SDLT: New case law on the meaning of residential property

Whether or not a property is residential can make a huge difference in the amount of SDLT a buyer has to pay. It is at the heart of any decision as to mixed use, or the availability of multiple dwellings relief (MDR). For example, a buyer purchasing a property for £1m might pay as little SDLT as £39,500, or as much as £150,000, all depending on whether or not it is regarded as “residential”.

Historically, the distinction between residential and non-residential property was less significant, as there was little difference between the tax rates. This is one of the reasons why there is relatively little guidance on the meaning of residential property in more nuanced cases. However, with the Government now seeking to increase the tax take from residential properties, the distinction is now much more important.

Legislation states that a property is residential for SDLT purposes where it is:

• used as a dwelling
• suitable for use as a dwelling, or
• where it is being constructed or adapted for use as a dwelling.

However, it sheds no further light on what a dwelling actually is, and HMRC has been known to interpret this in different ways depending on the context.

Fortunately, the First-Tier Tax Tribunal has recently issued a helpful judgment on the meaning of residential property for SDLT purposes, in the case of P N Bewley Ltd v HMRC.

The facts

A company purchased a dilapidated bungalow with no heating system, pipes or floorboards which had to be demolished due to asbestos.

The company took the view that the bungalow was not used as a dwelling, that it was not suitable for such use (because the property was dilapidated), and nor was it being constructed or adapted for such use. The company therefore claimed that it was not residential for SDLT purposes and paid the lower non-residential rates of tax. 

HMRC disagreed, arguing that the bungalow was residential. They sought to impose the higher residential rates of tax, on the basis that the property was a dwelling.

 Key points

• The Tribunal found that the word “dwelling” has no special definition for SDLT purposes and takes its everyday meaning as a place in which to live.
• Existing case law on the meaning of the word “dwelling” for other taxes was found to be informative. In line with that case law, the physical characteristics of the property are generally determinative. For example, the property in question should have all the necessary facilities for use as private accommodation (its own access, bathroom, bedroom, kitchen etc).
• The judgment emphasises that the “dwelling” test is to be applied at the time of completion. The purchaser’s future intentions are irrelevant, as is the seller’s historic use (though the latter may be informative as evidence for the property’s suitability for use).
• It is not sufficient for the property to be merely capable of being used as a dwelling; it must be suitable for such use. A property might be capable of being used as a dwelling (for example by squatters) without being suitable for use as such in ordinary terms. This is a question of fact that can be demonstrated by evidence such as photos, plans and surveyors’ reports, which show the physical condition of the property at the time of completion.
• HMRC’s own guidance is only helpful insofar as it indicates the approach HMRC might take in an enquiry. The Tribunal emphasised that this guidance is not law and can therefore be rebutted with evidence. For example, HMRC’s manuals state that a property which is not in use at the time of completion will take its most recent use by the seller (i.e. if its last use was as a dwelling, then it remains a dwelling as at completion even if it is unused). The Tribunal acknowledged that HMRC may have that opinion, but if the purchaser can show that the property is no longer in that last use at completion, then HMRC’s position may be rebutted.
• The Tribunal also noted that the broader context of tax legislation and policy appeared to incentivise residential dwellings being brought to market. HMRC’s arguments in this case appeared contrary to this policy, as the result would be to penalise a company which bought an uninhabitable building with the intention of bringing it forward for sale and occupation as a new home.

What does this mean for buyers?

Buyers should take extra care to identify whether their property is wholly residential or not, in light of Bewley. If the property is not wholly residential, then it may be eligible for the non-residential (or mixed use) rates of tax, which could offer a substantial tax saving.

In addition, buyers should consider how many dwellings they are purchasing in view of the Tribunal’s interpretation of the word. If a property is comprised of more than one dwelling, then the buyer may wish to explore whether they are eligible for multiple dwellings relief (MDR). This could provide a significant tax saving even where the property is wholly residential.

From a practical perspective, Bewley demonstrates that HMRC is clearly paying close attention to this area and is willing to pursue buyers where they disagree with their tax analysis. Unless they are rebutted beforehand, HMRC may take matters all the way to Tribunal or Court stage, even where only small amounts of tax are at stake.

Buyers should therefore make sure to take robust and well-qualified professional advice on their SDLT position. By doing so, they can secure whatever advantages tax legislation may offer to reduce their SDLT bill, whilst also mitigating the risks of HMRC raising tax assessments further down the line.

If you require further information about anything covered in this briefing note, please contact James Bromley, or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, March 2019