With recent tax changes and rising house prices, is it worthwhile buying a second home as a future investment for the kids?
TALK ME THROUGH STAMP DUTY
Since 1 April 2016 anyone buying a second home for any reason has had to pay a higher rate of stamp duty (a tax paid by homebuyers when they buy property or land) than someone buying a property as their main home. On your main home the tax is paid on houses over £125,000 and the amount paid is assessed on a tiered basis.
Second homes attract a higher rate. Anything other than your main residence, whatever its usage, is counted as a second home. Bear in mind that even if your main home is overseas this still applies.
If your second property costs over £40,000, you will have to pay stamp duty. For each tier you will pay a rate three percentage points higher than if it were for your main home:
On a property costing up to £125,000 you will pay 3%, rather than 0%.
On a property costing £125,000 – £250,000 you pay 5%, rather than 2%.
On a property costing £250,000 – £925,000 you pay 8%, rather than 5%.
On a property costing £925,000 – £1.5m you pay 13%, rather than 10%.
On a property costing £1.5m+ you pay 15%, rather than 12%.
So a house costing £100,000 would have a bill of £3,000. On a £200,000 property you would pay £7,500 (3% on the first £125,000 then 5% on the next £75,000), and if you were spending £350,000 on a second home you would pay £18,000 (3% on the first £125,000, 5% on the next £125,000 then 8% on the remaining £100,000). Someone buying a second home costing £1m would face a bill of £73,750 (3% on the first £125,000, 5% on the next £125,000, 8% on the next £675,000 and 13% on the last £75,000).*
WHAT’S THE LOCAL VIEW?
Bearing in the mind the price of the housing stock in NappyValley, estate agents in the area take a pragmatic view. Charles Streatfeild of Marsh & Parsons explains: “After the initial rush to get houses sold before this raised stamp duty, there is an adjustment period. But people still need and want to buy second homes for their kids in this area. Most properties that fall in to this category are upwards of £800,000 and bought by the Bank of Mum and Dad for their grown-up children to live in now or for young ones for the future.”
If parents buy a property for their child and are named on the deeds while already owning a property, they will be charged the additional stamp duty, but if they want to just give them the deposit then it isn’t a problem. “Where the only names on the deeds are the (grown-up) kids, this market doesn’t feel its been hit with a sledge hammer,” explains Joel Baseley at Rampton Baseley. “But the buyer looking for a flat to hold on to for 10 to 15 years until the kids are older has disappeared, for now.” But Luke Parle at Portico states, “While it’s a kick in the teeth – for homes over half a million, it’s nearly double the original amount – it’s a drop in the ocean on a long-term investment.”
According to Jonathan Dyson at Hamptons, “In the overall scheme of things it could have been a lot worse and over time, as we have seen in the past with most stamp duty rises, the additional costs will be absorbed into the transaction cost of buying into this type of investment. What would have been much worse would have been if George Osborne had introduced an ongoing tax for those rental investors – now that might have completely killed the market.”
WHAT AND WHERE TO BUY?
If you’re willing to take the long-term view and therefore take the hit, make sure you buy right, says Joel Baseley. “Stick to period property – no-one’s building any more Victorian houses and new builds don’t tend to look so good 20 years on. Three and one-bedroom flats are easier to rent – 90% of people buy two-beds so there’s lots of choice but sharers like to be threes and fours. Essentially it’s more about the property than the area: stick to the old rules about transport links and a good street, and try and find a good deal so you have equity in it straight away.”
Jonathan Dyson at Hamptons adds, “Generally smaller buy-to-let properties such as one or two-bedroom flats make good investments. Ongoing maintenance is always an issue with the older Victorian buildings so many investors will steer clear of these in favour of maintenance-free new build apartments. Avoiding void periods is crucial so for somewhere that ticks all the boxes – transport links, proximity to parks and other amenities will make these properties stand out and rent first.”
While Luke Parle believes that Victorian conversions will always be in huge demand, he says don’t forget about the riverside developments – “just be sure they have a river view! It’s advisable to buy something not particularly sexy but ready to rent – you can always do it up at a later date.” Luke suggests the area between Queenstown Road and Oval for Victorian conversions and ex-council properties, as well as the Nine Elms environs which will enjoy Tube links in the future. Charles at Marsh & Parsons says don’t plump for an edgy area – “somewhere between the commons will wash its face and is a safe bet”.
*Sophie Norris and Hilary Osborne,
The Guardian, stamp duty and second homes.