DOUBLE TROUBLE

Unintentional second-home owners will be caught out by a new tax

Owning a second home could soon be more trouble than it’s worth

For decades the biggest driver in the housing market has been to upscale and move to a bigger property. Most of us aspire to live in a home bigger than the one we are in. Children grow; lifestyles change; we need a new bedroom, or a conservatory, a larger kitchen or a store room – above all, a store room.

But, there is a growing trend in the opposite direction. The children have fled the nest. Or there has been a divorce. We no longer need all the space that seemed so vital a few years ago.

Or we are approaching retirement. Would we not suit a smaller property, away from the noise of the city in a rural setting? At the same time, we could raise surplus cash for retirement.

Across t he UK, downsizing is t he most popular reason for people planning to move to a new home in the next three years, with 46% of those surveyed citing that as a reason. The main reasons were a desire to move somewhere which better served their circumstances (53%), to reduce bills or free up equity (both 39%), or to provide extra cash for retirement (31%).

The average age for a downsizer is 53 and the largest proportion (37%) had lived in their current property between 11 and 20 years and had moved into that property at the age of 39.

According to Bank of Scotland research, detached home owners in Scotland looking to downsize could be in line for a potential windfall of more than £100,000 if they trade down to a semi-detached property. Those planning to move from a detached properly to a bungalow could raise an average of £66,000.

’There are two big perils from downsizing and we need to avoid them’

For those trading down, the potential amount that can be raised by downsizing from a detached property to a bungalow in Scotland has risen by 14% (or £8,365) in the past decade. A downsizer today would receive an average of £66,190 compared with £57,825 in 2005. The UK average growth is 2% (or £1,616), allowing Scots to realise a greater benefit from the move.

It sounds ideal – but there are two big perils from downsizing and we need to avoid them.

The first is a trend familiar to many. The aspirant downsizer starts off with the purchase of an idyllic second home – in Argyll, for example, or Deeside, or pretty Comrie in Perthshire, popular with many Edinburgh retirees.

But adjusting to a smaller property is more difficult than we thought. A large kitchen is still a sine qua non. A conservatory is a big attraction. Then there is the extra bedrooms for when children come to visit – bringing their children. And then there’s the quiet study. And, of course, the store room. Or store rooms. Because at this stage in our story, much has been acquired – and letting go is one of the most difficult and emotionally challenging features of ageing.

And so Mr and Mrs Mac Downsize discover they are not downsizing at all; they are upsizing. By the time the extra rooms have been added, the builders have finished with the loft conversion and the new garage, the new home is only fractionally smaller than the one they felt had become too big. And the extra work has swallowed up almost all the extra money they gained from selling.

The second peril is the risk of becoming an accidental second-home owner – and lumbered with a nasty tax bill.

But how can you ‘ accidentally’ own two homes and be deemed a second-home owner for the purposes of tax when you never intended to own more than one home?

The answer is the new extra second-homes supplement on top of the increased Land and Buildings Transaction Tax (LBTT). According to the Scottish Fiscal Commission, official watchdog of the Scottish Government’s tax

’Attempts to stipulate a grace period of as short as 14 days recently foundered’

and spending plans, the supplement will affect between 8,500 and 12,500 transactions each year, and could raise between £19m and £27m.

The intention is to levy an additional 3% charge on the purchase of second homes. A fair tax, you may think, on the ultra-wealthy. And you may take comfort that, by selling your detached home in Morningside and moving to that smaller house in Comrie, you had no intention to become a second-home owner, so therefore this new tax could not apply to you.

But as the proposed legislation stands, thousands of Scots will find themselves inadvertently liable. A person who buys a new house for the purposes of it becoming a main residence, but who has not yet completed the sale of their existing main home, will have to pay the full tax up front.

Even if you had no intention of owning two homes, but find, for any number of reasons – not being able to get dates to line up, or the person purchasing the property suddenly had to pull out or to delay – the sale has not completed, you could end up as an accidental second-home owner.

If the house being bought was valued at £300,000, this would mean having to pay an extra £13,000 overnight. If the house was valued at £125,000 – comfortably below and nowhere near the LBTT threshold – you would still have to stump up £4,050.

It is hard to believe the Scottish Government intended to hit those modest purchases that are exempt from the LBTT levy with a 3% surcharge. Equally, it is hard to believe that it is opposed to a ‘grace period’ that would exempt cases where, because of administrative delays on sale completion, people became accidental second-home owners.

While the bill provides for later reimbursement, it could be 18 months before the cheque comes back from HMRC, while the purchaser would be left strapped for cash to cover the costs that the purchase of a property involves.

Many would-be buyers might choose to defer a purchase until their existing property is sold. But this could oblige them to rent in the interim and store all their belongings. Others, particularly retirees, want to have their new home made ready, alterations completed, and furniture in place before vacating their existing house. This levy would also clobber them.

Gavin Brown, Conservative MSP and Holyrood Finance Committee member, estimates that between 10% and 15% of transactions do not settle on the same day. If this anecdotal evidence is correct, the number of accidental second-home owners could potentially total up to 10,000 transactions, based on 99,000 housing transactions last year. Attempts to stipulate a grace period of as short as 14 days recently foundered in Holyrood’s Finance Committee – all the more bizarre as members had accepted the principle of just such a period.

This is a glaring case of unintended consequence, unfairly taxing those who have no intention of being second-home owners and undermining confidence in the fundamental right of people to sell and buy a home. And it could cast a blight on those looking for a smaller home – and a cut in all those property outgoings.