Since Stamp Duty Land Tax (SDLT) was first introduced in 2003, the difference in the rates charged on residential vs non-residential property has changed dramatically, with the top rate of residential SDLT now resting at 17 per cent versus the top non-residential rate of only 5 per cent.
For SDLT purposes, the legislative definition of “residential” property is a property which is used, suitable for use or being constructed, or adapted for use as a dwelling. Given the disparity in rates, it is unsurprising that there has been increased scrutiny of this definition and of what a “dwelling” actually is.
One particular question is whether former homes that are derelict or otherwise in need of significant repairs can be “dwellings” for the purposes of this test.
The Case Law
This question was first tested in the case of P N Bewley Ltd v HMRC which we reported on here in 2019. In this case the property had such bad asbestos that it could not be safely remediated and the property had to be knocked down and rebuilt. The tribunal found that the property was therefore not a “dwelling” within the meaning of the legislation.
The case left open one key question: what was the level of disrepair required to render what was once a residential dwelling unsuitable for use as such? Two further cases, Mudan v HMRC and Henderson Acquisitions v HMRC, have shed some light on the answer.
In each case, the properties in question had been left empty for a period prior to completion which had resulted in significant disrepair. In the case of Mudan there had been vandalism which resulted, among other issues, in utilities that were not functioning, no boiler, damp, dangerous electrical defects and evidence of a vermin infestation. In Henderson Acquisitions in addition to a dangerous electric installation, the kitchen ceiling collapsed a few days after completion due to a water leak that caused significant damage. As a result, props were required to support the upper floors of the property, limiting safe access to much of the property and the ceiling joists ultimately had to be replaced. Both properties required significant renovation work to become habitable.
In each case, the taxpayers claimed the non-residential rates but in each case the tribunal found that these properties were still “dwellings” and therefore subject to the residential rates of SDLT. In particular, the tribunal highlighted that:
- Where a residential property can be renovated without demolition, it would likely remain suitable for use as a dwelling,
- “Suitable for use” on the effective date did not mean suitable for immediate use and occupation on that date, and
- A significant degree of disrepair was required to make a property unsuitable for use as a dwelling. Fundamental or structural problems e.g. a high risk of structural collapse would likely be needed (as in the case of Bewley).
It is worth also noting the case of Fish Homes v HMRC which also considered whether a property was suitable for use as a dwelling. In this case the home had flammable cladding which meant the flat did not comply with building regulations and could not be let commercially until remedial work had been carried out. Unlike the cases described above, the flat in this case remained otherwise suitable for use as a dwelling as a related party rented the flat informally whilst remediation work was carried out. The tribunal found that failure to comply with building regulations did not in and of itself mean a property was unsuitable for use as a dwelling.
Although these cases have only been heard at the first-tier tribunal and are therefore not binding, the answer to the question left open after the ruling in Bewley appears to have been partly answered. In short, absent further rulings from higher courts, only in very extreme cases of structural disrepair will a property be considered not to be a dwelling for SDLT purposes.
This reflects a growing trend in SDLT cases that have been decided in HMRC’s favour and have made it clear that the residential rates apply to most properties that the ordinary person would consider to be residential. Purchasers should consider HMRC’s guidance on this point at SDLTM00385 which, although not binding on HMRC, is broadly based on the case law in this area and provides examples of the issues that HMRC consider will or will not make a property unsuitable for use as a dwelling.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, November 2023