A current Tribunal case could open up challenges over other SDLT bills.
In PN Bewley Ltd v HMRC, 2019 UKFTT 0065 TC, the first tier tribunal ruled that higher rate stamp duty does not apply to the purchase of a buy to let property that is too dilapidated to be considered a dwelling.
Higher rates of stamp duty land tax (SDLT) apply to additional residential properties or those acquired by a company. SDLT surcharge does not apply to a commercial property or a mixed use property with a commercial element.
Mr and Mrs Bewley acquired through a limited company a derelict bungalow and plot of land with a planning permission for development. In summary:
- at the point of purchase the property had been vacant for several years
- heating, piping and floorboards had been removed
- the property was constructed from asbestos which had to be removed
- according to the demolition contractor for the bungalow, the removal of asbestos necessitated the structure to be dismantled, leaving the dwelling uninhabitable
- the property was damaged as a result of intrusive survey techniques, including breaking into floors and walls
- the bank’s survey report referred to the building as ‘a derelict bungalow to be demolished’
- the estate agent marketed the property as ‘an ideal refurbishment project’ and included no photos.
The taxpayer argued the property is not habitable as a dwelling and that refurbishment was not viable. Normal SDLT rates were paid.
HMRC argued that despite its dilapidated state the building was a dwelling which could be renovated and issued an amendment to the return, resulting in an additional £6,000 of tax. This decision was later subject to HMRC’s own review and upheld.
HMRC claimed that:
- a dwelling takes its ordinary meaning per Oxford English Dictionary and the National Census
- a property does not have to be mortgageable or be of a certain standard to be a dwelling
- a dwelling does not change its nature because it falls into dilapidation
- the building came within the meaning of ‘residential property’ for the purposes of s55 FA 2003 (which makes a distinction between SDLT rates for residential and non-residential properties) because it was not excluded by s116 FA 2003 (a residential property)
- the plot was a residential plot in a residential area, and supported by a planning application
- the intention was at all times for the plot to continue to be a residential plot comprising a dwelling and its grounds
- the appellant used a code on the SDLT return which identified it as residential
- the presence of asbestos did not prevent its renovation or reoccupation, as the critical risk would come during demolition.
The tribunal disagreed with HMRC. When considering the facts, the judge rejected as irrelevant HMRC’s arguments and assumptions which went beyond the statutory wording to determine what the test should be.
Paragraph 18 of Schedule 4ZA FA 2003 says that a dwelling is a building which is used or is suitable for use as a dwelling or is in the process of being constructed or adapted for such use.
The judge considered what ‘suitable for use’ means and decided that:
- it is not the same as ‘capable’ to be used a dwelling – ‘…a passing tramp or group of squatters could have lived [there] but that was not enough’
- it is irrelevant whether the property could be a dwelling after renovation – the building had to be suitable for use as a dwelling on the day of purchase
- the judge pointed out that the term ‘suitable’, at the centre of the debate, didn’t actually appear anywhere in the written case which HMRC put forward.
In addition the judge ruled that non-residential SDLT rates apply to the purchase of land because the bungalow on that land does not meet the definition of ‘residential property’.
Per s116(1) FA 2003 a ‘residential property’ is a building used or suitable for use as a dwelling and land that forms part of the garden of that dwelling. A property which does not meet those conditions is non-residential.
Accordingly the judge ruled that the Bewleys had been overcharged, and reduced the self-assessment by the effect of the incorrect 3% surcharge and by the excess of SDLT paid as a result of the incorrectly used residential rates instead of non-residential rates.
The original SDLT bill of £1,500 per self-assessment, later amended by HMRC to £7,500, ended up costing the company only £1,000.
Case law and guidance considered
The tribunal referred to case law and HMRC’s own guidance to test and support its judgement:
Per Uratemp, ‘dwelling’ connotes a place where one lives, regarding and treating it as home. This assumed the presence of facilities to wash, eat and sleep, which the bungalow at the date of completion did not have.
ACC Loan Management Ltd v Browne and another  IEHC 722 was a Consumer Credit Act 1995 case which defined a house as ‘any building or part of a building used or suitable for use as a dwelling and any out-office, yard, garden or other land appurtenant thereto or usually enjoyed therewith’.
Stamp Duty Land Tax Manual, Paragraph 00365:
‘Use at the effective date of the transaction overrides any past or intended future uses for this purpose. If a building is not in use at the effective date but its last use was as a dwelling, it will be taken to be ‘suitable for use as a dwelling’ and treated as residential property, unless evidence is produced to the contrary.’
‘Where it is claimed that a previously residential property is no longer suitable for use as a dwelling, perhaps because it is derelict or has been substantially altered, the claimant will need to provide evidence that this is the case.’
The judge considered that suitable evidence to the contrary was produced.
HMRC’s guidance note on ‘Stamp Duty Land Tax: higher rates for purchases of additional residential properties.’
‘2.7 “Dwelling” takes its everyday meaning; that is a building, or a part of a building that affords those who use it the facilities required for day-to-day private domestic existence. In most cases, there should be little difficulty in deciding whether or not particular premises are a dwelling.’
It was clear that such facilities were not present in the bungalow on the completion date.
If HMRC does not appeal and the judgement prevails, the Bewleys’ case could open up challenges over similar SDLT bills.
Article from ACCA In Practice