Mixed-use SDLT decision marks success for the taxpayer
In March, the final Budget of the Conservative government announced the abolition of Multiple Dwellings Relief for Stamp Duty Land Tax (SDLT). This came as no surprise, as HMRC had consulted on this issue and it was long expected.
What was surprising, though, was that no change was made to the treatment of mixed use properties. If a purchase consists of both a dwelling and non-residential property, then the whole of the purchase is treated as non-residential. As the top rate of SDLT on wholly residential property is (potentially) 17% , being subject to the top rate of non-residential at 5% is very attractive.
The legal definition of a residential property is a dwelling, and its gardens and grounds; anything that doesn’t fit into this definition is non-residential. The published HMRC guidance does not add much clarification to this definition. So, as always, it is left to case law to give clarity.
As noted above, the purchase of mixed use property could give rise to valuable SDLT savings and we have seen a number of cases where the taxpayer has determined to prove that their purchase was of mixed use.
Rare decision in taxpayer’s favour
Over the years the cases reaching tax tribunal have generally been lost by the taxpayer, a notable exception being that of Suterwalla. In this case, Mr & Mrs Suterwalla successfully argued that a paddock was not residential under the legal definition and so the purchase of it, together with their house and gardens, made the whole transaction non-residential. HMRC appealed this decision. The SDLT paid was £169,500; if not a mixed transaction that figure would increase to over £330,000.
The decision from the appeal to Upper Tier Tax Tribunal was published earlier this month and upheld the First Tier decision that the paddock was not residential.
In coming to this decision the judges focused on five relevant issues: that the paddock was under a separate Land Registry title from the house and garden; it was not close to the house and not visible from it; it was separate from the rest of the property by a hedge and only accessible via a small gate; it did not support the house; and it did not form an integral part of the property.
This case goes some way in determining what is and isn’t non-residential property. The case also discussed the grazing lease that was granted after completion and concluded that it should be ignored. Similarly the assertion by the Suterwallas that they would have preferred not to buy the paddock was irrelevant.
Although helpful, don’t expect this to be the last word on mixed use.
What Next?
The only SDLT policy announcement made in the Labour party manifesto was a proposed rise in the non-resident SDLT surcharge from 2% to 3% . It is assumed that this will be announced in the first Budget of the new government. The rules surrounding the non-resident surcharge are complex – and do not align with the income tax definition of non-resident – and may result in the payment, and then refund, of the surcharge.
As the above case demonstrates, SDLT is a complex area and favourable outcomes are the exception rather than the rule, so you should seek professional advice at an early stage.