Is it worth having a second house?

A second house can be a good investment but with so many changes to tax laws at the moment, you may start to wonder is it worth it.  Some of the few things that you would need to consider are:

Mortgage interest tax relief

There have been changes to the landlord tax rules one of the main changes being the mortgage interest relief is being phased out.  You will no longer be able to claim 100% of the interest against your property income and by 2020, the tax relief for this will be zero.  This could see you tax bill on your property going up.

 

Stamp duty charges

Since April 2016, there have been changes to the stamp duty charges as follows:

BUY TO LET STAMP DUTY CHANGES
Band Existing residential  SDLT rates Proposed additional rates for landlords
£0 – £125k 0% 3%
£125,001 – £250k 2% 5%
£250,001 – £925k 5% 8%
£925,001 – £1.5m 10% 13%
£1.5m + 12% 15%

 

‘Flipping’ Properties

A common strategy in the past was to flip properties.  This means when you bought a second house, if you made it your main residence even for a short time, you would save a lot of tax.  However, especially after the MP’s expenses scandal, the Treasury are being strict on this.  If you have a second house, regardless of how long you live in it, you still have to pay stamp duty.

The only way you can get a refund is if you are in between buying and selling your homes. So, if you buy a second house before selling the first house, you can get a refund if you sell your first house within 3 years of buying the second house.

Income under £2,500

If your income from renting your second house is less than £2,500 a year, you don’t have to report it on your self-assessment.  If it’s above £2,500 after allowable expenses or more than £10,000 before allowable expenses, then it needs to be reported on the self-assessment tax return.

Setting up a company

A lot of landlords are setting up a company which has all their properties in there. A company that has properties can avoid losing out on the mortgage interest relief. However, they still won’t avoid the extra stamp duty charges. There are also more costs involved in having a company and moving the properties into a company is not easy. So there are a lot of things to consider before setting up a company.

Ongoing costs

There will always be ongoing maintenance costs with properties.  In order to offset this against your income, these costs need to be reviewed to see if they can be included in your accounts. Other costs can include solicitor’s fees for problems with tenants as well as running the household costs when the property is empty.

Selling your second house

If you sell your second house, there is a capital gains tax of 10% or 20% to pay for any profit over £11,300 annual exemption.  If you were thinking of leaving it to your kids, there wouldn’t be any CGT but it will be considered part of your estate for IHT purposes.

 

A checklist provided by HMRC can be found here to help you work out what needs to be included in your tax returns: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/640399/Property_Rental_toolkit_17.pdf

 

These are just a few points to think about when buying a second house and is in no way an exhaustive list.  Each case is different and there can be many other factors to take into consideration when doing a person’s tax return.

As usual, if you would like any further details on this or any other accountancy matters, please follow this link:

In the meantime, here is a download for next month’s tax deadlines:  December tax dates

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