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Do you dream of owning a second home, perhaps to let out or occasionally use for holidays? Maybe you already hold such a property. In any case, being a second homeowner carries risks as well as opportunities. Tax erosion, in particular, can be an example of the former.
In this guide, our Padiham financial planners explain how taxes can bear upon second homeowners – offering ideas about how to navigate them more effectively in 2023-24. We hope these insights are helpful to you.
Please get in touch for more information or to discuss your own financial plan with us.
Tax and second homes
With respect to taxes, owning an additional property is quite different from owning your main home. Firstly, stamp duty works out differently. In 2023-24, you must pay an extra 3% on top of standard rates for a second property (if it is worth over £40,000).
However, the rate scales with higher property values. For instance, a £255,000 second home leads to an 8% stamp duty rate. For a £1.5m property, the rate is 15%. Bear in mind that these stamp duty rules do not apply to caravans, mobile homes or houseboats!
Secondly, you typically need to pay council tax on a property that is not your main home – but, the council may give you a discount. You may need to ask them about how much you get. However, be aware that some important rules came into effect in April 2023 about holiday lets.
In 2023-24, it is becoming more difficult for second homeowners to avoid paying council tax and claim access business rates relief. This used to be possible by declaring an intention to let a property out as holiday accommodation. Some property owners were able to claim tax relief without actually letting out their properties.
Now, stricter rules have come into force to try and prevent people from abusing the rules. Two conditions must be met for a property to be classed as “self-catering” and valued for business rates. Specifically, in 2023-24 the property must be:
- Available to let for short periods for at least 140 nights in total over the current and previous tax years
- Actually let for at least 70 nights in the last 12 months
Income tax
Not all second homeowners earn an income from their property. However, many act as landlords – e.g. renting out the property as a Buy to Let or holiday day – to generate some extra income. In which case, you need to factor this into your income tax bill.
Income tax is not just levied on employment income (salary). It is also levied on income which HMRC deems as “earnings” – which typically include rental income from tenants. Bear in mind that you need to subtract your relevant expenses first to calculate the tax liability.
For instance, suppose you earn £700 per month in rental income from a Buy to Let property. Your monthly mortgage payment for the property is £600. Assuming there are no other expenses (e.g. letting agent fees), your “profit” is £100 per month. This £100 is the part that is subject to income tax.
Some landlords put their additional properties into a limited company structure rather than holding them in their own name. This means that the profits are subject to corporation tax instead of income tax. This can be more tax-efficient in some cases.
For example, a landlord who is a Higher Rate taxpayer pays 40% tax on his Buy to Let rental income. By contrast, another individual holds her Buy to Let properties within a company structure and the profits are taxed at 19% (the total profits are under £250,000 per year).
However, before rushing to put additional property into a company structure, seek professional advice. This route has its advantages, but it also comes with drawbacks and risks (e.g. less preferable mortgage rates in many circumstances).
Inheritance tax
Owning additional property not only brings immediate tax considerations, but also long-term ones. In particular, inheritance tax (IHT) can bear upon the wealth tied up in property portfolios – indeed, quite punitively if careful planning is not undertaken.
One benefit of holding properties like Buy to Lets in a company structure is that it can be useful for intergenerational financial planning. In general, it is easier to pass down company shares in a property portfolio compared to passing down additional properties in your own name.
Trading businesses can enjoy 50% or 100% IHT relief on specific assets. However, HMRC does not apply these reliefs to Buy to Let portfolios – classing them as “investment businesses” rather than as “trading businesses”.
Unfortunately, accumulating additional properties, like Buy to Lets, involves building up a lot of capital which HMRC is going to want a piece of. By acting early, however, investors can plan ahead to mitigate the impact of a future IHT liability using financial advice.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you.
Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
