Is a House always “Residential Property” for SDLT?
Stamp Duty Land Tax (“SDLT”) is payable by the buyer on the purchase of land and property in England and Northern Ireland.
The rate at which SDLT is charged is determined by whether or not the property is “residential” property, which is defined in the legislation as a building that is:
- Used or suitable for use as a dwelling; or
- In the process of being constructed or adapted for such use.
The rates of SDLT for residential property are higher than those for non-residential property, plus an additional 3% surcharge may also apply where the purchaser already owns residential property. Therefore, it is important that the nature of the property is correctly identified.
In P N Bewley Ltd v HMRC (2019), the First-Tier Tribunal considered the meaning of “residential property” for SDLT purposes, specifically whether a house that had fallen into disrepair was suitable for use as a dwelling.
- Prior to purchase, P N Bewley Ltd (“PNB”) commissioned a demolition survey for a delapidated house where it was found that the property contained asbestos-containing materials and the heating system had been removed. The survey itself was described as a disruptive and fully intrusive survey that involved destructive application techniques, including breaking into floors, walls, and ceilings.
- PNB purchased the house for £200,000 and applied the SDLT rates for non-residential property on the basis that it was not capable of being used as dwelling due to its poor state of repair, and was unviable as a renovation or refurbishment project as this would disturb the asbestos.
- HMRC disagreed with PNB’s treatment of the property and re-calculated the SDLT on the basis that the property was a residential property.
The issue for the FTT to consider was whether the property was suitable for use as a single dwelling. As the property was not under construction, it was not necessary to consider the second limb of the test noted above.
HMRC made a number of submissions, including:
- The term “dwelling” does not require the property to be mortgagable, meet the better homes standard, or to be of standard construction, and a dwelling does not change its nature because it falls into dilapidation.
- The property was a residential plot in a residential area, and the intention was for the plot to continue to be a residential plot comprising a dwelling and its grounds.
- The fact that a buyer could not be found to refurbish the property did not mean that it ceased to be a dwelling, or that it was not capable of being renovated and occupied as a dwelling.
- The presence of asbestos in the existing building did not prevent its renovation or reoccupation, as the critical risk would come during demolition.
PNB argued that they had provided evidence that the property was not habitable at the time of purchase, and added that the property had no form of heating, old electrics, the kitchen and bathroom were dated, and the building was in poor condition. Any renovation would have disturbed the asbestos, and the property in its current form would not comply with the Decent Homes Standard.
In its judgement the FTT appeared unimpressed with HMRC’s submissions, noting that the word “suitable” did not appear in HMRC’s statement of case despite this being the correct test for whether a property is a dwelling for SDLT purposes.
Ultimately, the Court found in favour of PNB and held that the property was not suitable for use as a dwelling, and therefore the non-residential rates of SDLT should apply.
In reaching their decision, the Court stressed that the test is whether the property was suitable to be used as a dwelling at the time of purchase – not whether it was capable of becoming suitable for use as a dwelling in the future.
What does this mean?
This ruling demonstrates the importance of applying the correct test – in this case that the “suitability” test should be applied at the date of the property transaction. Whether or not the property is capable of being suitable as a dwelling in the future following refurbishment is irrelevant.
Dwell, Dwell, Dwell – HMRC Clarifies SDLT Guidance (21 February 2019)
Stamp Duty Increase for Second Homes (19 January 2016)