TAX NOTES ON BUYING SECOND PROPERTIES
Buying a second property has become so popular that the government has now seen this as a way to bring in extra revenue via taxes. Sorry, I mean look after first-time buyers (by taxing investors).
There have been changes to the Stamp Duty Land Tax (SDLT) rates, as those who have been looking at a buy-to-let as a potential revenue stream may be aware. In a way this is similar to VAT which is charged on goods and services in that you will pay tax, based on a percentage of the purchase price. Until recently there was no charge if you bought something under £125k (if only you could find something locally for that kind of money!) Now, if this happens to be your second property, be it to live in or to let out, you’re now up for 3% of the purchase price in tax (more if over £125k). If you sell the first and meet certain conditions; you might get some or all of your money back. There are twists to this, but not many, and in layman’s terms if you buy a second property and keep it, there’s no way around it.
The next squeeze the government has levied on investors is the restriction of tax deductibility on loan interest. Until recently, if you were in the 40% tax bracket, £1,000 in bank interest would have shrunk your tax bill by 40% (£400). By 2020 that will be restricted to 20% or £200. Again, there are twists to this and space limits me from going into this in more detail. That and the likelihood that it will send most readers to sleep.
Any creative tax adviser would look at this and say; ‘Hey! let’s wrap up your purchase in a limited company.’ Great idea; however the government have now got a neat little mechanism called Annual Tax on Enveloped Dwellings. This is an annual tax mainly on limited companies who own residential properties over £500,000. Again, there are twists – well they couldn’t produce a tax that was simple – that would be far too convenient.
This broadly means that property investing – and by that I don’t mean trading (buy, renovate, sell) is not as good as it used to be. However, because it is investment income, it still carries no National Insurance liability on the profits, so it still stacks up quite nicely for the small, sole trader investor when compared to trading income.
In summary, all of the information above is only part of the picture; if you’re looking at this (I know; I would say this, but) get advice. Caveat emptor is an ancient expression but it is still as relevant in today’s landscape as it ever was.
01603 630882 [email protected]wichaccountancyservices.co.uk www.norwichaccountancyservices.co.uk
Jon Hook, the legal expert from Norwich Accountancy Services