Thinking of moving to the seaside? Don’t forget these key tax considerations

The Covid-19 pandemic has normalised working from home and made UK staycations more popular. Purchasing a main home or holiday home in seaside locations continues to be attractive and consequently, seaside property prices have risen dramatically.

In addition to property inflation, the tax aspects of such investments must not be overlooked. Here are some key tax considerations (and savings) to factor into that seaside move. 

Buying the property 

Generally, if you purchase a property located in England and Northern Ireland you will be subject to Stamp Duty Land Tax (SDLT).

For residential properties, SDLT starts at 2% for properties costing £125,000 or more and increases on a tiered basis to a maximum of 12%. A surcharge of 3% applies on all rates where an additional property costing over £40,000 is purchased. Rates are increased by a further 2% for non-UK resident buyers. But, for first-time buyers if the property costs £300,000 or less, no SDLT is payable and below £500,000 a reduced rate applies.  

Different stamp tax regimes apply in Scotland and Wales – Land & Buildings Transaction Tax (LBTT) if situated in Scotland, and Land Transaction Tax (LTT) in Wales.

However, these stamp taxes are deductible from the sale proceeds when calculating any chargeable gains. 

Letting the property

Individuals are taxed on rental profits at their marginal rates of tax (20, 40 or 45% currently) but expenses incurred for running the rental business, including the costs of replacing furnishings and maintenance are deducted in working out the taxable profits. However, mortgage finance costs are restricted, reducing the tax payable by only 20% of the interest payable.

If the letting qualifies as a furnished holiday let (FHL) some preferential tax reliefs are available. For example, finance costs are deductible in full against rents and a lower Capital Gains Tax (CGT) rate may apply on disposals. FHLs require that the property is available for letting and let for prescribed, minimum periods. There have been some relaxations of these rules due to Covid-19. 

What about when you sell the property?

Remember that CGT rates for residential property disposals are 18% and 28% but legal costs of purchase and sale, and other associated transaction costs are deductible, as are costs incurred for renovations which increase the value of the property.

Main residence relief should be available if you have occupied the property as your main home at some point, but some periods of absence may not qualify for relief. The last nine months prior to sale are always exempt even if the property is not used by you at the time.

Estate planning

If the value of your estate including your holiday home exceeds the nil rate band (NRB) of £325,000, or £650,000 for spouses/civil partners with joint ownership, you will potentially have an Inheritance Tax (IHT) exposure at 40% on the excess.

However, if the seaside property is your main home and it is passed to your direct descendants on death, your estate can qualify for an additional NRB of up to £175,000 or £350,000 for married couples/civil partners. So, a property valued at up to £500,000 or £1m can pass to your heirs IHT-free. However, this relief is tapered down for estates valued at more than £2m.

If you borrow to purchase the property, any outstanding debt on your death should be deductible from the value of your estate.

If you decide to gift a share of the property itself during your lifetime, then be aware of other tax charges which might arise such as CGT and SDLT. Additionally, you cannot typically continue to benefit from the asset you’ve given away, otherwise it may not be effective for IHT purposes, but other tax charges might still apply.

Increased seaside property investment may create price pressures but could boost the local economy, improve the wellbeing for those working from their seaside home, as well as reduce the carbon footprint of flying abroad. There are ways to manage the owners’ tax exposure too.