SDLT and dilapidated "dwellings"

PN Bewley Ltd V HMRC 2019

The First Tier Tribunal has rejected HMRC's assertion that the 3% SDLT surcharge on purchases of additional residential property applied to a company's purchase of a bungalow acquired for demolition and redevelopment.

This was on the basis that the property was not "suitable for use as a dwelling" at the date of completion due to its dilapidated condition. As such the non-residential rates of SDLT were held to apply to the transaction.

The facts of the case

PN Bewley Limited purchased a bungalow as an investment for £200,000 in early 2017. The bungalow in question had been empty for three years and the heating system and floorboards had been removed. Safe renovation was no longer possible and the previous owner had obtained planning permission to demolish the bungalow and to replace it with a new dwelling.

A demolition survey had identified asbestos at the property and recommended its urgent removal. Water, gas and electricity services remained connected. Slightly oddly, the buyer had paid the standard residential rate of SDLT when it had acquired the property and the SDLT return used a code that identified the property as "residential".

SDLT of £1,500 was paid at completion. HMRC opened an enquiry into the return and found that the transaction met the relevant conditions of paragraph 18 of the Finance Act 2003 meaning it was a chargeable transaction for the purposes of that paragraph and as such the higher rates of SDLT (the 3% surcharge) were payable and the correct SDLT liability was in fact £7,500.

HMRC argued that a dwelling is still a dwelling even if it becomes dilapidated. The company appealed on the basis that the property did not meet the condition of being "suitable for use as a single dwelling".

The decision

The company's appeal was allowed. The Tribunal stated that the sole issue to be determined was whether the bungalow was at the date of completion suitable for use as a single dwelling.

Given the state of the property with radiators and pipework having been removed and the presence of asbestos, it was not suitable for use as a dwelling albeit it may have been "capable" of being occupied as such.

It also held that the appropriate rate of SDLT was the non-residential rate on the basis that non-residential property is, logically, any property that is not residential property.

The Tribunal referred to HMRC's own guidance note issued in 2016 on the 3% surcharge and quoted the following ""dwelling" takes its everyday meaning; that is a building, or a part of a building that affords those who use it 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". The Tribunal was clear that such facilities were not considered to be present in this property on the completion date.

What this means

Although only a First Tier Tribunal decision, this case appears to support the view that notwithstanding those factors which make the building unsuitable for use as dwelling are temporary, the test is to be applied to the building as it is at the completion date rather than whether or not it can be made suitable for use as a dwelling in the future.

This means that developers purchasing genuinely derelict residential property can now consider whether it would be appropriate to self-assess SDLT at the significantly lower non-residential rates.

The Tribunal made it clear that the intentions of the buyer for the future use of the property are not relevant and nor is any planning permission for future development. The fact that a building could be renovated and then used as a dwelling is not relevant.

Whether a building is suitable for use as a dwelling will depend on the facts and particular circumstances. For example, removing kitchen facilities will not render a building unsuitable for use as a dwelling. The context as a whole must be looked at.

It's fair to assume that without cogent supporting survey evidence as to the unfitness of the property for habitation being disclosed when the SDLT return is lodged, HMRC is likely to take a robust approach in challenging returns filed in these circumstances, particularly if the recent history of the property appears to point to its suitability as a dwelling.

Buyers must therefore expect to arms themselves with the appropriate evidence if non-residential rates are to be paid in similar circumstances.