Will new stamp duty changes affect me?

Discussion in 'General Property Investment Discussion' started by Adam Kahn, Feb 3, 2016.

  1. Adam Kahn

    Adam Kahn New Member

    I want to remortgage my home into a buy-to-let mortgage after April and move into rented accommodation. Could stamp duty changes affect me?

    I currently live in a three bedroom house that I have a normal residential mortgage on. It has been my only residence since 2010.

    However, due to changes in circumstances, I will be living on my own and no longer be needing the extra space within a couple of months.

    One option I had in mind was to remortgage into a buy-to-let mortgage and move myself into a second residence which would be a much smaller one-bedroom rented apartment.

    If I could get a half decent rate, I should be end up having enough money left over from rental income each month to subsidise my new rent in the one-bedroom apartment I move into (even after factoring in changes to how buy-to-let mortgages will be taxed).

    My question is whether if I take this step after April, is there any way the stamp duty increase on purchases of a second residence might affect me?

    Of course, there will be no new property purchase in my scenario. But would changing my current primary residence into a secondary residence post-April mean I have to make up the additional stamp duty charges buy-to-let’s will incur compared to the much lower rates I initially paid when I bought the property?

    Basically, how are properties that were purchased before April 2016, but become second residences after that date, taxed for the purpose of stamp duty?

    Any responses are much appreciated!

    Thanks
     
  2. Nicholas Wallwork

    Nicholas Wallwork Editor-in-Chief Staff Member Premium Member

    Hi Adam,

    The changes will only effect second home owners... not second "homes" when one is just rented accommodation. So you will be fine...

    Have you considered turning it into a small HMO (House of multiple occupation)? This would involve converting extra reception rooms into bedrooms and lets say you have two reception rooms (separate lounge and dining room) you could end up easily with 5 rentable bedrooms in your HMO house share. You should even live in the largest room and the 4 others would most likely easily cover all your mortgage and bills. Leaving you in a very nice situation indeed. This is exactly what I did to get me into the property business...

    With regards to the mortgage ask your existing mortgage company for a "right to let" permission before doing anything to ensure you're not in beech of their T's & C's as you may not need to re-mortgage with their permission. If they don't allow it you will then have to re-mortgage onto a BTL mortgage or HMO specific BTL mortgage (if you go down the HMO route).

    Where is the property can I ask?
     
  3. Adam Kahn

    Adam Kahn New Member

    Hi Nicholas,

    Thanks for the advice! That’s not a bad idea (living in the property and renting out the other rooms). My initial reservation about letting out room by room was the potential admin and management such an approach might require, especially if individual tenants move out and I have to find new ones every so often.

    I liked the idea of having an agency manage the letting through a guaranteed rent scheme so that it’s hassle free.

    On the other hand, however, there is huge demand for rented properties in my area (the property is in Newham, London), so I may reconsider this option; especially as choosing decent tenants and having a ready supply of new tenants should old ones move out isn’t something one needs to be too worried about in Newham - simply because of the demand.

    On a separate, but related note, the new stamp duty/ tax changes have made me re-evaluate some of the tentative plans I’d been thinking up over the previous few months. For instance, I was hoping to move out and then perhaps re-mortgage my existing property at some point for the purpose of releasing equity and using it towards purchasing another buy-to-let property.

    I have £190k left on my current mortgage, but a three-bedroom is currently going for round 400k in Newham, so there’s definitely additional equity in the property I could draw out.

    I guess there’s no escaping the stamp duty I’d have to pay on any subsequent property I buy, unless I re-mortgage and buy before April which is extremely unlikely.

    I’ve read about the possibility of using an SPV (special purpose vehicle) to buy a property, as I understand that would exempt me from the new Buy-to-let tax and capital gains changes.

    But, it’d be great to get an idea of how profit and loss works for the purpose of buying a property through a Ltd company? Would any jobs I outsource around the house, refurbishment, estate agency fees, etc be written off as a company expense that brings down the total profits of the company? And might all these costs bring down the final corporation tax bill, should I ever want to sell (and provided the price of the property increases)?

    Again, any feedback is much appreciated!

    Adam
     
  4. Nicholas Wallwork

    Nicholas Wallwork Editor-in-Chief Staff Member Premium Member

    Hi @Adam Kahn

    No worries we're here to help!

    Lots of questions thrown in there... It might be worth asking the tax specific ones in another thread in the tax related sub forum here:
    http://www.propertyforum.com/forum/discussions/property-tax-and-accounting.399/

    To answer your other points:
    - don't be put off by tenants moving in and out. I minimise this by providing a great service and standard of a accommodation to our tenants this minimising turnover. We turn it into a positive by charging a fair check in/out fee which at least covers the extra admin costs.
    - I see a well managed HMO as a lesser risk than traditional buy to let properties. This is because even if you have some voids in the property, a few rooms will still usually cover the mortgage repayment and bills. So you get a higher yield when filled and less risk as voids are less serious and have a bigger buffer margin on each individual property! Win/win right?
    - guaranteed rent schemes are great if you really want hands off. The down side is the agent or primary leasee is making that extra margin you could be making. It works for some but in an area of very high demand I'd personally prefer to put in the extra work and take the extra income whilst retaining full control of my own asset... I don't like leaving much to other external companies as rarely does it work out as no body cares as much as you do.
    - stamp duty: no getting away from it, if the deal doesn't have substantially more than 3% in it though you shouldn't be buying it anyway.
    - for new Mortgage interest tax a Ltd co or SPV should work, take specific advice as I'm not an accountant! Yes most of those items you mentioned would be allowable costs in a Ltd company and reduce your taxable profits, refurbishment be careful as various ways to claim that so check with an accountant again first to ensure you claim the right way for you.

    Your last question you mention corporation tax but you mean capital gains tax... Corporation tax is the yearly tax on company profits (after expenses mentioned above etc...). Capital gains is charged on the increase in value of the property when you come to sell. For the later it's complicated how to plan for minimising your capital gains tax. You have personal allowances if bought personally which helps but this is not available in a company. On the flip side of you keep the funds IN the company and re invest you could possibly only pay corporation tax in the company which is lower than capital gains tax... SO it massively depends on what your strategy is and how long you intend to hold the property etc... There is no right or wrong answer but it needs to be tailored to you and your plans for a particular deal... Sorry it's not more specific than that... Again post this question in the tax forum and hopefully an accountant will reply with some tips...
     
  5. Rob Gillis

    Rob Gillis New Member

    Nice informative post. Is it necessary to also consult a lawyer for this business? As my friend consulted one as he was not aware about the stamp duty laws. He searched (moderated) and social media to find the suitable ad experienced one.
     
    Last edited by a moderator: Nov 23, 2016
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