Contractors' Questions: How to make my two properties less taxing?
Contractor’s Question: The ex-chancellor’s tax on second properties is really something I want to avoid or at least mitigate; how can I cut what’s going to be a big stamp duty bill?
I’m having two properties only because we need to keep the first, where we’ve been living, so we can rent it out for income due to my work outlook being uncertain. And we’re only moving because we need extra space as my wife has given birth to twins (for whom there’s no childcare funds until their 3rd birthday). Please advise if I can make keeping my two properties less taxing.
Expert’s Answer: George Osbourne’s departing gift as chancellor was indeed a 3% surcharge on the purchase of second homes and buy-to-lets. It’s something we’d all like to see banished alongside the widow tax. But in practical terms, Mr Osborne’s levy leaves little room for mitigation. Nevertheless, there are several things you could do to circumvent this surcharge all together.
Firstly, you mention that your work outlook is the main reason you’re keeping both properties. It’s worth noting that should your work situation stabilise, allowing you to sell what would then be your former home within 36 months of purchasing your new abode, the 3% surcharge will be refunded to you by HM Revenue & Customs.
A second, more terminal solution, would be to purchase your new home in your sole name and transfer your current property and mortgage into your wife’s sole name. This could prove complex and will involve jumping through some mortgage-related hoops, but would potentially negate the need to fund an extra 3% stamp duty charge.
As mentioned though, this is a somewhat terminal approach and will result in a second set of stamp duty being payable if you add your wife to the deeds of your new home in the future.
Changing the ownership of the property to your wife -- or to a company, could also help you to rent the property in a more tax-efficient manner, providing some reprieve from the looming change to mortgage interest relief, set to bite from April 2017.
While not related to your original question, I suggest that this removal of relief may have a greater long term impact on the financial viability of your arrangements and, as a result, I highly recommend you seek professional advice from an accountant joined by a mortgage adviser, to better understand your options with your lettable property.
Lastly, congratulations on your two new arrivals! In answer to this final point that you raise, there are some exceptions which allow you to claim government support after just two years, but these are largely linked to claims relating to other state benefits claims. You may find it simpler and more tax-efficient to offer yourself childcare vouchers while you wait.
The expert was Luke Somerset, IFA at ContractorMoney, a specialist in contractors' finances.
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