Second Home & Investment Purchases
Land and Buildings Transaction Tax
The first major thing to consider is the initial cost of buying a second property. After the purchase price, the largest expense will be the payment of the Land and Buildings Transaction Tax (LBTT) and if applicable, the Additional Dwelling Supplement (ADS), or second home tax. LBTT runs on a banding system, however, ADS will be charged at 4% of the purchase price on top of normal LBTT. To understand the liability in regards to LBTT and ADS please visit the Revenue Scotland LBTT calculator.
Cash or Mortgage?
Depending on your financial position you may be able to use cash to buy your second home and the process for this is relatively straight forward. However, if you aren't able to use cash, you may need to get a mortgage. If so, lenders have different requirements for buy to let mortgages in terms of deposit and affordability. So it’s important to get the correct advice.
Use and Obligations
If the property is to be used solely as a holiday home and is not being rented out, then you will have no extra obligations apart from your running costs.
However, if your second home is used as a buy to let property and you become a landlord, you are effectively running a small business, which has important legal responsibilities. These responsibilities include both Landlord Registration and making sure the property is safe and meets the required repairing standard. If you are considering a buy to let property then our Lettings Team can help.
If you are thinking of using the property as a short term let, it’s important to note that the market has grown substantially in the last few years. This has led to many complaints in areas which are over populated with short terms lets. A licensing regime is currently being considered by the Scottish Government in conjunction with Local Authorities which will enforce similar obligations on owners as the private residential tenancy agreement. Local Authorities may go further and are considering a requirement for short term lets to be deemed as commercial.
If this were to come into place, owners would be required to submit a planning application to their local authority for a change of use, from residential to commercial property. This may have a financial impact as Commercial and Council Tax rates vary. Any thought of venturing into the short terms let market should be thoroughly researched and implications considered.
Risk and Reward
With such a large financial investment, you want to thoroughly understand the risk and reward. In the case of a standard buy to let property there will be ongoing costs that you will need to factor in. Meeting your obligations as a landlord, carrying out repairs to the property and paying a mortgage during gaps in tenancies are all costs that fall within and affect your Rental Yield. This in essence is what your tenants pay in rent, minus running costs, such as your mortgage, landlord insurance, repairs, maintenance, and agents fees etc. You will also need to remember to file an annual tax return to HMRC to notify them of your rental income.
With the scale of the costs involved, any buy to let property should be seen as a medium to long term investment. This means your money will be tied up in property for a period of time and considering that you have to serve notice on your tenants and then market the property, recouping your money may be slow and administration heavy.
Of course at the point of selling, the price you may achieve for the property will be highly dependent on the market conditions. Given the choice, everyone will want to sell in a strong market, and you would hope to make a profit, however, this may not always be the case. Any profit made on the sale of a buy to let property is known as Capital Growth. This simply means you have sold the property for more than you bought it for. As Capital Growth is a reward from your investment, and you may be liable for Capital Gains Tax on this profit, so, you must take this into account.
In short, owning a second property can be financially rewarding in the medium to long term if managed correctly. The day to day management and your responsibility as a Landlord can be labour intensive, but, the pressure can be eased by sourcing a good letting agent. If you are considering a venture into the buy to let market or if you are an existing landlord struggling to fulfil you requirements please do contact our Lettings Team who would be happy to help.