Commercial Property Partner Hannah Bambury discusses the Stamp Duty Land Tax (SDLT).
Since Stamp Duty Land Tax (SDLT) was introduced in 2003 – being a government tax payable upon the acquisition, creation, surrender, release or variation of a chargeable interest in land or property (an ‘effective transaction’) – the difference in the rates of tax paid for effective transactions of residential property as against non-residential property has grown steadily. Lower property SDLT rates apply where an effective transaction contains an element which makes it not ‘wholly residential’ and therefore mixed use.
The legislation defines ‘residential property’ for the purpose of SDLT as land or buildings:
- used as a dwelling;
- suitable for use as a dwelling;
- in the process of being constructed or adapted for such use; and/or
- land that is, or forms part of, the garden or grounds of the building in the above.
By default, non-residential property is then anything which is not ‘residential property’.
Owing to the differences in tax liability that non-residential and residential property attract respectively it is particularly important to classify property correctly so that the correct amount of tax can be paid at the time of the effective transaction and also ensuring that tax is not overpaid as a result of a wrong classification of the property.
This was illustrated by the recent case of Hyman v Revenue & Customs , in which a property was acquired that consisted of a farmhouse, garden and 3.5 acres of surrounding land. This land comprised a meadow, which had a bridleway running through it, and also on which a barn (classified as a non-residential building for planning purposes) was situated. The bridleway, being a public right of way, was used for the purposes of recreation by the public on a daily basis.
This surrounding land was physically separated from the farmhouse by tall hedgerows and it was asserted that the property should be classified as mixed use owing to the barn, meadow and bridleway being non-residential elements. The tribunal ruled that despite this assertion the acquired property ought to have been classified as entirely residential, with the barn, bridleway and meadow included. In the tribunal’s view the surrounding grounds and land should be interpreted widely, with there being no requirement for the owners to actively use the land and it did not matter that the public exercised rights over it. As such, public access and separation of the land did not prevent it from being deemed grounds surrounding the property itself.
As a direct result of this case HM Revenue & Customs (HMRC) has published additional guidance on the meaning of garden and grounds and this is broadly consistent with the tribunal’s decision, looking at the historical and future use of the garden and grounds to help determine whether a transaction is residential or mixed use.
HMRC’s updated guidance runs contrary to previous indications which HMRC has given and so purchasers of both non-residential and residential property should take note, to ensure they are aware of the potential for re-classification. What is emerging frequently from HMRC guidance is that in order to qualify for a mixed use classification some of the property and grounds must be used for agricultural or commercial purposes.
What is certain is that HMRC will continue to look closely at those sorts of transactions and so SDLT implications should be considered carefully by prospective purchasers. The key point being that if you are purchasing a property which has with it additional land, used either as a garden or on a commercial basis (such as farmland), it is important to take advice at an early stage on the tax treatment of such property.