Second home tax implications?

The_stingemeister

Advice please for a bit of a property buying and selling dummy (me). I am contemplating buying a second home as an investment, rather than an actual second home to live in occasionally. Personally I'm not sure how anyone manages to make any real profits from it with the large amounts of tax to be paid. Now I gather if buying a house for, say, £280,000 then I'd need to pay an extra £12,400 stamp duty on top? If selling (later on) you have 18% Capital gains tax to pay? Or is that wrong, paying tax twice on one property? I know there are some ways to avoid the taxes, like if you have a spouse and sign the property over to them. But what if you live alone? 
Any helpful advice appreciated, in layman's terms please. Hopefully no tutting replies about tax avoiders, having worked long and hard for decades to save enough.

blue_max_3

You only pay capital gains tax on any rise in value, when you come to sell.
You'd really need to rent it to offset the costs of keeping it empty. And that is a big subject!

The_stingemeister

blue_max_3 said:

You only pay capital gains tax on any rise in value, when you come to sell.
You'd really need to rent it to offset the costs of keeping it empty. And that is a big subject!

Yes, paying council tax and heating on an empty house would be madness. Although, is an empty house exempt from council tax? The grand scheme would be to sell it inside 3 years (house market permitting)  although may have to wait longer. I don't have any long term aspirations to be a landlord.

AdrianC

The_stingemeister said:

Advice please for a bit of a property buying and selling dummy (me). I am contemplating buying a second home as an investment, rather than an actual second home to live in occasionally. Personally I'm not sure how anyone manages to make any real profits from it with the large amounts of tax to be paid.

The simple answer is that the tax changes in the last couple of years have made it much less profitable than it was - especially if heavily leveraged.

Which, of course, is exactly what those tax changes were designed to do, because of a political perception that there were too many BtL landlords and they were skewing the housing market. (I am making no comment on the accuracy of that perception, btw)

Now I gather if buying a house for, say, £280,000 then I'd need to pay an extra £12,400 stamp duty on top?

Correct.
https://www.stampdutycalculator.org.uk/

If selling (later on) you have 18% Capital gains tax to pay?

On the gain in the capital value of the property in your ownership. Not the entire value. So if you buy for £280k and sell for £400k, £120k will be taxable. There is an annual allowance.

Any helpful advice appreciated, in layman's terms please. Hopefully no tutting replies about tax avoiders, having worked long and hard for decades to save enough.

Simply put, BtL property is an investment. It is not the only investment. It may well not be the most profitable investment. If anybody ever promised you it was, they lied.

It is also not a passive investment. You are not just buying an investment - you are starting a business in the residential lettings industry. You have legal responsibilities towards your customer, your tenant... Yes, you can pay somebody else (an agent) to take those responsibilities on... That, of course, eats into your return.

If you're wanting a short-term flip, then that's never going to be profitable outside of a steeply rising market - and the chances of that in the next year or three are slim. Don't forget the CT hike if a property's empty for 2yrs+ - as well as difficulties in insuring it. If you're adding value to the property, then it's going to count as property developing and be subject to income tax - because the buy-improve-sell is viewed as a business activity in itself.

The_stingemeister

AdrianC said:

The_stingemeister said:

Advice please for a bit of a property buying and selling dummy (me). I am contemplating buying a second home as an investment, rather than an actual second home to live in occasionally. Personally I'm not sure how anyone manages to make any real profits from it with the large amounts of tax to be paid.

The simple answer is that the tax changes in the last couple of years have made it much less profitable than it was - especially if heavily leveraged.

Which, of course, is exactly what those tax changes were designed to do, because of a political perception that there were too many BtL landlords and they were skewing the housing market. (I am making no comment on the accuracy of that perception, btw)

Now I gather if buying a house for, say, £280,000 then I'd need to pay an extra £12,400 stamp duty on top?

Correct.
https://www.stampdutycalculator.org.uk/

If selling (later on) you have 18% Capital gains tax to pay?

On the gain in the capital value of the property in your ownership. Not the entire value. So if you buy for £280k and sell for £400k, £120k will be taxable. There is an annual allowance.

Any helpful advice appreciated, in layman's terms please. Hopefully no tutting replies about tax avoiders, having worked long and hard for decades to save enough.

Simply put, BtL property is an investment. It is not the only investment. It may well not be the most profitable investment. If anybody ever promised you it was, they lied.

It is also not a passive investment. You are not just buying an investment - you are starting a business in the residential lettings industry. You have legal responsibilities towards your customer, your tenant... Yes, you can pay somebody else (an agent) to take those responsibilities on... That, of course, eats into your return.

