Government forced into U-turn on 'granny flat' tax

The government was forced into an embarrassing U-turn this week on the new stamp duty rules that have only been law for few days. The Treasury has had to amend the new stamp duty rules regarding second homes after realising it penalised people with so-called 'granny flats'.

At the start of this month changes to stamp duty were brought in that mean anyone buying a property that isn’t their main home faces an extra three per cent levy on their stamp duty bill. The move is targeted at the nation's army of buy-to-let investors, whose ranks have swelled in recent years in an era of ultra-low borrowing costs.

However, under the original terms of the rule properties with self-contained annexes, such as granny flats, would have been classed as two homes, forcing a purchaser to pay the three per cent levy.

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Anyone buying a property with a granny flat could have found their stamp duty tax bill almost tripled as a result of the new legislation. For example, someone buying a £300,000 home would owe £5,000 in stamp duty. But, if the property included a self-contained annex, the tax would rocket up to £14,000.

“It will definitely reduce the value of affected homes – possibly by up to per cent,” Johnny Morris, of Countrywise estate agent, said in the Daily Mail.

The quirk in the legislation was described as “part of the wicked law of unintended consequences,” by former Conservative Cabinet minister Sir Eric Pickles in The Telegraph. He criticised the issue saying it would discourage families from keeping elderly relatives nearby, the exact opposite of what he campaigned for during his time in government.

Initially the Treasury was defensive stating that the legislature would effect “fewer than 1,000 properties every year.”

The Government has now announced that the rules will be changed so that more granny flats will be exempt from the additional stamp duty levy. Now, self-contained accommodation will only attract the extra tax if it makes up more than a third of the whole value of the property.

“The government will table an amendment to correct the error to ensure fair treatment for annexes,” David Gauke MP, Financial Secretary to the Treasury, told the House of Commons. “We certainly do not want to discourage people who wish to create an annexe for an elderly or disable relative, providing them with support close at hand.”

It isn’t just granny flats that are being adversely affected by the new three per cent levy. Parents wanting to help their children onto the property ladder are also in for a shock thanks to the change.

In the past many parents would go in on a joint mortgage with their children to help them afford their first home. Now, if the parent already owns their own home, that would mean the child’s house would have the three per cent levy added as it would be an ‘additional home’ for their co-investing parent.

Hopefully, the government will make another amendment to address this as it currently puts yet another hurdle in the path of first-time buyers.