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I am concerned about the government’s plans to double council tax on second homes. My girlfriend and I both have a one bed apartment separately.
We are ready to take the next step in our relationship and move in together and use my apartment as our primary residence. Instead of selling her apartment, we would like to keep it as an investment and rent it out.
To convert the mortgage to a buy to let mortgage I need to put down an additional £10,000 and the plan is to make it a joint mortgage.
From left to right: Henry Lowe, partner at accountants Mercer & Hole, Jessica Cowell, head of lettings at Hamptons in Putney, Alan Knightly, senior head of lettings at the Hamptons City branch
But this means I have two mortgages and essentially two houses. Does this mean that we have to pay double municipal tax?
I would also like to know if keeping the property as a rental would be a good investment and what the possible tax implications are?
Ed Magnus from This is Money answers: It’s true that second homeowners could see their council tax double from April 2025.
However, this will be aimed at those who leave their homes vacant for long periods of time. It should not apply to you and your girlfriend who plan to rent out the property.
Municipalities will soon be able to charge a ‘vacant home premium’ if a home has been vacant for twelve months or longer.
Earlier this month, the Department for Leveling Up, Housing and Communities announced it would allow councils to charge double council tax on properties after they have been vacant for 12 months.
This is a decrease from a two-year grace period set out in the Leveling Up and Regeneration Act, which was passed into law in October 2023.
However, every council must wait at least a year before charging the extra fees, so the new rules won’t come into effect until April 2025 at the earliest.
How much you pay depends on how long the property has been vacant.
For example, you could be charged three times your normal council tax bill if your home has been empty for five years or more.
According to the HomeOwners Alliance, the city considers the house empty unless you furnish and live in it for more than six weeks at a time.
The rules are different in Scotland and Wales, so check with your local council to see what’s happening in your area.
Buy-to-let has been hit by a series of tax attacks in recent years, but property investing still remains popular with those who like the familiarity of brick and mortar.
Perhaps one of the most painful recent tax changes affecting landlords is the elimination of the mortgage interest deduction.
Previously, a landlord with mortgage interest payments could deduct those full costs before calculating his tax bill on the remaining profit. This meant that they received an exemption at the highest tax rate.
Now, mortgage interest is not fully deductible before you pay taxes, even though you are taxed at 20 percent on the portion of your rent that equals your mortgage interest costs.
| Tax year | Annual rental income | Annual mortgage interest rate | Rental income that is taxed | Tax on rental income | Mortgage interest deduction | Net profit after taxes |
|---|---|---|---|---|---|---|
| 2016/17 | £12,000 | £4,800 | £7,200 | £2,880 | £0 | £4,320 |
| 2017/2018 | £12,000 | £4,800 | £8,400 | £3,360 | £240 | £4,080 |
| 2018/2019 | £12,000 | £4,800 | £9,600 | £3,840 | £480 | £3,840 |
| 2019/2020 | £12,000 | £4,800 | £10,800 | £4,320 | £720 | £3,600 |
| 2020-now | £12,000 | £4,800 | £12,000 | 4,800 | £960 | £3,360 |
You will also need to consider rental agent costs (if you decide to use one), maintenance costs and various legal costs including gas and electrical safety checks.
To be able to be rented out, the home must also have at least an Energy Performance Certificate of E.
However, if you’re comfortable with all the tax and regulatory requirements, real estate has historically increased in value over the long term – of course, it performs better in some locations than others.
If you live in an area where people want to live and work and that is close to good transport links, then you are likely to attract tenants.
Rents also tend to increase over time. In fact, Zoopla reported earlier this month that average rents in Britain have risen by 29 percent since just before the start of the pandemic.
On the plus side, the average rent in Britain was £948 per month in January 2020 and is now £1,223
We spoke for expert advice Henry Lowepartner at accountants Mercer & Hole, Alan Knightlysenior head of leasing at the Hamptons City branch and Jessica Cowellhead of rental at Hamptons in Putney.
Do they have to pay extra municipal tax?
Jessica Cowell: As for council tax, if they rent their home to a long-term tenant, the tenant pays the council tax themselves.
They only have to pay municipal tax on their main residence. Although, if the buy-to-let is vacant (i.e. between tenancies) they are liable.
Henry Lowe adds: Your rental agreement should state who pays the council tax.
Usually this is the tenant, but some tenants are exempt, for example full-time students. Please contact your local government before deciding to whom you will rent the property.
Is buying to let a good investment?
Alan Knightley replies: With rental prices generally at their highest levels over the past 12 to 24 months, landlords have generated good income from their rental investments.
However, this is somewhat offset by two main factors – multiple interest rate increases since 2022, which impact monthly expenses, and high inflation which has a clear impact on the main costs for landlords – namely through higher maintenance costs and service charges.
The good news is that inflation is falling rapidly and as such, financial markets expect the Bank of England to follow suit by cutting rates two or three times by the end of 2024.
In addition, we expect rental prices to remain at their current high levels, which means that landlords can expect greater returns on their investments in the near future.
Rent pressure: Hamptons’ Alan Knightly says he expects rents to remain high
Jessica Cowell adds: While it depends somewhat on the area, holding real estate is generally a good idea as you are obviously hoping for capital appreciation over time.
Renting out the property can also help the tenant pay off the mortgage, turning potential sunk costs into income-producing assets.
Although quick returns should not be expected, buy-to-let investments generally require a long-term horizon for stable and substantial returns in the UK.
Despite the current high interest rates, rents in Britain have recently seen their highest rise in a decade.
This trend highlights strong rental demand and the potential for robust rental yields, offsetting higher financing costs.
For those who wait, Hamptons’ Jessica Cowell says buy-to-lets require patience to pay off
What are the tax consequences?
Henry Lowe replies: As for the wider tax implications, when you rent out a property you will have to pay income tax on the rental profit after certain costs, including letting agent fees, repairs and maintenance.
There is a fixed property allowance of £1,000 per year, which may be easier to claim if your expenses are less than or around this amount.
To pay the tax, you must file tax returns. You can claim tax relief for mortgage costs, but only on 20 percent of the interest. So take this into account when choosing your mortgage.
To get a joint mortgage, you may both need to own part of your girlfriend’s flat.
Depending on which of you is the highest earner, you will need to consider how you share ownership, as the distribution of taxable income will be proportionate to your ultimate ownership.
A deed allows you to transfer a percentage of the ownership of the apartment to you. Even if no money changes hands, the transfer is treated as a disposal for capital gains tax (CGT) purposes at the market value of the apartment.
Tax demands: Henry Lowe of Mercer & Hole says landlords need to stay on the good side of HMRC
The good news is that, assuming this is her main residence, no CGT need be payable.
You may still be liable for Stamp Duty Land Tax (SDLT) if you take over part of your girlfriend’s mortgage.
If your friend decided that it would be better to transfer ownership of the rental property to a limited company, which could be beneficial if a larger rental business is considered in the future, CGT would normally be an expense.
Again, in this case she doesn’t have to pay this as it is her main residence, but the company can pay SDLT.
The mortgage must be in the name of the company and not your girlfriend.
If you are thinking about the future sale of property that has not been your main residence, please note that from April 6, 2024, the CGT rate will drop from 28 percent to 24 percent for those on higher interest rates.
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