BUYING A SECOND HOME?

An influx of second-home buyers in 2021 continues the boom from the previous year. That five-year plan to buy a bolt hole by the sea or in the countryside has come forward considerably for many buyers.

With many people released from the daily commute, thanks to more flexible working, families are looking for the perfect second home for weekends and longer breaks.

The option to rent the property out and make a little extra cash is an attractive and lucrative perk.

Even before the pandemic, UK holiday home owners were able to charge for a week what you might expect to pay for a private villa with a pool in Greece if they had a place in a desirable location such as Devon or Cornwall.

Rental rates have gone through the roof since the pandemic with many families taking staycations. This trend could continue even with the restrictions lifted on much overseas travel now.

One measure of the boom has been an increase in the number of transactions liable for the second home 3% stamp duty surcharge.

It hit a new high of 84,700 in the second quarter of this year, dropping slightly to 70,000 in the third quarter[1].

The demand is set to continue with a recent report[2] suggesting that one in ten UK adults between the ages of 35 and 45 has made plans to buy an investment property in the next 12 months.

The practicalities

While the idea of a gorgeous bolthole (and potential money-maker) is compelling, there are many financial matters to ponder. Firstly, there’s the 3% stamp duty surcharge when buying an additional home, which is charged on top of standard stamp duty tax.

For a £500,000 property, a second homeowner would pay a total of £30,000 with the 3% added.

Unless you’re a cash buyer, there’s also the mortgage to consider. You will need a deposit of at least 15% and if you already have a mortgage on your primary home, you will have to meet affordability requirements to take out a loan on your new purchase.

Once you buy the property, remember that you will be to pay a second set of bills such as council tax, water, insurance and energy bills, not to mention the extra costs to maintain it and redecorate where necessary.

When you have got your head round the finances, you’ll want to find somewhere that will grow in value, be accessible and, last but not least, be the kind of place you and other holidaymakers will enjoy visiting time and again.

Considering being a landlord?

Investing in a buy-to-let property is still a compelling option for some investors. It’s essential to buy in the right area where the yield is right – and where there’s enough demand.

Many landlords suffered during the pandemic as tenants who suffered a loss of income needed payment holidays from rent. Others ending their tenancies to move back in with family, leaving many properties empty.

Now that life is returning to a more normal state, city-centre rents that dropped during the pandemic are rebounding and landlords are feeling more positive about the market.

A survey of 600 landlords[3], revealed that the proportion of landlords feeling optimistic is the highest it has been for five years. 

If you plan to rent the new place out as a buy-to-let property you have to take out a specialist buy-to-let mortgage and your deposit should be at least 25%.

Landlords must also brace themselves for maintenance costs and times when their rental property is empty.

Want to know more?

Having a professional mortgage adviser can help as second home mortgages can be more complicated than getting a standard home loan, depending on how you’re going to use the place. It can also help to have someone to crunch the numbers on expected costs – and returns – and consider your wider financial situation.

Don’t forget that if you decide to sell a second home further down the line, if its value has increased since you bought it you might have to pay capital gains tax.

Your home may be repossessed if you do not keep up repayments on a mortgage. The firm is not responsible for the content of external links.

Source:

[1] https://www.gov.uk/government/statistics/quarterly-stamp-duty-land-tax-sdlt-statistics/quarterly-stamp-duty-land-tax-statistics-commentary

[2] https://www.aviva.co.uk/aviva-edit/in-the-news-articles/how-we-live-2/

[3] https://www.paragonbankinggroup.co.uk/news/news-releases/landlord-confidence-hits-five-year-high

BUDGET 2021 ROUND-UP

Chancellor Rishi Sunak’s Autumn Budget marked the roadmap for rebuilding public finances.

While major tax rises had already been announced earlier this year, the Autumn Budget contained a number of new measures that will affect savings, investments, pensions and financial planning as a whole.

Here are some of the most important things you need to know:

TAXES ON EARNINGS:

Lower National Insurance thresholds[1] included in the Budget would normally mean workers pay less tax.

Yet the Budget also confirmed the increase in National Insurance by 1.25% from April 2022, which means that most taxpayers will be subject to higher NI from next year. The more you earn, the bigger the impact on take home pay.

