With the much-reported flight to the country still in full flow, it's worth remembering that a significant Stamp Duty Land Tax (SDLT) saving can be had for a buyer looking to make that move, if they can find the right rural property.

A freehold residential property purchased by an individual as a replacement for their main dwelling for £5 million would create an SDLT liability of £513,750. However, if any part of that property was not residential and it was deemed mixed-use, then that SDLT liability would drop to £239,500 – a saving of £274,250. This can be particularly important for many country homes or rural estates being sold with land which will be being put to various uses, some of which may be commercial and therefore non-residential for the purposes of SDLT.

Gardens and grounds: a key point of uncertainty

Section 116 of the Finance Act 2003 includes within the definition of "residential property" any land that "… is or forms part of the garden or grounds …" of a building that is used or suitable for use as a dwelling. Therefore, the question for any buyer of a rural estate or country home is whether any of the surrounding land does not constitute the garden or grounds of the dwelling.

For many years, there has been considerable uncertainty among professionals on this point. However, the First-tier Tribunal considered this issue last year in Hyman v HMRC [2019], a decision that was followed earlier this year with Myles-Till v HMRC [2020]. In addition to these two cases, HMRC has issued guidance on what it considers to be "garden and grounds" when defining a residential property.

What do we know about how HMRC defines "garden and grounds"?

While the question has still not been definitively answered, when looking to answer that question, we now know the following:

Ideally, you'd need some commercial exploitation of the land at the point of completion to show it was neither garden nor grounds to the residential property. It's not enough for the land to be used for what appears to be a non-residential use, such as a paddock for horses or as an orchard or vineyard, as without a commercial element to those uses they could be deemed leisure activities or hobbies associated with the main house. You would need to show that any such use was being undertaken on a commercial basis – for example, the receipt of BPS payments related to any grazing land would be a helpful indicator of an ongoing commercial use. That said, this isn't necessarily self-evident of the non-residential nature of the land.
A Farm Business Tenancy granted to a third party for exclusive occupation of the land for a fixed term can also be a strong indicator of a non-residential use; however, a short-term licence is less indicative.
The physical proximity of the land to the dwelling can indicate that they are "garden or grounds", but again, it's by no means definitive. Land separated from the dwelling may still be deemed "garden or grounds" if it was at one time historically associated with the dwelling; for instance, if it is a parcel of land which is separated from the dwelling but was at one time the grounds of a larger estate.
The extent/size of the land in question will also be relevant in relation to the dwelling. For example, the grounds of gardener's cottage are unlikely to extend to hundreds of acres whereas the principal house on the estate may. The test is whether the land comprises the garden and grounds of the dwelling in question.
Planning consents or restrictions on use are also not necessarily indicative of whether the land is garden or grounds, although planning consent for a non-residential use would be a useful indicator that the land was not part of the garden or grounds. It's not determinative, though, as land that may be used as garden land which was at one time farmland without planning consent would still be part of the gardens of the dwelling.
There's no requirement for there to be an ongoing use of the adjoining land as part of the property for it to be "grounds". It's enough for the land to be ornamental or used for recreational purposes. An adjoining paddock that at one time kept horses but was empty at the time of completion would be deemed to be part of the grounds of the dwelling.

HMRC's approach to what it considers to be gardens and/or grounds is a lot more nuanced than was previously understood. Our experience is that HMRC is raising an increasing number of queries on SDLT returns where mixed-use has been claimed and we anticipate this will continue over the next few years.

If there is any doubt regarding whether the mixed-use rates can be applied, then the approach taken can be disclosed to HMRC at the point of filing the return. By disclosing this to HMRC, you may be inviting them to investigate further, but it could help to avoid penalties being levied against the buyer should HMRC then successfully challenge the SDLT paid.