In October, the Autumn Budget saw an immediate Stamp Duty increase for second properties, rising from 3% to 5%. However, more Stamp Duty changes are on the way, affecting homebuyers, as current thresholds decrease from 1st April 2025. We look at the potential impact if you’re considering whether you can move or buy a second home.
Although ‘bricks and mortar’ investments have been a popular strategy for many years, legislation changes are putting increasing pressure on the rental market. The new Renters’ Rights Bill (formerly the Renters’ Reform Bill) is currently being ratified into law. This bill gives more rights to tenants and more powers to courts to pursue landlords. Also, the cost of Stamp Duty has made buying a second property a lot higher than a few years ago.
Breakdown of the Stamp Duty changes
From 31 October 2024, anyone buying a second property has to pay an additional 5% in Stamp Duty Land Tax (SDLT). This is above the regular Stamp Duty rate for the property and applies to any ‘additional property’ such as buy-to-lets or holiday homes. Even if you only have a share in another property, the increased SDLT rate will still apply.
Another factor to consider is the current ‘Stamp Duty holiday’ from the pandemic that comes to an end in April. At the time of writing, you would only pay SDLT on properties worth over £250,000. But from 1st April 2025, the threshold will be reduced to properties over £125,000. The only exception is for first-time buyers, where the threshold will be over £300,000. However, as the current threshold is £425,000, this is also a significant difference.
Costs beyond Stamp Duty
If you are thinking of moving house or buying a second property, there are other cost factors to consider too. The average cost of buying a home over £250,000 and under £925,000 will incur a Stamp Duty fee of 8%. As well as this cost, you would also need to factor in conveyancing fees and removal costs, which could total several thousand pounds.
Depending on the property you intend to buy, there might be repairs or renovation work needed. You might also be required to bring your existing property up to a saleable standard to ensure its market value. Therefore, there is a high cost for moving house, along with the fact this tends to be one of the most stressful experiences people face in their lives.
Now, let’s look at a buy-to-let investment. When you rent out a property, there are a number of potential risks, such as tenant-related damage, the cost of unpaid rent and gaps between tenants. You would also need to factor in the cost of maintenance, repairs and legal expenses. Many of these ongoing costs would also apply to renting out a holiday home.
Rental income of any form is taxed just like any other type of income. So, you would need to understand the tax implications of becoming a landlord. Capital Gains Tax (CGT) is also charged on the sale of assets, which includes second homes. CGT has increased to 18% for basic-rate taxpayers and 24% for higher-rate taxpayers.
There are estate planning considerations for buying a new home or an additional property, such as inheritance tax (IHT). In some instances, you could look at putting a property into a trust. As the terms and conditions of trusts vary, you would need to get professional advice.
Alternative investment strategies instead of a second property
Are you weighing up your options when it comes to purchasing or investing in property? If so, then it’s worth considering if there are any other suitable ways to use your money. A mix of different savings and investments could generate better returns than a second property.
The key is to create a financial plan that accurately reflects your financial position and takes into account your objectives. Ask yourself why you want to move or buy a second home, and whether it’s going to generate the returns you are seeking.
Consider placing funds into high-interest rate savings accounts, tax-free ISAs, and a well-diversified investment portfolio. Get an up-to-date pension review to see your forecast in terms of your retirement income. Check whether your money and home have enough protection, so if the worst does happen, your partner and family have a financial buffer in place.
As there are various ways to invest your money, we would always urge caution when it comes to some alternative investment options. Some investments promise high returns but are either high risk or scams. Many people have lost their lifesavings with such schemes, so you should always check any investment with a qualified financial planner.
Wealth Management, Nottingham and Lincoln
A diverse approach to your savings and investment strategy ensures that you are not solely reliant on one type of investment. It also avoids the stress and burden of being a landlord at a time when changes in legislation are set to come into force. Even if you only plan to rent out a holiday home, economic volatility could mean gaps between guest bookings.
At Balance: Wealth Planning, our financial planning team can review your savings, investments and pensions to help you make informed decisions about property purchases. We will create a financial plan tailored to your specific goals. Our team will also carry out a cash-flow planning exercise, providing you with your own Lifetime Wealth Forecast.
Unsure if you can afford to move or buy a second home? Get in touch to book a consultation with our financial planners.
Sources:
https://www.bbc.co.uk/news/articles/c89v7ednx8zo
https://commonslibrary.parliament.uk/research-briefings/cbp-10166/
https://www.zoopla.co.uk/discover/buying/q-a-new-3-stamp-duty-surcharges/
https://www.gov.uk/capital-gains-tax/rates