The NI increase is not the only threat to income. By freezing the income tax thresholds until 2026 – announced in the March 2021 Budget – people on more modest salaries will also be dragged into higher tax brackets and pay higher tax bills.

A major report by the Institute for Fiscal Studies (IFS) [2] said that the combination of inflation and higher taxes would outweigh any wage increases for those on middle incomes. It warned that middle earners would be around £180 worse off next year compared to their present income.

CAPITAL GAINS TAX:

While there was no change for the capital gains tax thresholds in the Budget, the Chancellor announced that there will be an increase in the payment window for capital gains tax purposes in relation to UK property disposals. It has now been extended from 30 to 60 days. 

INHERITANCE TAX:

IHT thresholds were also unchanged in the Budget. The nil-rate band has been frozen at £325,000 since 2009/10, so IHT has been increasing in real terms over time. Had inflationary adjustments not been suspended, the nil-rate band would now be much higher at £417,000. 

SAVINGS AND INVESTMENTS

ISAs:

The annual ISA allowances were unchanged at £20,000 for the 2022/23 tax year and £9,000 for Junior ISAs meaning investors cannot shelter any more savings from tax.

The Budget also confirmed the rise to dividend taxes. Each investor can receive £2,000 in dividends a year without paying tax. Above that basic, higher and additional-rate taxpayers pay 7.5%, 32.5% and 38.1% respectively.

These rates will rise by 1.25 percentage points in April 2022. For basic rate taxpayers that means the rate will be 8.75%, and 33.75% and 39.35% for higher-rate and additional-rate taxpayers respectively.

GREEN SAVINGS BONDS:

The launch of the Green Savings Bonds was highlighted in the Autumn Budget. They were made available to customers via NS&I on 22 October. The NS&I Green Savings Bond is a three-year fixed-term savings product with an interest rate of 0.65%. Customers can invest between £100 and £100,000. Backed by a HM Treasury-backed 100% guarantee, they will be on sale for a minimum of three months.

PENSIONS:

The rate of pensions tax relief is often rumoured to be on the chopping block, but was left alone.

The allowance has been dramatically cut over the last decade and is now frozen at £1,073,100 until 2026. While this may appear high to most savers, it is leading to a growing number of workers risking breaching the limit. The Office for Budget Responsibility expects the CPI inflation rate to rise from 3.1% in September to 4% over the next year, which will further erode the real value of the lifetime allowance.

Rishi Sunak announced that the government will consult on changes to the charge cap – currently at 0.75% – for pension schemes to allow investment in illiquid future growth projects.

SPENDING:

While the cost of living crisis rages on with inflation rising, there was good news in that the planned rise in fuel duty has been cancelled. “After 12 consecutive years of frozen rates, the average car driver will now save a total of £1,900,” Mr Sunak said.

However, wholesale oil prices have been soaring, pushing up the price of a tank of fuel for drivers over the last few months.

The planned rise in alcohol duty has also been cancelled. In the future, the Chancellor will streamline duty rates which are currently different across many beverages.

Under the new regime there will be just six duty rates on alcohol – the stronger the drink, the higher the rate.

Domestic air passenger duty has been reduced for flights between airports in England, Wales, Scotland and Northern Island– the rate will halve to £6.50 from April 2023.

However, long-haul flights over 5,500 miles to destinations including Hong Kong, Singapore and Tokyo there will be a price rise of £7 per person travelling in economy. For destinations between 2,000 and 5,500 miles in economy will change from £84 to £87 – a rise of £3.

What can individuals do?

It’s worth doing everything you can to take control of your finances and save and invest as tax-efficiently as possible. With inflation rising it’s even more important to keep your money working hard.

That could mean taking advantage of tax breaks such as the annual ISA allowance and where possible consider having dividend-paying investments in an ISA where no tax is due, and ensure you think about inheritance tax planning sooner rather than later.

Source:

[1] https://www.gov.uk/government/publications/autumn-budget-2021-overview-of-tax-legislation-and-rates-ootlar/annex-a-rates-and-allowances

[2] https://ifs.org.uk/budget-2021