Stamp Duty Land Tax and mixed use premises: "grounds with house for sale?"
Those acting in the sale or purchase of agricultural property, which includes a dwelling, will be aware of the possibility that the purchaser might pay Stamp Duty Land Tax ("SDLT") at the "mixed use" rate of 5% (on the top slice), rather than the "second home" higher rate of 15%. This can make a considerable difference, so for example, where the purchase price is £10m the difference between the two rates might amount to as much as £924,250! It probably explains why, anecdotally at least, the position of HMRC appears to be hardening. We consider some of the arguments which HMRC can raise and how best to mitigate the SDLT burden in response to such arguments.
Where HMRC reviews a return, it usually requests documentation (sales particulars, contracts of sale etc) from the taxpayer. HMRC then decides whether the information demonstrates evidence of non-residential "use" of the property, entitling the taxpayer to the lower rate of SDLT.
If HMRC decides that the incorrect rate of SDLT has been paid, it will demand immediate payment of all the additional tax plus interest. This decision can be reviewed internally and be appealed to the Tax Chamber of the First-tier Tribunal (the Tribunal), however it should be noted that time limits apply to those processes. Furthermore HMRC can insist that the tax is paid pending the appeal, although the Tribunal can override this in certain circumstances.
The current SDLT regime is set out in the Finance Act 2003 (FA03). Section 116(1) defines residential property as:
- 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
- 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), or
- An interest in or right over land that subsists for the benefit of a building within paragraph (a) or of land within paragraph (b);
and 'non-residential property' means any property that is not 'residential property'.
So it appears that for a property to be treated as 'residential' it must ALL be residential, given that 'non-residential property' means any property which is not 'residential'. In our agricultural scenario it is over the interpretation of the "grounds" where the battle occurs.
HMRC may seek to argue that:
- all of the land accompanying the dwelling is 'grounds';
- other buildings or structures forming part of the garden or grounds are also residential; and
- an interest in or right over land granted with the dwelling and grounds subsists for their benefit.
HMRC is rather disadvantaged in these arguments by past battles it has waged on CGT and the application of private residence relief. In CGT cases HMRC is usually seeking to limit the extent of the grounds, whilst SDLT arguments require the area to be enlarged to enhance the tax take.
The expression 'garden or grounds' is also found in the Taxation of Chargeable Gains Act 1992 (TCGA). This is supplemented by HMRC's interpretation of the phrase 'garden or grounds' in its note RI 119 (August 1995). This document draws on relevant case law and sets out the dictionary definition of 'grounds' as
"enclosed land surrounding or attached to a dwelling house or other building serving chiefly for ornament or recreation".
This definition rather limits the extent of 'grounds', given that they would need to surround a dwelling, or be attached to it. As such the document is unhelpful to HMRC, and others have suggested this explains why it has been withdrawn!
HMRC will naturally raise valid arguments that SDLT is a different tax from CGT, and the statute can be interpreted differently. The counter argument is that the TGCA preceded the FA03, and the draftsman of the FA03 was presumably aware of the interpretation which both HMRC and the Courts had put to the phrase 'garden or grounds'.
There will be some properties with no farming base at all, but perhaps some parkland grazing takes place in the landscape around the property. It is these cases which are going to attract the most attention, on the basis that there is no specific business activity based on the property, which firmly dispels the position that there is mixed use. On the other hand, a handsome stately home could apparently be sold with perhaps, stables converted into offices, and the tax payer would instantly save a very substantial amount of tax.
It may be that the draftsmen intended to pick this up in the drafting of limb (b) or (c) of Section 116(1) however, that might be argued to stretch the definitions somewhat.
Date for non-residential status
Other common areas for dispute include the date on which the evidence must indicate non-residential status, whether that state of affairs has to subsist at the effective date of the transition, and how such a state of affairs is to be assessed (objectively or subjectively).
Worryingly, the SDLT manual appears to indicate that the claimed use must be happening at the effective date of transition. This would mean that a farm sold with vacant possession would be deemed as residential, because no non-residential use would have been taking place as at the effective date of the transaction! There are very recent cases from the Tribunal on property that is suitable for use as a dwelling, and relevant intent required for development projects, but nothing yet directly on point. As such the area is ripe for further disputes, and for the Tribunal to provide some welcome clarity to all involved.
Planning a property purchase
If any potential purchasers or professionals involved in a property purchase are concerned about the application of the SDLT rules to the transaction , we would be pleased to assist in designing appropriate structures and strategies to minimise the SDLT payable; and (if matters are a little beyond that) to represent purchasers in correspondence or before the Tribunal.
We take instructions from individuals, agents, accountants, and other firms of solicitors (including on non-poaching terms), and would be pleased to discuss any requirements.
For contentious matters contact Adam Corbin, Barrister, FAAV in our Contentious Agriculture Team or for advice on structures and strategies contact Tom Hyde, Partner, MRICS or Philip Wolfgang, Partner, in our Non-contentious Agriculture Team.