Financial focus: Will I pay more tax on my second property?

Over the last few years tax rules have changed, making the ownership of second properties more complicated and often, more costly. The new rules focus on ‘second’ properties, which can be defined as any property you own that is not your main residence.This could therefore include any of the following:

• Buy-to-let properties
• Second homes
• Holiday homes
• Inherited properties.

These changes to the tax rules can be summarised across three different stages of owning a second property; when you BUY a second property, when you receive INCOME from a second property and when you SELL a second property. Let’s review these three stages one by one.

_{Buying a second property}

Most people are aware that when you buy a property here in the UK, you may have to pay “Stamp Duty Land Tax” (sometimes known simply as Stamp Duty). Stamp Duty is charged using a tiered rate system (you can read more on these here) with the lowest applicable rate at 0% and the top rate of 12%.

The changes however mean that a surcharge of 3% will be added to the applicable rate when the purchase relates to a second property. This means the lowest rate applicable increases to 3% and the highest rate to 15%.

As an example, if someone buys a £250,000 property and it is their main residence, they would pay £2,500 in Stamp Duty. If it is however a second property, the increase in rates means that the tax bill increases to £10,000.

_{Receiving income from a second property}

The tax rules also impact the income someone receives from a second property as well, which can include rent. Previously, any rental income could be offset by any mortgage interest payments before any Income Tax due is calculated.

From April 2020, Higher and Additional Rate taxpayers will not be able to fully offset their mortgage interest and instead be capped at the same level of benefit as a Basic Rate taxpayer. (You can read more about it here).

So, a Basic Rate taxpayer who offsets their mortgage interest saves £20 tax on every £100 of mortgage interest they offset. An Additional Rate taxpayer previously saved £45 tax on every £100 but will now save £20 (thanks to the cap) and the difference in tax.

_{Selling a second property}

Finally, when you come to sell a property you may pay Capital Gains Tax (CGT) on any increase in the value of the property since you originally bought it (your main residence is excluded). The changes create another surcharge for second properties, increasing the CGT rate by 8%.

This would mean Basic Rate tax-payers pay 18% CGT on any gain on a second property and Higher or Additional Rate tax-payers pay 28% CGT (again, you can read more on this here) but to put it in context, for every £100,000 that the value of a second property has increased in value, this means an additional £8,000 on the Capital Gains Tax bill.

_{In summary}

It’s now typically more complicated and expensive to own a second property. At the same time, new rules have come out benefitting first-time-buyers through the Help to Buy and Lifetime ISAs and first-time-buyer Stamp Duty relief, so this could all form part of a larger plan to dampen the property market and give “young people” a chance to get on to the housing ladder. Whatever the reasons, the impact these changes can have on individuals today are real and can be costly.

_{More info}

Pinney Talfourd Solicitors have an experienced Residential Property Department that can assist anyone who is looking to buy, sell or make changes to the ownership of their property. If you think this could include you, we would be happy to advise. 

If you would like to find out more about financial investments generally please contact the Pinney Talfourd Wealth Management Team. Their investment strategy can help navigate your wealth through the ups, downs and cycles that are a feature of our financial investment systems.

This article was written by  Daniel Watts, Independent Financial Advisor at Pinney Talfourd Wealth Management.​

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