Points to Consider When Buying a Second Home

Ten key points to consider when buying a second home for your own use or as a buy-to-let investment

To buy-to-let or not to buy-to-let, that is a difficult question! It can be quite a conundrum for people with capital to invest who are dithering between the stock market or bricks and mortar.

Since April 1 2016 – as many homeowners will be aware – a stamp duty surcharge of three per cent has been levied on second homes with obvious implications for the buy-to-let sector. If you are contemplating a second home, whether for your own use or as a buy-to-let investment, here are the 10 key points to bear in mind.

1. Stamp duty – or to give it the full title, stamp duty land tax (SDLT) – is a tax paid by homebuyers when they purchase property or land. The tax is banded so that no tax is levied on properties worth less than £125,000, but £7,500 on a property worth £350,000 and £43,750 on a property worth £1million, and so on.

NB It’s worth bearing in mind that from November 2017, first-time buyers no longer pay stamp duty on homes valued up to £300,000. Among those buying a home worth up to £500,000 in areas of high value such as London, first time buyers do not have to pay the stamp duty tax on the first £300,000 of value. The remaining £200,000 still incurs the 5% charge but this could still mean a saving of up to £5,000.

2. Since April 1 2016 second homes have been subject to a three per cent stamp duty surcharge. Under the banding system, second homes worth less than £125,000 now attract three per cent tax instead of zero. Those worth between £125,000 and £250,000 now have a five per cent rate rather than two per cent, and so on. At the top end of the scale, second homes worth in excess of £1.5million attract 15 per cent stamp duty rather than 12 per cent.

3. Visit the government’s stamp duty calculator to work out tax liabilities.

4. Second homes – for the purposes of the stamp duty surcharge – are homes other than a main residence whether they are let or not. It does not matter if a main residence is overseas because a second home in the UK will still be subject to the stamp duty surcharge. However, a buy-to-let property will not attract the higher rate if the main residence is rented, not owned.

5. Homebuyers helping a family member buy a property will still be treated as second home owners and the relatives will be liable for the surcharge.

6. Anyone owning two homes because they have bought a new one, but not yet sold the old home, will have to pay the three per cent surcharge. But if the old home is sold within three years, the three per cent will be refunded.

7. No one will be able to escape the higher rates of stamp duty by ‘flipping’ properties which is defined as moving into a new home, designating it a main residence, then letting out the old home.

8. Couples who have separated, but not yet divorced, and own two properties between them, will not be treated as second homeowners. But couples living together, whether married or not, will be treated as one unit. They will not be able to buy a second home and escape the surcharge by putting one property in one partner’s name and one in the other’s.

9. Stamp duty is not payable on caravans, mobile homes or houseboats.

10. It is sometimes possible to reduce stamp duty liabilities by designating a property, whether the main home or a second home, ‘mixed-use’: i.e. used for both residential and commercial purposes, such as running a small business. But this can also expose the homeowner to higher business rates and higher rates of capital gains tax. If in doubt, talk to an accountant or mortgage provider about tax liabilities.