The Stamp Duty Land Tax (‘SDLT’) changes recently announced by the Chancellor, may turn the dream of owning a second home, buy to let or holiday home, into a reality.
Anyone completing a purchase of a main residence costing up to £500,000 between 8 July 2020 and 31 March 2021 will not pay any stamp duty, and more expensive properties will only be taxed on their value above that amount. Before you start picking out the furniture and deciding on colour schemes, there are several things that should be considered.
- SDLT: The recent announcement means that for purchases up to £500,000, SDLT will not be payable for main residence purchases. However, if the property is a second home, the additional rate of 3% will still be payable.
- Capital gains tax (‘CGT’): If the property is not your main residence, CGT is payable on the amount of profit (gain) when you sell i.e. the difference between the sale price and purchase price, less some associated costs and fees. In addition, individuals can claim an annual allowance, currently £12,300 (2020/21). The amount of tax you pay will depend on your circumstances and how much profit you make. There are 2 rates, 18% for basic rate taxpayers and 28% for higher rate. The government recently announced a review of CGT, so the rates could increase significantly. Remember that from 6 April 2020, sellers of UK residential property must now report disposals to HMRC within 30 days of completion. At that time, payment on account of any tax due will need to be made. Interest and penalties will apply to late filing and/or payment.
- Income tax: if the property is rented out, the income must be declared and tax paid. There are special tax rules for rental income from properties that qualify as furnished holiday lettings provided occupancy conditions are met.
- Inheritance tax (‘IHT’): Owning a buy to let property in your own name is deemed an investment for IHT purposes and does not qualify for Business Relief (‘Relief’). Holiday homes and claims for this Relief are a contentious issue and HMRC have been very successful in their argument that they do not usually attract this Relief. This means the full value will, except in exceptional circumstances, form part of your estate when you die.
Buying with friends is an exciting prospect. Apart from taking holidays together, it also shares the costs and the risk. It is important to have documentation in place (such as a declaration of trust) that clearly sets out the financial aspects of such a relationship – the amount put in by each party, how the income will be split, who pays for the furniture and decoration, how will the mortgage and bills be paid, for how many weeks will it be let, how many weeks can each party use the property if it is a holiday home, how will the sale proceeds be split and what happens if one party wishes to sell or dies, gets divorced or goes bankrupt.
It is always important to have a Will and never more so than when you own property with others. You should discuss what will happen to your respective shares if one party dies. If there is a mortgage, life insurance should be considered and written in trust to ensure the proceeds are used to repay the debt.
If the second property is not in the UK, you should make a Will or review an existing one to ensure the asset is passed to your intended beneficiaries. Some countries, such as France have ‘forced heirship rules’ which dictate the way in which the property is inherited when you die. To avoid this, your Will must specify which law will be applicable to your succession. This is not always straightforward, and advice should be taken.
Lasting powers of attorney
If one party becomes incapable of managing their own affairs, a lasting power of attorney ensures there is an attorney in place who can deal with their financial affairs on their behalf. Without this, you may have no alternative but to apply to the Court of Protection to be appointed as a deputy, a process that can take at least 6 months and is costly. Until the order is made, their financial affairs are frozen.
Buying a second home can be complex particularly if it involves another party. Greenwoods GRM can advise on the legal aspects of the purchase.
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If any of these issues have highlighted a need for advice, please call our Wealth Preservation enquiry line on +44 (0)203 691 2080, we can help.