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With HMRC looking increasingly closely at stamp duty land tax (SDLT) returns and in light of the newly issued HMRC guidance concerning the definition of residential property, it is more important than ever to be sure that you are applying the correct SDLT treatment to land transactions.
Generally speaking, hotels, inns and similar establishments will constitute non-residential property and will therefore be subject to the non-residential rates of SDLT. However, the treatment of bed and breakfast establishments (B&Bs) is a grey area and with the significant difference between the residential and non-residential rates of SDLT, especially when taking into account the higher rates surcharge for the purchase of additional dwellings, it is essential to consider and establish the SDLT treatment on a case by case basis.
HMRC’s guidance indicates that a B&B would be considered non-residential property where there are ’bathing facilities and telephone lines etc.’ installed in each room, and the rooms are available all year round. This seems fairly straightforward and should cover the majority of B&B establishments but what if you removed one of the suggested criteria? There are a number of establishments, for example, that do not have telephone lines in each room and some establishments which will have shared bathing and toilet facilities.
The truth of the matter is the absence of just one of the criteria as set out in HMRC’s guidance is unlikely to be prohibitive in establishing a property as non-residential where it is operated as a B&B but each case must be considered on its merits. It is also important to consider the weighting of each of the criteria in relation to the others. For example, the absence of a telephone line in every room is unlikely to be as significant compared with the presence of bathing facilities in each room.
Another consideration when purchasing a B&B is establishing that the property is being used or has been used in the course of a business. HMRC’s guidance indicates that the property’s use at the effective date of the transaction, as well as historic use, will be taken into account when assessing whether the property is non-residential. However, no consideration will be given to the intended use of the property by either the vendor or the purchaser for categorisation purposes.
In connection with the presence of an established business, it is also important to consider how the consideration for the purchase of the property and business is apportioned, as this will likely impact the SDLT liability arising. For example, the consideration attributable to the goodwill of the business may form part of the chargeable consideration depending on whether it is linked to the land, whereas consideration given for chattels will not form part of the chargeable consideration for SDLT purposes. The consideration provided for chattels is not always established but the SDLT savings can be significant, especially when chattels includes items such as carpets, curtains, blinds and kitchen white goods (if not fully integrated). This split of the consideration can also be important for other property purchases such as hotels.
It is clear that ascertaining the SDLT treatment of serviced accommodation such as B&B establishments can be challenging and regard should be had to obtaining advice well in advance of any transactions taking place so that you have the best opportunity to mitigate the cost.
By Jon Watson – Tax Senior