There is plenty to consider when buying a second home, either for your personal use or to rent out. One key thing to understand is the tax implications of having a second home. Here are three ways you’ll pay tax on your second property:
Stamp duty on buying a second home
You will have to pay stamp duty at the standard rate plus a 3% surcharge on each band if buying your new residential property will mean you own more than one.
You are liable to pay the surcharge even if the other property you own is outside the UK. If you are married or in a civil partnership, you have to pay the higher rates even if just one of you owns a second property. You are liable to pay the surcharge even if you jointly own your other property. It is also irrelevant whether you bought your other property. If you inherited it or were added to the title deeds at a later date, you technically own the property. Therefore, any new property purchase will be treated as a second one.
If you sell your main residence within three years of purchasing your additional property, and the additional home is now your main one, you may be eligible for a stamp duty refund. For more information, read our blog article on claiming a stamp duty refund.
Income tax on renting out a second home
If you get rental income from your property, it will be taxed at the same rates as income you receive from your business or employment – 0%, 20%, 40% or 45%, depending on the bracket your total income falls into.
You’re able to deduct expenses you incur from letting the property. These are things like letting agent fees, accountants’ fees, buildings and contents insurance, maintenance and repairs (but not improvements) and service charges. If you have a mortgage on your second property, you’ll also get a tax credit of 20% of your mortgage interest payments.
Capital gains tax on selling a second home
You will face a capital gains tax bill when you sell a property that is not your main home. The first £12,300 of profit is tax-free, but after this, you have to pay CGT. Couples who jointly own property can combine this allowance, allowing a gain of £24,600 without paying tax. The tax is charged at 18 percent for basic-rate taxpayers and 28 percent for people in the higher and top-rate income tax bands.
As the name suggests, CGT is only payable on the profit (gain) you make rather than the total sale price. To work this out, deduct the amount you originally paid for the property from the sale price. You can also deduct costs you incurred when buying and selling the property, including stamp duty, conveyancing fees, surveyors fees and the costs of improvements you made to the property whilst you owned it (but not maintenance costs).
We can help
If you are thinking of buying a second home in Wimbledon, Wimbledon Village, Coombe, Kingston, Raynes Park or New Malden our friendly sales team can help. Contact us to find out more about our selection of properties.