Stamp Duty Land Tax: the mixed-use conundrum

Stamp Duty Land Tax (“SDLT”) is the tax paid on the purchase of properties in England and Wales. Often, our clients come to us for advice on the SDLT rates applicable to their purchases, especially where these properties are located in rural areas, spread over large areas of land and not used solely for residential purposes.

If the property comprises both residential and non-residential elements, purchasers may be able to significantly reduce their SDLT liability (mixed use properties are subject to SDLT at the commercial rate). The illustration below reflects this position.

Mrs Jones intends to purchase a farmhouse in West Sussex for £1,500,000. The land includes agricultural fields, stables and other commercially-used outbuildings. Mrs Jones currently owns a small home in East Sussex but is hoping to be able to fund the farmhouse purchase without having to sell her existing property. On a purchase price of £1,500,000, Mrs Jones’ SDLT liability could be as follows:

1. Residential rate: £93,750

2. Additional residential rate: £138,750 (given Mrs Jones intends to keep her property in East Sussex)

3. Mixed use/commercial rate: £64,500

It is clear that Mrs Jones can reduce her tax bill by more than half compared to the additional residential rate (if she keeps her existing property) and by almost £30,000 compared to the standard residential rate (if she sells her existing property beforehand).

Also, mixed use properties are subject to SDLT at the commercial rate, so that the higher rate SDLT for additional residential properties does not apply.

In order to apply the commercial rates of SDLT, the first step is to establish whether or not property qualifies as a mixed-use property.

What constitutes a mixed-use property? – The legislation

The SDLT legislation states that residential SDLT rates apply where the relevant land is ‘entirely residential’. ‘Relevant land’ here means the land which is the main subject matter of the transaction. The definition of residential property within the statute is a dwelling or the garden or grounds of a dwelling.

On the basis of the above, it can be argued that if the property in question does not comprise entirely of residential property then commercial SDLT rates should apply on the basis of it being classified as a mixed-use property.

What constitutes a mixed-use property? – HMRC’s stance

However, HMRC’s manual SDLTM00365 leads to uncertainty on this point as it states that:

“A building that is used only partly as a dwelling may nevertheless be suitable for use wholly as a dwelling. Its overall suitability will be judged from the facilities available at the effective date. For example, if two rooms of a house were in use as a dentist’s surgery and waiting room at the effective date, HMRC would nevertheless normally consider this property suitable for use as a dwelling.”

A strong test here is whether the loss of some or the entire alleged non-residential parcel of the land would actually deprive the occupier of their reasonable enjoyment of the residential parcel. If not, then that would be a strong indication of mixed use.

Examples

In recent years, we have seen an increasing number of queries from HMRC on transactions where the commercial rate of SDLT has been applied as a result of the property being classified as mixed use. For example, in one case, a rural estate comprising a manor house with parkland failed to qualify for mixed use rates for SDLT on the basis that there is no statutory definition of garden or grounds. The guidance in the SDLT manual provides that ‘garden or grounds’ includes land which is needed for the reasonable enjoyment of the dwelling having regards to the size and nature of the dwelling.

Clearly, a large amount of agricultural land included with a dwelling is clearly more than that which is needed for the reasonable enjoyment of the dwelling and therefore is mixed use. While not all hope is lost, one thing is clear that strong evidence is required to show HMRC that the land is not purely residential by nature. We have successfully helped clients in providing sufficient evidence to HMRC of mixed-use land ranging from photographs of paddocks or animals grazing to copies of agricultural agreements or grazing licences. Despite the increased HMRC scrutiny, we have successfully argued for the mixed-use rate to apply to rural property purchases, one client even saving over £100,000 in additional SDLT.

If a purchaser intends to initially purchase a solely residential property and then purchases an adjoining piece of non-residential land in a clear attempt to rely on mixed use rates for SDLT, HMRC is likely to demand full payment of the residential SDLT rate for at least the residential parcel of land.

Summary

Unfortunately, the applicability of the commercial rate to mixed use properties remains uncertain. Nonetheless, provided that appropriate evidence can be produced, it is possible to argue for the mixed-use rate.

Given that property transactions like this often involve large numbers together with the increase in HMRC’s scrutiny in this area of law in recent years, it is now more important than ever to seek professional tax advice before considering such purchases.

Sarah Cardew, Tax Partner and Anamika Pandey, Solicitor at Irwin Mitchell. Please contact on 0370 1500 100, sarah.cardew@irwinmitchell.com should you need advice.

Disclaimer

This article is based on current UK tax law, practice and interpretation thereof as at the date of this article.

This article is intended for general purposes only and is not intended to constitute tax advice. Specific tax advice should always be sought in relation to a particular situation.