The Daily Telegraph - Saturday - Money
Stamp duty dilemma: pay extra or sell the pub
Entrepreneurs who own a business with a residential property attached are being forced to contemplate selling up because of the punitive stamp duty surcharge on second home purchases. Many business owners live above or next to their workplaces in attached flats, but when they come to move they find themselves stung by George Osborne’s additional charge.
As part of a crackdown on the buy-to-let market in 2015, the former chancellor announced the change of law, meaning buyers must pay three percentage points extra in stamp duty if they are buying a second property. Under the rules, anyone who is replacing their main residence can apply to HMRC for a refund, but to do this the buyer must sell their previous property within three years.
This doesn’t help those whose business is attached – meaning they are faced with the option of selling the source of their livelihood or paying the surcharge.
This side-effect of the stamp duty rules emerges as The Daily Telegraph campaigns for wider reform of the regime, which is blamed for paralysing the housing market by making it too expensive for families to move or for elderly couples to switch to a smaller property.
Paul Sullivan, 44, owns a funeral firm in Dover. He lived in a flat above the property for 10 years but, as his family grew, he decided to move to a larger property with a garden. He bought the house for £295,000 and paid £13,600 in stamp duty, of which £8,850 was the surcharge.
“I wasn’t looking to buy a rental property. I was finally getting out of the flat but I ended up having to pay the charge,” he said.
“I started the business from scratch and put in 10 years’ hard work to be able to get a house and I ended up having to borrow more on the business just to pay the stamp duty charge. I’ve fallen into a grey area where I haven’t gone out looking for a buy-to-let but I’ve been penalised by the rule.”
Many owners of certain types of business could be hit by the rules. Peter Freeman and his wife, Sonia, have a lease on a pub near Norwich. They used to live in a small flat above the bar, but last year decided to move out and buy a place of their own.
They too were hit by the surcharge, as their ownership of the pub meant they already had a major interest in another property. Mr Freeman called this unfair, as the only way to avoid the surcharge would be to sell the lease on the pub, potentially depriving them of their business.
Additionally, the terms of the lease dictate that the occupant of the flat must be an employee of the pub. Currently a member of the pub’s staff does live in the flat, but Mr Freeman said that if that tenant were to leave, no other employees would be interested in living there, meaning it would be left empty. This is contrary to the purpose of the policy: to free up properties for firsttime buyers.
Mr Freeman said: “We were completely shocked when our solicitor told us how much we would have to pay in stamp duty.”
Nimesh Shah, a partner at Blick Rothenberg, the tax adviser, has been a critic of the wide-reaching impact of the stamp duty law.
“The likes of pub landlords, funeral directors, maybe head teachers at schools, could all be caught up in this,” he said.
“There are lots of professions where you need to live close to work, or where the property you operate is attached to a flat. The problem is they can be quite small properties, which aren’t conducive to full-time family living. It’s unfair that these people are being penalised because of the trade they are in.”
Mr Shah said one way for people in this situation to avoid the surcharge was to have the residential part of the property valued at less than £40,000. The stamp duty surcharge only applies above that threshold.
He explained: “If the whole building is worth £300,000, say, you could reasonably say the residential part was worth less than £40,000. You would need to get someone to value it officially to make sure that was the case, however.”
Mr Shah also said the Government’s guidance was that the surcharge applied only when the buyer had an interest in another property lasting longer than 21 years. As many pub leases are fairly short, this could mean many that pub landlords are not liable to pay the surcharge.
Telegraph Money has reported many cases in which people have been unfairly caught out by the surcharge. Young teacher Sophie Fernandez, for example, faced paying an extra £15,000 when she bought her first home because she had already invested in a rental property. Most buyers would be able to “replace” their main residence, but as Miss Fernandez is currently renting, she has no main residence to replace.
HMRC last year handed back £127m in refunds after the stamp duty surcharge was wrongly applied. This is likely to be to those who were replacing a main residence.
This newspaper has campaigned for the tax to be reviewed. Since Mr Osborne changed the overall stamp duty regime in 2014, housing transactions have fallen by 11pc, prompting cabinet ministers to urge Philip Hammond, the Chancellor, to abolish the tax in his autumn Budget.
Business owners who live over their shop are the latest to be caught by the new surcharge, says Sam Meadows ‘Pub landlords, funeral directors and head teachers could be caught up in this’