When is a house not a dwelling (for the purposes of stamp duty land tax)?

When assessing a liability to stamp duty land tax (SDLT) one of the most important questions to answer is whether the transaction involves residential or non-residential property, or a mixture of both. The rates of SDLT differ between residential and non-residential property, with the non-residential rates generally being more favourable, subject to certain reliefs. For SDLT purposes, mixed-use property (those consisting of both residential and non-residential elements) is subject to the non-residential rates.

In the context of SDLT, residential property is defined as a building that is used or suitable for use as a dwelling, or is in the process of being constructed for such use. This definition is extended to also include the garden or grounds (including any buildings or structures on said land) or an interest or right over land that subsists for the benefit of a dwelling.

Advantages for the taxpayer

If it is established that the subject matter of the transaction is non-residential property, the non-residential rates of SDLT will apply. This is likely to pose an advantage for the majority of taxpayers with the rates of SDLT for non-residential property capped at a maximum of 5% as opposed to potentially 15% for residential property.

In addition, for acquisitions of second homes, or property being bought by a company, if it can be established that the property is non-residential, the surcharged SDLT rates may no longer be relevant.

Does the property meet the definition of residential property?

Whether a building is used as a dwelling at the effective date of the transaction is a question of fact, and will in most cases be very easy to determine. However, the question of whether a building is suitable for use as a dwelling is a much more complicated one.

There are two relatively recent cases, both heard by the First Tier Tribunal, which have considered this question, and their findings have been very helpful in answering this question.

In the case of P N Bewley Ltd v HMRC, the decision was reached, that the bungalow that the taxpayer had purchased was sufficiently derelict that it should not be considered suitable for use as a dwelling, and therefore it should be treated as non-residential property.

This decision largely focused on two key aspects:

Firstly, there was a significant amount of asbestos present in the property. It was recommended by a surveyor that the asbestos present should be removed as a matter of urgency. It was generally accepted by the tribunal that any renovation work was likely to disturb the asbestos posing a risk to the persons carrying out the work, and also for future occupants.

Secondly, the heating system along with copper pipes and floorboards had been removed.

The case has helpfully confirmed that the test is not whether a building is capable for use as a dwelling, but whether it is suitable for use as a dwelling. On this point the tribunal felt that the presence of asbestos and the general state of disrepair was sufficient for the building to be deemed unsuitable for use as a dwelling.

The case of Fiander and Brower v HMRC, did not look directly at the issue of whether property was residential, but did briefly consider the issue of disrepair.

The first key point raised in this judgement was that it was not necessary for a building to be ready for immediate occupation in order for it to be suitable for use as a dwelling. This was particularly interesting as there was no functional heating system as the boiler needed replacing, and the floorboards needed to be replaced.

The second key point in the judgement was that a building or part of a building can remain suitable for a certain use if it is clear to an objective observer that it was used for such a purpose in the relatively recent past, and it has simply fallen into a state of minor disrepair.

Based on the extracts from the two cases mentioned above, it seems apparent that it is necessary for fairly substantial works to be required before a property will be considered sufficiently derelict for it not to be deemed suitable for use as a dwelling. Therefore, if it is simply that a bathroom or kitchen has been removed, or a roof is in need of repair, it is unlikely that this treatment will apply. This view is echoed in HMRC’s manual.

However, it does clearly show that there will be a class of building that will be capable for use as a dwelling, but not suitable for such use. This potentially provides taxpayers looking for development opportunities the possibility of purchasing what would objectively appear to be a house, without it being suitable for use as a dwelling, therefore allowing the application of the lower non-residential rates of SDLT.

Fish Homes Ltd v HMRC

The recently published decision in  the Fish Homes case heard by the first tier tribunal concerned a flat with defective cladding and whether the property was suitable for use as a dwelling for SDLT purposes. As a result of the flammable cladding (similar to that used on the Grenfell tower block) the taxpayers concluded that commercial letting of the property under a tenancy agreement was not possible immediately following its acquisition. Instead, under an informal agreement, the adult daughter of the company’s directors and majority shareholders, and her friend, occupied the property and agreed to pay rent. The taxpayer in this case contended that the danger presented by the defective cladding on the flat meant that it could not be considered a dwelling for SDLT purposes. However, the tribunal found that the property was suitable for use as a dwelling and therefore residential rates of SDLT applied.

The tribunal commented that failure to comply with building regulations did not by itself render a property incapable or unsuitable for use as a dwelling. The tribunal did however comment that “some defects in what could otherwise be a dwelling or suitable for use as such would mean that it is not so. Defects which make it dangerous to live in fall within that category but such danger must in my view be such that a reasonable person would say “it’s too dangerous to live there”.

What does this mean in practice?

For those contemplating a potential property purchase, it means that careful consideration needs to be given as to whether a building is sufficiently derelict or dangerous for it to be considered unsuitable for use as a dwelling. The decision in Fish Homes confirms that the threshold for the latter is high and regard must be had to the reasonable person test in determining the correct position.

You may, however, be reading this in light of a historic transaction. If this is the case, do not despair, as there may still be scope to correct the position. For the purposes of SDLT a taxpayer is able to make an amendment to their return within the 12 month period following the filing date for the SDLT return. In addition, it may be possible in certain circumstances to submit an overpayment relief claim to HMRC, up to four years following the transaction.

Therefore, if you are contemplating a property transaction, and think that this treatment may apply, or you have a historic transaction where you feel you may have overpaid, feel free to contact us to discuss. We will be happy to provide with professional, practical advice tailored to your case.