What you need to know about buying and selling a second home in 2022

As an IT professional, you may have built up a sizeable amount of wealth during your career and have a variety of choices for what to do with it. One option that you could consider is buying another home, whether that is to live in part-time or to rent out for extra income.

Of course, in the past few weeks, there has been a lot of discussion in the government about how owning additional properties affects local communities. According to the BBC, Michael Gove plans to implement a new bill that will affect second homeowners.

While this new law is yet to take effect, it might have made you wonder about the tax implications of this potential decision. If so, read on to find out three important things to consider when buying, renting out and selling a second home.

You may have to pay a higher rate of Stamp Duty

When buying a second property, one of the biggest issues that you will need to be aware of is that you may have to pay higher taxes on the purchase. Depending on the total value of the home, this could end up being a substantial amount.

When you buy a property, you typically have to pay a tax, known as “Stamp Duty”. This is calculated in bands, as you can see below:

So, for example, if you were buying a home worth £300,000 then you would have to pay:

  • 0% on the first £125,000 (£0)
  • 2% on the next £125,000 (£2,500)
  • 5% on the final £50,000 (£2,500).

In total, you would have to pay a total of £5,000 in Stamp Duty for that purchase.

However, when you are buying a second home this complicates matters slightly, as you also have to pay an additional 3% surcharge on each band.

This means that taking the same example above, you would have to pay:

  • 3% on the first £125,000 (£3,750)
  • 5% on the next £125,000 (£6,250)
  • 8% on the final £50,000 (£4,000).

So, if you were buying a second home, then the amount of tax you would owe increases sharply from £5,000 to £14,000 for the same property.

Renting out your second property can help you to grow your wealth

One great reason to buy a second property is that you can rent it out to create an additional passive income stream. While it may be a large initial investment, over time you could see large returns in the form of rent from your tenants.

Of course, if you did this then you would need to keep the tax considerations in mind.

While becoming a landlord can be a useful way to grow your wealth, it may not be as simple as you might think.

Typically, if you get rental income from your property then you will have to pay tax at the same rates as the income you receive from your job or business. This will be 20%, 40% or 45%, depending on which bracket your total income falls into.

That being said, you can also deduct some expenses you incur from letting out the property from your tax bill. This typically covers expenses such as buildings insurance premiums, maintenance costs and letting agent fees.

It is also worth noting that if you have a mortgage on your second property, you can get a tax credit worth 20% of your mortgage interest payments.

You may have to pay Capital Gains Tax on your profits when you sell a second home

If you decide to sell your second house, you will need to bear in mind that, generally, you will have to pay Capital Gains Tax (CGT) on any gains you make on the sale. This only applies if a property is not your main home.

The first £12,300 of profit is tax-free (for the 2022/23 tax year) but you will be taxed on anything above this. Helpfully, if you are a joint owner with your spouse or partner, you can combine your allowance – meaning that you can gain £24,600 before having to pay any tax (in the 2022/23 tax year).

Typically, the rate of CGT that you will have to pay stands at 18% for basic-rate taxpayers and 28% for people who pay the higher and additional rates.

It is also important to note that you only have to pay tax on the profits of the sale, rather than the total price itself. To calculate this, you need to deduct the amount that you originally bought the home for from the sale price.

You can typically also deduct any expenses you incurred while buying and selling the property, including:

  • Stamp Duty
  • Conveyancing and surveyor’s fees
  • Cost of improvements made to the building.

When selling a property, it can be useful to seek professional advice, so you know which expenses you are allowed to deduct, helping you to save more of your hard-earned money.

Get in touch

If you want to know more about whether buying a second property could be right for you, we can help. Email enquiries@bowmorefp.com or call us on 01275 462 469.

Please note:

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it. Buy-to-let (pure) and commercial mortgages are not regulated by the FCA.

Bowmore Financial Planning is not regulated to provide mortgage or tax advice

Bowmore Financial Planning Ltd is authorised and regulated by the FCA.

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