Buying a second home may sound like a great idea – and with the buy-to-let market booming it’s definitely an option to consider. However, it’s key to understand exactly what the tax implications are of having a second home! Well, we’re here to help. Here are further details of the two main ways you’ll pay tax on your second property:
If you get rental income from your property it will be taxed along with other income whether you’re a basic or higher-rate tax payer. Therefore if you’re in a higher tax bracket, you’ll be taxed at 40 (or even 50) percent. However, the good news is that you’ll be able to claim back mortgage interest payments, repairs and maintenance expenses, council tax, letting agency costs, accountancy fees, service charges and any other running costs such as utility bills, against the taxable income. You can also claim ten percent of the net annual return for wear and tear of furnishings.
Capital Gains Tax
Capital gains tax affects you when you sell a property for profit and applies to any property that is not your main home. The first £10,900 of profit is tax free but after this you have to pay CGT. The tax is charged at 18 percent for basic-rate tax payers and 28 percent for people in the higher and top-rate income tax bands. And beware, this year HMRC is clamping down hard on those trying to avoid the tax – second property owners had until Friday the 6th of September (just last week) to pay their share!
Just thought we’d enlighten you about the process of “flipping” – a practice highlighted in the press during the MPs’ expenses scandal. The way it works is that married couples and those in civil partnerships are only allowed one main residence between them. Be aware that you have to do this within two years of owning both properties. “Flipping” is when you change the property that you call your main home. If you sell this property you actually do have some private residence relief, including the last three years of ownership – so a CGT break on part of the profits (no wonder our politicians found it so, ahem, useful!)