If you're wanting a short-term flip, then that's never going to be profitable outside of a steeply rising market - and the chances of that in the next year or three are slim. Don't forget the CT hike if a property's empty for 2yrs+ - as well as difficulties in insuring it. If you're adding value to the property, then it's going to count as property developing and be subject to income tax - because the buy-improve-sell is viewed as a business activity in itself.

Thanks for the clear answers. I do have my eye on a short term flip, would have to be a "do-er up-er" really considering the shortish time scale. You'd think the tory government would want to encourage entrepreneurship, not put hurdles in the way. I could understand if its someone with several properties, but why penalise a decidely small time investor..

blue_max_3

It's not a second home, it's an investment property. 

AdrianC

The_stingemeister said:

Thanks for the clear answers. I do have my eye on a short term flip, would have to be a "do-er up-er" really considering the shortish time scale.

OK... Now pause and consider how you're going to find the right property to give you a profitable flip. Especially with the SDLT hike.

Will you be paying trades full commercial rate to do the work needed? So how come the place didn't get snapped up already by somebody established in the business, who has contacts with all the EAs?

You'd think the tory government would want to encourage entrepreneurship, not put hurdles in the way. I could understand if its someone with several properties, but why penalise a decidely small time investor.

You know it's over four years since that was introduced, right...?

Here's the official line from back in the day:
https://www.gov.uk/government/publications/stamp-duty-land-tax-higher-rates-on-purchases-of-additional-residential-properties

Remember, the people they're trying to incentivise are those who are finding it hard to buy one property (to live in), over those trying to buy additional properties (to invest in)... Why? Because the market had got skewed towards the multiple-property-owners.

Mickey666

The_stingemeister said:

Thanks for the clear answers. I do have my eye on a short term flip, would have to be a "do-er up-er" really considering the shortish time scale.

If you're looking for a 'project' have you considered a self-build?  'Self-build' does not mean you literally build it yourself, just that it's a privately built new home.  There are many advantages: flexible mortgage advances (assuming you need one) mean you only borrow what you need when you need it, so less interest, reduced stamp duty (or none if the plot is less than £125k I think), no council tax to pay until the house is finished, and other savings compared with buying an existing home.  A self build might seem daunting but you can buy 'serviced plots' with planning consent and all services laid on if you don't want to start from ground zero.  You can do as much or as little of the building work as you wish (or are capable of) and even hire a project manager to run the whole thing if you really want.  When finished you can move in and sell your current home completely tax free.  So, little or no stamp duty, no council taxes, no capital gain tax on the profits.  Something to consider anyway.  Perhaps make a spreadsheet of the two options and see what the numbers say.

AnotherJoe

I'd be amazed if in Just three years you could clear enough profits to pay back the SDLT and other costs let alone a profit. On the upside There may be no CGT ...... because you may make a loss on the house. 

Why did you look at becoming a landlord with all the rules and regulations that entails, rather than other investments ?

The_stingemeister

AdrianC said:

The_stingemeister said:

Thanks for the clear answers. I do have my eye on a short term flip, would have to be a "do-er up-er" really considering the shortish time scale.

OK... Now pause and consider how you're going to find the right property to give you a profitable flip. Especially with the SDLT hike.

Will you be paying trades full commercial rate to do the work needed? So how come the place didn't get snapped up already by somebody established in the business, who has contacts with all the EAs?

You'd think the tory government would want to encourage entrepreneurship, not put hurdles in the way. I could understand if its someone with several properties, but why penalise a decidely small time investor.

You know it's over four years since that was introduced, right...?

Here's the official line from back in the day:
https://www.gov.uk/government/publications/stamp-duty-land-tax-higher-rates-on-purchases-of-additional-residential-properties

Remember, the people they're trying to incentivise are those who are finding it hard to buy one property (to live in), over those trying to buy additional properties (to invest in)... Why? Because the market had got skewed towards the multiple-property-owners.

It's not impossible to pick up an under priced property, study your local market and wait for a seller to drop their price. I did, and with fairly cosmetic improvement would of made a decent (and could still do so) profit. Then again maybe I just got lucky.

The_stingemeister

AnotherJoe said:

I'd be amazed if in Just three years you could clear enough profits to pay back the SDLT and other costs let alone a profit. On the upside There may be no CGT ...... because you may make a loss on the house. 

Why did you look at becoming a landlord with all the rules and regulations that entails, rather than other investments ?

See my post above about profit.  As for becoming a landlord, that was just a short term answer to the main goal. If possible would like to avoid that route.