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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!