Second Home Stamp Duty & Income Tax
by on 09·02·2016
From April 2016 investment in buy-to-let and second home properties will become harder for the majority. A 3% surcharge on each stamp duty band could potentially choke the market into breathing its last major breath.
The current thresholds and changes are as follows:
| Property Value | Standard Rate | Second Home Rate |
| Up to £125,000 | 0% | 3% |
| £125,001 to £250,000 | 2% | 5% |
| £250,001 to £925,000 | 5% | 8% |
| £925,001 to £1.5 million | 10% | 13% |
| Over £1.5 million | 12% | 15% |
Based on a value of £250,000 the current Stamp Duty is £2,500 (an effective rate of 1%). This will increase to £10,000 from April 2016 for the Buy to Let/Second Home market (an effective rate of 4%).
Coupled with the tax changes on income for Buy to Let properties it will become harder to cover costs moving forward in the hope of longer term growth. Higher Rate/Additional Rate Taxpayers will only get basic rate relief on the costs involved tapering in from April 2017 with completion in 2020.
For example, if you are a Higher Rate Taxpayer and earn £20,000 a year from your property, and the interest only mortgage costs £10,000 a year, tax is currently chargeable on the profit (£10,000) and thus for a Higher Rate Taxpayer £4,000 tax will be payable to HMRC leaving you with a sum of £6,000.
From 2020/21 tax year, when the rules are fully implemented, the tax will be 40% of the total income received £20,000 (£8,000) less a tax credit equivalent to basic rate relief tax of 20% on the £10,000 interest only costs (£2,000). This means £6,000 heading downwards towards the tax man leaving you with a heavenly £4,000 from the original £10,000 'profit'.
I won't even mention the new 'wear and tear allowance' rules implementing from April 2016, it simply adds to the sadness.
What on earth will middle/upper classes do now I hear you cry?
I suppose you could always buy a Caravan, Houseboat, Mobile Home or a Property under £40,000 (good luck) to avoid the additional tax as these are exempt from the new rules.
The fortunate minority certainly need to have a good think about whether the figures will stack up moving forward or, if they are not currently, perhaps think about marrying a Basic Rate Taxpayer well below the Higher Rate Tax threshold!