What Is A Residential Property?

Lee Sharpe considers what is a dwelling for stamp duty land tax purposes. 

A few weeks ago, HMRC people sat down with representatives from the professions, including the Chartered Institute of Taxation (CIOT), to discuss what is, and what is not, a ‘dwelling’ insofar as stamp duty land tax (SDLT) is concerned. The details have been published on the CIOT’s website. Such things are as rare as hens’ teeth, so it is worth reading for those who have an interest.

The legislation that defines the meaning of ‘residential property’ for SDLT purposes is at FA 2003, s 116. For the purposes of this article, ‘residential property’ is taken to be interchangeable with ‘dwelling’. It matters because dwellings are charged at much higher rates of SDLT than non-residential (commercial or ‘mixed-use’) properties. SDLT on dwellings can be as high as 15%, while it basically cannot exceed 5% for other property. So:

This article will summarise some of the key points coming out of the notes of the meeting.

HMRC is emphatic that land sold separately from the dwelling itself – typically, carving out a plot from garden or grounds while the property is retained – should be taxed as if it were residential. 

So far, this will not come as a surprise to many advisers since the legislation can easily support this view. But HMRC adopts this position even when the land has been fenced off and is physically inaccessible in relation to the dwelling/vendor. However:

For SDLT purposes, HMRC does not adopt as a minimum threshold the ‘golden brick’ approach to construction, which will be familiar to those who deal with VAT on construction projects (basically, construction has progressed above the level of the foundations). However, there must be more than simply a hole in the ground, and construction of the building must have commenced.

Insofar as multiple dwellings are concerned, the test is applied separately or individually to each dwelling being sold. If work has not yet commenced on a particular site, it cannot fall within the scope of a claim to multiple dwellings relief – at least in relation to what is being constructed (although it might yet, depending on what was originally purchased there, if residential).

For a mixed-use development (e.g. a ground floor with retail outlets and residential apartments above), starting construction of the overall mixed-use building will be sufficient to have it categorised as mixed use.

HMRC has accepted that its guidance in its Stamp Duty Land Tax manual (specifically at SDLTM00365) that an existing building ‘being adapted or marketed for…domestic use…is to be treated as residential property’ is not part of the test and is misleading. The guidance is to be updated. 

HMRC may use marketing material as a factor in determining whether or not a property is suitable for use as a dwelling at the relevant time, but simply marketing for potential later residential use does not necessarily mean it must be a dwelling.

HMRC will consider legal conditions that restrict residential use as relevant factors in determining the nature of the property, but they are not necessarily determinative. 

For example, some terms of occupation may simply prohibit continuous occupation as to only a month a year, so that a property may be lived in for the remaining 11 months. Physical characteristics, such as kitchen, bathroom, etc., and the permanence of the structure will also be factors to consider. Whether or not non-domestic rates or council tax are charged on the property are likewise a factor for evaluation in the round.

HMRC considers that, for a typical ‘home office’ scenario, rooms used for office work remain suitable for use as part of the dwelling, and that the dwelling overall remains in use only as a dwelling. A standard home office setup does not, therefore, make a dwelling into a mixed-use property. 

However, where a property is substantially converted to accommodate business activity, then it could be for a mixed-use (and, therefore, chargeable so SDLT at the lower rates applicable for mixed-use properties). A typical scenario would be where part of a dwelling is given over to a doctor’s surgery, or similar, such that there is a clear separation between residential and non-residential areas, and significant effort would be required to convert the non-residential part back into being available for use as a conventional dwelling.

Where land or property other than the dwelling itself is given over to another purpose, there is a question of whether or not the land continues to be available for enjoyment as part of the dwelling. So, a paddock, or a meadow planted with wildflowers, is still available for the enjoyment of the occupants; but where land has been given over to grazing by a third party, it may no longer be said to be available for enjoyment as part of the dwelling.

There are some very useful pointers here for advisers (and property owners) who want to understand HMRC’s thinking on various aspects of the question of whether or not SDLT is chargeable at the higher rates for residential use. There is more detail in the notes themselves; HMRC also intends to update parts of the corresponding sections in its SDLT manual. However, much will remain subjective (for example, when does a property become ‘derelict’?), and landlords should always seek the advice of a competent professional before assuming that particular arrangements will secure a lower rate of SDLT (or similar).