Court ruling could open way for 3% stamp duty refund claims on second homes

A recent court ruling could potentially open the way to challenges to the 3% stamp duty surcharge levied on additional homes.

It could offer an opportunity for those who have already paid the charge to request a refund from HM Revenue and Customs (HMRC) – and could set a precedent for other buy-to-let investors.

What’s the background?

Since April 2016, buyers have had to fork out an extra 3% in stamp duty when buying a second residential property for £40,000 or more, such as a holiday home or buy-to-let.

HMRC calls it the ‘Higher Rates on Additional Dwellings’ or HRAD for short.

What’s happened now?

A recent tax tribunal in Bristol found in favour of Paul and Nikki Bewley, and said they didn’t have to pay this 3% charge as they were buying a property which was, at the time, uninhabitable – even though HMRC contested it.

The Bewleys purchased a derelict bungalow in Weston-Super-Mare for £200,000 as a buy-to-let investment in January 2017.

At the time, the property was riddled with asbestos and had no central heating – and was not fit to live in.

The couple decided to demolish the original building so they could build a new home in its place.

They did so in the belief they would not be liable for the 3% surcharge for purchasing a second home. 

How much stamp duty did they pay?

When the Bewleys bought the property, they paid the normal rate of stamp duty of £1,500.  However, they were later told by HMRC they should have paid £7,500.

What does the law say?

According to the Housing Act of 1967, a property must have a cooking and bathing facilities and a lavatory to be deemed habitable.

What did HMRC say?

HMRC contested this and said it believed the higher rate of stamp duty was applicable on the grounds that a property was capable of being used as a dwelling sometime in the future.

What did the tribunal rule?

However, the tribunal ruled against HMRC and sided with the Bewleys, stating they shouldn’t be liable for the 3% surcharge because the property was not fit to live in immediately.

Due to the ruling, the couple ended up only having to pay the standard rate of stamp duty – a sum of £1,500.

Who does this affect?

Experts say this landmark case could open the flood gates for hundreds of claims from buy-to-let investors who paid the surcharge for the purchase of properties that needed renovation.

This could mean homebuyers who voluntarily overpaid on their tax will now seek to claw back millions of pounds in refunds from the taxman.

Specialist buy-to-let broker, Commercial Trust Limited, says this judgement suggests buy-to-let investors may have a case for exemption from the 3% surcharge if they are buying a property that is uninhabitable at the time of purchase.

It adds that potentially, this ruling could represent an opportunity for retrospective claims from buy-to-let investors who have paid the additional charge on properties that were uninhabitable at the time they were bought.

What does this mean for investors?

This verdict will come as welcome news to the ears of buy-to-let investors who have been hit from all sides recently by a combination of higher stamp duty costs, the loss of tax reliefs and stricter mortgage lending criteria.

This has made it harder for many to generate a decent income and led to many investors quitting the market.

Going forward, buy-to-let investors eager to avoid the 3% surcharge will try to look to take advantage of this loophole by purchasing properties that are derelict or uninhabitable.

What will happen next?

HMRC says it is considering the judgement carefully. But it is also expected to challenge people wherever it can – as there’s a great deal of money at stake if HMRC can force additional homeowners to pay the 3% stamp duty surcharge.

However, going forward, we could expect to see major legal arguments over what constitutes a ‘dilapidated home.

Top 3 takeaways

• HMRC loses a court case against a couple who were charged additional rate stamp duty on a property that was uninhabitable at the time of purchase

• Homebuyers who overpaid the tax in the same way could now seek to claw back millions from the taxman

• New investors may may take advantage of new loophole to avoid the 3% surcharge.