Chris Thorpe looks at whether some land bought with a house will necessarily be subject to the residential rates of stamp duty land tax.
The disparity between residential and non-residential (including mixed-use) land for stamp duty land tax (SDLT) rates is such that the latter makes for a far more attractive purchase.
Non-residential land rates are capped at a maximum of 5% on amounts above £250,000, whereas residential rates are up to 12% on values above £1.5 million. Residential rates can be as high as 15% for properties worth over £500,000 when the purchaser is a corporate body.
Furthermore, surcharges of 2% and 3% are in place for non-residents and additional house purchasers or corporate bodies, respectively. Therefore, if a property has some part of it which is non-residential, the whole property may be described as mixed and thus come under the non-residential SDLT rates. A contentious area is where a house is bought with some land.
HMRC guidance
The only legislation defining residential property for SDLT purposes is FA 2003, s 116(1):
‘(a) building that is used or suitable for use as a dwelling, or is in the process of being constructed or adapted for such use, and
(b) land that is or forms part of the garden or grounds of a building within paragraph (a) (including any building or structure on such land)’.
Subsection (b) is the critical part when considering land. HMRC has published guidance (in its Stamp Duty Land Tax manual, at SDLTM00440 onwards) to assist with (their) interpretation of this legislation.
The relationship between the land and the house is examined in the round to determine whether the former is the latter’s garden or grounds or has a separate, non-residential identity.
HMRC cites factors such as use of land, its layout, proximity to the house, extent of the land and the legal status (e.g., planning restrictions or covenants in place). Whether the land meets the definition of a garden for CGT and principal private residence relief is irrelevant for these considerations, as we will see below.
Useful though this guidance is to determine what HMRC believes to be important factors, it is case law which sets precedents and gives SDLT payers a better idea of what awaits them.
Case law
The recent Upper Tribunal (UT) case Hyman, Pensfold & Goodfellow v. HMRC [2021] UKUT 68 helped shed some light on the matter. In that case, Dr Hyman bought a house with 3.5 acres of land with a barn, bridleway and meadow; he argued that the land did not constitute garden or grounds and, therefore, a refund of the higher residential SDLT rates paid was due. Dr Hyman tried to tie the definition of garden to that of private residence relief, i.e., that to be garden or grounds, it must be required for the reasonable enjoyment of the property – which it wasn’t. This had been based on HMRC’s statement of practice at the time.
However, HMRC and the First-tier Tribunal (FTT) disagreed with the buyers, the FTT finding that garden or grounds was to be widely defined as any non-commercial land to which the homeowners had access, irrespective of its use. HMRC’s guidance was non-binding and so was disregarded by both HMRC and the FTT. When the matter went to the UT, they agreed that HMRC’s guidance was non-statutory and thus not binding; the legislation makes no mention of any reasonable enjoyment criterion and so HMRC’s arguments were upheld.
Practical tip
By the time the property is bought, there is usually little which can be done to turn a garden or grounds into some non-commercial land simply to avoid paying the higher rates of SDLT. The land is what it is. Good advice from an accountant, solicitor or land agent before the purchase is the best a buyer can seek – to be forewarned of the likely SDLT dangers is to be forearmed.
