Kevin Read compares two stamp duty land tax cases with similar facts but different outcomes in relation to residential property.
Readers will be aware that stamp taxes, whether stamp duty land tax (SDLT) or its devolved equivalents, are usually higher for residential property than non-residential or mixed-use property (although the current nil rate thresholds for SDLT, particularly for first-time buyers, mean that this is not always the case). ‘Second home supplement’ may also apply to residential property.
To be residential, the property must be a ‘dwelling’. Let’s compare two recent cases.
Mudan v HMRC ([2023] UKFTT 317 (TC))
In August 2019, the appellants bought a property in London for £1.755 million and submitted their SDLT return, paying SDLT (at residential rates) of £177,000. In July 2020, they amended their return on the basis that the property was not suitable for use as a dwelling and so was not a residential property.
Factors they used to support this claim included:
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the house was infested (and therefore not safe to live in) and needed rewiring;
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the boiler was detached from the wall;
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there was a hole in the roof letting in rainwater and the basement was flooded; and
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external doors and windows were broken.
The couple moved into the property with their family in May 2020, by which time the building work was partially completed. Having made a repayment of £99,750 to the appellants, HMRC later issued a closure notice confirming that the property was residential property and that the SDLT payable was the original sum paid over.
What does the legislation say?
Under FA 2003, Sch 4ZA, para 18, a building is a dwelling if it is:
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used or suitable for use as a single dwelling; or
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in the process of being constructed or adapted for such use.
Similar wording is found elsewhere in the tax code, for example, in:
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TCGA 1992, Sch 1B, which deals with the non-UK resident CGT charge (where different rules apply for residential and non-residential property); and
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F(No2)A 2017, Sch 10, para 8, which covers the inheritance tax rules for ‘enveloped’ UK residential property interests.
So, a case such as this may be of significance for other taxes, not just SDLT.
First-tier Tribunal decision
The property had been used relatively recently as a dwelling and was structurally sound. The property was therefore a dwelling, as it had been recently used as a dwelling and, while empty, had not been adapted for another purpose.
With no structural issues, the property was capable of being used as a dwelling once more, once the repairs and renovation work had been carried out. None of this work was sufficiently fundamental to make it non-residential property at purchase.
P N Bewley Ltd v HMRC ([2019] UKFTT 65 (TC))
This case was similar, but with a different outcome. The property was a dilapidated bungalow in Weston-Super-Mare, which cost £200,000. ‘Second home’ supplement raised the SDLT from £1,500 to £7,500.
The property was in a very poor state of repair (e.g., radiators and pipework removed and the presence of significant amounts of asbestos). It was uninhabitable, unmortgageable and was to be demolished and replaced with a new dwelling.
On appeal, the FTT judges concluded that the bungalow was not suitable for use as a dwelling. It was treated as a non-residential property, and as a result, the SDLT liability was reduced to £1,000. The key distinction from the other case seems to be that this severely dilapidated property was not being repaired to become usable as a dwelling again.
Practical tip
If an existing dwelling is uninhabitable when purchased, expect to pay residential rates of SDLT if the intention is to make it habitable again.
