HMRC has come out on top yet again in another claim for ‘mixed-use’ rates of Stamp Duty Land Tax (SDLT) on an acquisition of a dwelling with accompanying land.
The taxpayers in Harjono and another v HMRC acquired a property with an adjoining paddock and paid SDLT at the commercial rates, principally on the basis of a grazing agreement negotiated between the taxpayers and a third party. This agreement was signed before completion and the document was dated by the taxpayers’ solicitor just afterwards.
The taxpayers argued that the paddock (which comprised around half of the surface area of the whole property) could not be regarded as part of the garden and grounds because it was used for commercial purposes unconnected with the dwelling. The grazing agreement was a genuine commercial agreement and a pre-existing encumbrance which was required to be taken into account when assessing the nature of the property at completion. Also of note was that the paddock was not visible from the house, it had its own separate title number and its use was not necessary for the reasonable enjoyment of the house.
HMRC contested this arguing that the paddock and the property had been linked together under Land Registry records for around 12 years prior to the sale, the marketing material regarded the paddock as a key selling point and it was accessible from the garden. Further, the grazing agreement could not have come into place until after completion, which is after the point at which the nature of the property is to be assessed. Even if the grazing agreement was in place at the effective date of completion, it was not enough to render the property not residential for SDLT.
The First Tier Tax Tribunal (FTT) considered a number of previous cases and the multi-factorial assessment which must be undertaken to judge the nature of property for SDLT.
Regarding the time of assessment of the land, HMRC noted that while the legislation should be read as requiring a commercial agreement to strictly be in place at the time of completion (as opposed to on the day, or after it, as had been held in another case), the grazing agreement here was effectively an encumbrance on the property and its being agreed before completion was tantamount to it being in place at the point of completion. However, while it could be taken into account in the multifactorial assessment, it did not follow that the agreement was the sole and decisive factor which would tip the scales. It was just one of a number of factors. Significantly, the FTT also noted that such an arrangement with a third party would need to be more than a simple commercial agreement as a bargain of convenience. The ultimate use of the land after completion would be of more significance. Here, the insertion of the commercial agreement per se was not significant enough to outweigh the ultimate use of the paddock after completion, which was for grazing.
This reiterates the primacy of the multifactorial assessment when determining the nature of land or property for SDLT. In particular, the FTT was eager to point out that a third-party commercial use will not be the ‘slam-dunk’ factor. The judge was unequivocal in this instance that, given the minimal terms of the grazing agreement (a short arrangement of £50 per month and which in fact ended fairly soon after completion as the third party could not make practical use of the arrangement), concluding that this property was not residential for SDLT would be unjust and absurd.
As regards the time at which the nature of the land is tested, this is at the point of completion. The previous case of Suterwalla (where a grazing lease was by the buyer granted immediately after completion) was not followed. The decision also was notable for the idea of ‘ultimate use’ of land under the multifactorial assessment. Land which is used for a commercial purpose can still be regarded as part of the grounds of a dwelling.
The case also reinforces how closely HMRC is scrutinising claims for SDLT mixed-use treatment involving properties with an area of grounds or additional land. It follows hot on the heels of the Ridgway case in February 2024 (in which the taxpayer also lost). There have been very few success stories in recent years and while each case will turn on its specific facts, taxpayers should be wary of filing SDLT returns on the basis of a mixed-use argument without a significantly strong case to back this up. In particular, a simple third-party commercial arrangement should not be seen as a silver bullet to defeat any HMRC challenge.
The application of the anti-avoidance legislation at section 75A of the Finance Act was also not raised in the decision. Very broadly, s.75A can apply when a certain step or arrangement is taken in connection with an acquisition and which results in less SDLT being payable. The exact application of s.75A has been the subject of recent cases (for example in Ridgway) and taxpayers should be further wary of scrutiny under this head.
This article is for information purposes only and is not a substitute for legal advice, and should not be relied upon as such. Please contact our specialist lawyers to discuss any issues you are facing.
