- There are a lot of decisions to make when buying a home with someone who already owns a property
- Letting it out may seem like the easy option, but stamp duty costs mean there is a lot to consider
Moving in with a partner is an exciting prospect, but merging two lives can come with tough decisions: which books to keep, whose artwork gets centre stage, and even – in an age when couples cohabitate at an older age – whose house to live in.
Official statistics show that factors such as rising divorce rates and later-life relationships mean a growing number of the population are getting married or moving in with a partner already owning a property. There were 66,000 marriages in 2019 where at least one member of the couple was divorced, according to the Office for National Statistics, 17 per cent higher than in 1970.
One solution has always been to let out the existing property. But as rules have changed, this has become more complicated. There is tax to consider, management costs and, if planning on buying a home together, maybe even an extra stamp duty bill. Below, we discuss the potential scenarios, and explain what works best in each situation.
How stamp duty works
The most significant factor when considering letting out a property in this scenario is whether or not you need to pay the additional rate of stamp duty. This only matters if you are buying a new property together, rather than moving into an existing home.
The rules are complicated: basic-rate stamp duty (5 per cent on anything paid for a property above £250,000 and 10 per cent between £925,001 and £1.5mn) is due if you are buying a new main residence together, one of you is selling your main residence, and you are married.
Outside of this arrangement, things get complicated as there is an additional rate for additional dwellings. This stamp duty rate is generally due if you are buying a property but retain interest in another. It is payable if you do not sell a main residence – ie, one or both of you own one or more properties as an investment. Even then, there are several circumstances in which requirements vary, so it is always worth checking against official advice, at https://www.gov.uk/guidance/stamp-duty-land-tax-buying-an-additional-residential-property.
The additional rate equates to 3 per cent on any value up to £250,000, 8 per cent on anything paid between £250,001 and £925,000, 13 per cent between £925,001 and £1.5mn, and 15 per cent for any higher amount. In basic terms, buying a £500,000 home under the normal stamp duty regime costs £12,500, but if an additional rate is charged, this would rise to £27,500. For a £1mn property, the cost would rise from £41,250 to £71,250.
Karen Noye, mortgage expert at Quilter, says: “Stamp duty is a huge consideration. If you own a property and move home by selling your main residence, the normal stamp duty rates are applicable. But if you buy a second or additional property then the higher stamp duty rate would apply. That would be the case if one party owned a property already and the other didn’t, as the transaction is treated as a whole not individually.”
Why stamp duty matters
The additional rate of stamp duty fundamentally affects the calculation of whether or not letting out a second property is financially viable. Let’s take the example of a couple moving in together where one party remortgages their existing home on a buy-to-let mortgage and uses the proceeds to buy a new home with their partner.
Any decision to keep the flat rather than sell it should be based on whether or not the profit from being a landlord covers the cost of the additional stamp duty, the mortgage payments and in enough time. A helpful calculation is to take monthly rental income minus mortgage payment and then divide the additional stamp duty bill by that gross profit monthly figure. This tells you how many months it would take to pay off the stamp duty bill. However, it’s worth remembering that is a basic formula that does not account for running costs.
There are a lot of variable factors to consider here, too, as mortgage costs and rent change with market fluctuations. Location also matters given the considerable differences between London and the rest of the country in terms of house prices and rents.
For example, according to estate agency Hamptons, the average semi-detached home you might expect to be bought as a first home by two people moving in together costs £678,690 in London but only £281,150 in the rest of Great Britain, on average. Similarly, rents can differ too, albeit by a much smaller margin, with the average monthly rent for a flat in London being £2,005 versus £1,300 for the rest of Great Britain.
Therefore, someone in London keeping their flat and renting it out (with an average 75 per cent loan-to-value interest-only buy-to-let mortgage) will have a gross monthly profit of £633, while someone outside of London will make £578. The difference here is not that stark, but stamp duty changes that. The Londoner would pay £41,795 when additional stamp duty is factored in, £20,361 more than if they sold their flat and paid normal stamp duty rates. Those outside London would pay £9,992 in stamp duty costs, £8,435 more than the lower rate. What this means in practice is that it would take a Londoner 32 months’ rent to cover the cost of keeping hold of the property, but this would fall to just 15 months outside of London.
On the face of it, that might seem too long a pay-off to justify keeping a flat when buying another property at London prices. However, there is rental and house price growth to factor in. What's more, mortgage rates can fall. Hamptons expects rents in London to grow 9 per cent this year, 8 per cent in 2025 and 4 per cent in 2026. Similarly, house prices are estimated to increase 5 per cent next year, and 7.5 per cent in 2026.
If mortgage costs fell back to anywhere close to what they were in 2019, this would also vastly shorten the pay-off period. Running the same calculations using 2019 mortgage rates, average house prices and rents, the London pay-off period falls to 16 months versus nine months for the rest of the country. So, for those who can ride the ups and downs of the market, keeping an asset that eventually pays for itself via income and grows in value over time could be worthwhile.
Aneisha Beveridge, head of research at Hamptons, said strong rental and therefore yield growth in both London and the rest of the country means the financials are promising.
She adds: “However, given that yields tend to be much higher outside of London (5.6 per cent in London versus 6.9 per cent elsewhere), the feasibility of keeping the original flat and renting it will depend on location. Last year, the cost of upsizing from the average flat to a semi-detached in Great Britain was an extra £58,000, or 26 per cent. In London, this rises to almost £250,000, a 58 per cent increase."
What else you should consider
Of course, there are the costs of being a landlord on top of this, as well as a range of factors to consider. Quilter’s Noye says potential landlords should factor in the state of the property market, rental demand, changing interest rates, and exactly how they will convert their mortgage into one suitable for renting out.
“They could go down the consent-to-let or buy-to-let route depending on their circumstances,” she says. “This includes any existing mortgage, early repayment charges and equity. With buy-to-let mortgages, you need more equity compared with residential ones, so the property value and any outstanding finance will be important factors, as well as the estimated rental income. The borrowing amount will depend on the rental income with the majority of buy-to-let lenders.”
Noye says the decision should first be governed by how much equity you have in your property. If you have built up equity over time, then converting to a buy-to-let might work well, and even mean below-average mortgage rates.
“Letting a property is a significant decision,” Noye warns. “If you can keep your existing property and let it out then you have another asset to your portfolio, another income source (although the tax treatment isn’t as favourable as it used to be) plus the potential to build up equity as property tends to do well as a long-term investment.
“However, property has its drawbacks and people must remember it is a non-liquid asset. You need to make sure you have back-up funds for property maintenance, insurance and rental voids, as well as any other periods where cash may be required over and above what is normal expenditure.”
Beveridge seconds this. She adds: “It’s very important to account for other additional costs associated with letting a home, too – for example, tax, maintenance, service charges and agency fees.”
Tax should be a huge consideration. Any rental income will be subject to your marginal rate of income tax, with mortgage tax relief limited to just 20 per cent of your interest payments. In addition, once the property ceases to be your main residence, and becomes a rental property, main residence relief from CGT will no longer apply.
