Beware of the 'Love Tax' on 2nd Home Mortgages

Michelle Tuvey Michelle Tuvey | Loan Underwriter

When former chancellor George Osborne announced changes to stamp duty for property purchases earlier in 2016, the intent was to discourage buy-to-let investors from adding to their portfolios so as to level the playing field between buy-to-let investors and first-time buyers struggling to get into a home. Whether people agree it was a smart decision or not, the change has led to an unintended consequence that now punishes individuals for getting married and taking out 2nd home mortgages.

According to a piece on the Financial Times website, two single people who own their homes and then decide to marry may have to pay the higher stamp duty should they choose to remortgage one of the properties. Some conditions apply of course, but this provision of the stamp duty rules is contrary to the original intent of the changes announced by Osborne.

We know that the higher stamp duty does not apply to the purchase or refinancing of a primary residence. But consider two single adults who each own a home before deciding to marry. They may choose to keep one of the houses as a rental unit and live in the other. Everything will be well and good as long as nothing changes with their mortgages. But if they decide to take out a 2nd home mortgage in excess of £80,000 on one of the properties, they may have to pay the higher stamp duty.

Confusion at HMRC

We specifically said the couple in our example 'may' have to pay higher stamp duty because there is still quite a bit of confusion. The Financial Times cited a real-life example of a couple who married and then took a 2nd mortgage on the home they resided in. Because that home was now considered to be owned by both, and the wife was still the legal owner of the rental property, they were told by their conveyancer they would be required to pay stamp duty on the remortgage.

After two lawyers had given them conflicting opinions, the couple contacted HMRC and could not get a straight answer from them either. They recommended the couple follow the conveyancer's advice and pay the stamp duty because, if they were required to pay and failed to do so, they would owe penalties and interest on top of the tax.

It is ironic that what is being described here is now being referred to as the "love tax'. What was intended to slow down the buy-to-let market could have an adverse impact on people who find themselves with two homes just because they chose to get married. One would hope that the government would find a way to fix what appears to be an egregious error.

The Lesson to Be Learned

As always, we like to come away with an important lesson when we talk about these sorts of things. The lesson to be learned here is that 2nd home mortgages tend to be slightly more complicated than primary mortgages because there are many more things to consider. Stamp duty is just one of them.

In terms of qualifying for 2nd home mortgages, there are also stricter income requirements, rules that apply to equity and early payment, and a lot more.

The good news is that 2nd home mortgages can be excellent for a lot of different reasons. You can use a 2nd mortgage to remodel, refinance an interest-only mortgage, help pay for a child's university education, or even to purchase investment property if you wish. Just remember that additional properties are subject to higher taxes.


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