Will I get a higher rate of tax because I own a rental property in Wales?

Mouthy Money’s Your Questions Answered panellist Natasha Heron answers a reader’s question on whether they will have a higher rate of tax on their rental property in Wales while living somewhere else.

rental property in Wales

Question: I own a home (paying the mortgage) in Wales which is currently being rented to tenants.

In 2023 my wife and I will look to buy a home together. We currently live in a flat which is owned by my wife’s sisters.

If we were to buy a property in Wales, would I be stung with a higher rate of tax because I already own a property which is being rented?

The new property will be my main residence and, preferably, I’d like to keep hold of the property I am letting out.

Answer: This is one of the main areas which causes confusion as the SDLT surcharge on second homes includes a special exemption when a purchaser is replacing their main residence.

The test is a two-tier approach.

Firstly, do you hold more than a £40,000 interest in any worldwide residential property? If yes, then you fall into the surcharge for second homes.

Next, we look at each buyer separately to see whether they qualify for an exemption. It is important to remember that each buyer must qualify and if one does not, they will ‘taint’ the entire purchase.

Secondly, have you (or are you) making a disposal of a main residence? The main residence exemption safeguards buyers who are simply selling their main residence to replace it with another to ensure they are not unfairly landed with the surcharge.

Usually, a main residence is sold in conjunction with purchasing a new one. However, the rules do permit for a main residence to be sold within three years of the purchase. This means the surcharge applies but it is refundable provided conditions are met.

If we use the two-step approach above, ask:

1. Do you own more than a £40k interest in a residential property? Yes, you have a BTL.

2. Main residence exemption:

a. Have you sold a main residence in the past three years?

b. Are you selling a main residence?

As you are married, we can consider whether you can rely on your wife’s situation. Unmarried, joint purchasers cannot rely on one another’s situation, but spouses and civil partners can.

If your wife has sold a main residence within three years preceding the purchase and she also lived in her property as a main residence in that time frame, you can potentially rely on her sale.

Assuming the answers to the above are “no”, the surcharge will apply to your new purchase.

Your only option to avoid the surcharge is to sell the BTL before purchasing your new property. If it is sold afterwards, you cannot reclaim the surcharge as you have not occupied the BTL as your main residence.

This is a tricky tax and you must seek advice at the earliest opportunity.

Natasha Heron is a tax manager at the accountants Hillier Hopkins, and host of the Tax Able With Tash podcast.

Photo by Thirdman