Our fully inclusive guide on what tax implications you may face if you choose to buy a new property prior to selling your current home.
When it comes to selling property, it can be difficult to know which way to go about it. The industry itself can feel like a tricky place to be, particularly if you haven’t sold property in the past.
One of the age – old property selling debates tends to revolve around the order in which the buying and selling should take place. Should you sell your current home before buying your new one, or should you buy your new home and sell your current property afterwards, assuming you have the money to do so?
Well, unfortunately, there may be some tax implications of buying a property before selling, so if you’re considering doing this, listen up!
Read on for our fully inclusive guide on what tax implications you may face paying if you choose to buy a new property prior to selling your current home.
What Tax Implications Might I Face if a Buy Before Selling?
Before delving right into the thick of things, we’re going to be looking at what tax implications you might face on the surface if you decide to buy a property prior to selling.
The main one of these is, without doubt, Capital Gains Tax (or CGT). The reason for this, is because your property will no longer be covered fully by Private Residence Relief.
If you choose to keep your old home on as a buy – to – let and become a landlord, you will also be likely to experience the implications of income tax on the rent you receive.
As well as this, you’re likely to be charged a further 3% Stamp Duty charge on the new property you buy, because it’s classed as your second property. This is a larger sum than the standard stamp duty charge rates.
Why Would I Even Want to Buy A New Property Before Selling my Current One?
So, all of these potential implications may have left you questioning why you would even want to buy a new property before selling your current one. Is it really worth the tax implications?
Well, there are in fact an array of reasons why you might want to buy prior to selling, some of which we are going to be detailing below:
- You might want to keep an investment on your home in order to create an income which will ultimately be part of your retirement funds.
- You could be finding it difficult to sell your home on the current property market, if it happens to be slow, or in a cold period. Remember that waiting for a slow sale of your current property could negatively impact the buying of your new property, and some want to avoid this at all costs.
- Remember that sellers also like buyers who can move quickly. Buying property before selling a new one will eliminate the chance of you being stuck in a slow – moving property chain.
- If your current property is currently in negative equity, you may need to buy prior to selling.
- If the second house happens to be a holiday home, for example in the countryside or by the sea, then this could be a reason for buying a second property.
So if you keep your existing house, how will this impact your taxes?
Let’s take a further look shall we.
It’s Likely That You’ll be Required to Pay an Additional 3% Stamp Duty
For those who own more than one home at a given time in the UK, the government have introduced the stamp duty penalty in recent years.
This means that if you don’t sell your existing home prior to purchasing the new one, you will have to pay 3% Stamp Duty Land Tax (SDLT) on the second property.
This additional stamp duty rate of 3% is higher than the average stamp duty rate.
For example, if your new home has cost you £300,000 in order to buy it, and you were selling your existing home, the Stamp Duty Land Tax you’d pay would sit at around £5,000. However, if you were choosing to keep your current home, then the cost of Stamp Duty Land Tax would cost you as much as £14,000, which is a whopping £9,000 increase.
Not so appealing!
Can I Apply for a Stamp Duty Refund?
In some scenarios, you may be able to apply for a stamp duty refund.
For example, if there is a delay in selling your property due to a small market, you are likely to be entitled to this. You can apply for this refund within the first three years of buying your new home.
If you have had to pay the higher level of stamp duty, this is how you will be able to claim a refund:
- If you sell your previously main residence within three years.
- If you claim the refund within three months of the sale of your previously main residence. You must claim within twelve months of filing the date for your SDLT return.
So, if need be, you could actually rent your initial main residence out for a couple of years while waiting for the market situation to improve. In doing this, you’ll be able to sell your home in a better market, and you’ll then be able to reclaim the extra stamp duty.
What About Capital Gains Tax on Property You Own?
If you only own one property in the UK, you will not have to pay capital gains tax on these, when you sell it on. Why?
Because the UK government allow Private Residence Relief on your only – or main – residence.
What are the Rules Surrounding Private Residence Relief?
Let’s now take a more in depth look at what the rules are surrounding private residence relief.
You might be entitled to private residence relief, if:
- You are entitled to private residence relief if you have one home, and you’ve lived in it as your primary home for the time in which you’ve owned it.
- If you have never rented out part of your property, excluding a one bedroom lodger.
- You have not used part of it for business, and business only.
- The grounds (including all of the buildings) are less than five thousand square metres in total. This equates to just over an acre.
- You can prove you didn’t buy it simply to make a gain on it.
What Happens if You Keep Your Existing House on and Let it Out?
If you choose not to sell your existing home when buying your new one, you risk having to pay capital gains tax.
This can be a little complex at times, however. With this in mind, we would advise seeking professional tax advice if you’re intending on buying a secondary home and becoming a landlord.
Remember that Capital Gains Tax is only ever to be paid on the difference between what you sell the property for, and what you actually paid for it in the first place. You’ll also only pay this if there is a profit.
Where Does Income Tax Liability Come into Play?
Last of all, but by no means least, we’re going to be taking a look at where income tax liability comes into play.
This is almost certainly likely to impact you if you choose to rent your home out to tenants. In the UK, the government brought in a rule that disallows interest as an expense. The implication of this? You’re going to effectively end up paying for income tax on all of your interest payments.
Before this law came in, it was considered a deductible expense under Section Twenty – Four of the taxes act.
Nowadays, however, you actually have to pay interest from the taxed income. This creates a difficult circumstance wherein you could possibly end up paying more in interest on your mortgage than you’ll make in rent, after it’s been taxed – meaning you’ll have to fund paying for your mortgage through another source of income, which defeats the point for a lot of landlords.
The only way around having to do this, is by adding your existing home to a limited company. The issue here, is that this will attract Stamp Duty, and that’s at the very least.
If you’re facing this as an issue, we would always recommend contacting a tax professional, and seeking their advice. This is because the benefits that are associated alongside keeping your current house to buy a new one could ultimately end up being outweighed by the disadvantaged we have discussed above. It’s always best to seek help If you aren’t sure!
We hope that today we have helped you to better understand what the tax implications are if you’re buying a new property prior to selling your current one, and how you can avoid this negatively impacting you if you choose to go down this route.
Thanks for reading!