scotland, although they too carry some form of transaction tax charge.
This could come to thousands of pounds more than you would have expected or anticipated. Ensure that any real estate agent is notified when you are looking to buy a second property and includes the higher stamp duty charge in any prices quoted to you.
If you are buying a new main residence and there is a delay in selling your previous main residence, the additional 3% stamp duty will be charged on the purchase as you would then own two properties. However, you can claim a refund of any higher rate stamp duty if you sell or give away your previous main residence within 3 years of the transaction.
Where you are buying a property jointly with someone else, such as a spouse, civil partner or other person who already owns a residential property, then the higher rate will be charged in this instance.
To find out more about higher rate Stamp Duty Land Tax, or land taxes on purchasing a property in Scotland or Wales, refer to the guidance provided by HMRC.
Capital Gains Tax on a secondary property
The next issue to consider is Capital Gains Tax on a secondary property sale. You will be taxed on the additional gain over what you paid for a property, not the full sale value. Capital Gains Tax is not charged on your main residence but would be applicable to any property that is deemed as an investment and is charged at a different rate than for non-property assets. Basic-rate taxpayers pay 18%, while higher and additional-rate taxpayers pay 28% on any gains made from selling an investment or second property.
You do not have to pay Capital Gains Tax if all of your chargeable gains for that year fall under the CGT annual allowance. This is presently set at £12,000. You can read more about your CGT allowance at HMRC.
In the 2015 Autumn Statement, it was proposed that a payment on account for any CGT must be made within 30 days of disposal of a residential property, together with a return sent to HMRC on the transaction. In the April 2017 Autumn Budget this requirement was deferred until April 2020. The payment on account would be credited against your full Income Tax and Capital Gains Tax liability for the relevant tax year.
These new rules would most commonly affect those who own a second home or a rental property. It’s expected that this proposal will ignore chargeable gains which are related to non-residential property assets. However, they are anticipated to apply to overseas residential property sales, unless the resulting gain would be taxed in another country.
Deciding on the length of investment and income streams
Another consideration should be the length of time you wish to hold your funds in the property. Generally, long-term second home investments assume that, over time, the asset grows in value. In the medium-term, though, it may be used to give you a source of income. For example, some people choose to invest in a secondary property as they wish to use it as a source of regular income. Others choose to buy a property, improve it and sell it on at a profit in a short-term process.
Some choose to take the long-term view, for example, using an appropriate buy to let mortgage scheme. These tend to be interest only but carry a higher rate and may have other conditions. Any interest only mortgage is then repayable in full when the property is sold on.
Short-term investments are more dependent on your ability to read the market and to utilise the time, skill and expertise needed to remodel properties to a budget, without making a loss. This is a high-risk strategy that often needs you to have people in place to do the work at a rate that you can afford, in a short space of time, so you can turn them around quickly. Minimising costs so that you can sell a property at a premium value is the aim here.
Considerations when utilising Buy to let
Many people take on the remodelling or letting of a property while they work a seasonal role, or they might simply wish to develop it as a business. There’s a lot to decide with regards to what kind of buy to let properties you could take on, whether you choose something in a busy city, a rural suburb or somewhere fit for seasonal pick-up. There are other things to consider such as budgeting for gaps in letting, whether to operate under a limited company, or if you want to look at passive property investment schemes where a letting agency manages the operations for you. Whichever way you opt to do this, be aware of the financial and tax aspects around your actions.
Rental income streams and Income Tax
As with any income stream, you will need to pay Income Tax on revenues derived from property rental. You will have to report this to HMRC and include letting income on a Self-Assessment return.
Getting help with your property investing
As ever, you can reach out to Devonshire Green if you need any support or assistance with your second property. From recognising what tax you will be charged to ensuring you have the right systems and structure in place for your property development activities, we can help you to work out how to make the most of the purchase of a second property.