Residential and rural update – June 2021 – 3 / 4 观点
There have been a number of stamp duty land tax cases coming before the First Tier Tribunal (FTT) and Upper Tier Tribunal (UTT) recently – none of which have brought much good news to those hoping that the factors which make up the grey area between what is and isn't considered residential property might be widened.
If a property is a residential property, then tax is payable at the higher residential rates. However, if it is non-residential, or mixed-use, then tax is payable at the lower non-residential rates.
Section 116 Finance Act 2003 (s.116) defines residential property as the building itself and "any land that is or forms part of the garden or grounds of a building that is suitable for use as a dwelling".
The question in a lot of cases – particularly with rural estates and country homes – is whether any of the surrounding land could be considered to constitute a garden or grounds. If does constitute a garden or grounds, then SDLT at non-residential rates can be applied to the purchase – which represents a considerable tax saving.
In the case of Hyman, the FTT ruled previously that the three and a half acres of land and barn which came with the house were part of the grounds of the main dwelling, so SDLT was payable on the whole of the property purchased at residential rates. This was around £30,000 more than that which would had been payable had non-residential rates been applicable.
The case was appealed to the UTT, together with two other sets of taxpayers arguing that the FTT's interpretation of s.116 was wrong. One of the other taxpayers, Goodfellow, tried to argue that a room above a garage used as an office and the stable yard and paddocks were not residential, meaning that their purchase should also have been taxed at the lower, non-residential rates.
The FTT said that "grounds" has a wide meaning. Given its ordinary use, the term would mean the land surrounding the house which is available for the owners of that house to use. The FTT said that it was not required that the buyers actively use it. Such grounds do not only need to be for ornamental or recreational purposes – indeed, they can be allowed to grow wild. It also does not matter if they are separated by hedges or footpaths; this does not make them any less part of the house.
The FTT did, however, make the distinction that the land accompanying a property bought would not constitute grounds to the extent that they are used for separate commercial purposes. In that instance, they would not then be occupied with the residence, but would be the premises on which a business was conducted. This would include land that is actively farmed but might also include outbuildings which are let to third party tenants on commercial terms.
In the case of Goodman, the FTT made a similar argument. It said that the size of the house purchased meant that having paddocks was to be reasonably expected to enable the family to enjoy country pursuits, and the extent of the land accompanying the house ensured their privacy and a "feeling of space". The FTT considered that the office was simply part of the house and could be given over to any number of ancillary functions as part of it – there was no evidence that it was ever separately let or served a separate commercial purpose.
At the UTT, the taxpayers (together) argued that land can only be part of the garden or grounds of the house if the land is needed for the reasonable enjoyment of the house, factoring in the size and nature of the house. This reflects wording within the CGT guidance about disadvantaged areas relief, which the taxpayers submitted should be considered by both the FTT and UTT when considering the application of s.116.
In response to this, HMRC argued that there was no process of statutory construction that could take into account the requirement that the grounds or gardens were needed for the reasonable enjoyment of the house, saying that it simply wasn't part of s.116. Instead, it cited previous decisions that said that the words should just be given their ordinary meaning and said that s.116 is clear and unambiguous. The guidance that the taxpayers referred to was non-statutory and, as the UTT said, while it may be persuasive, it is not non-binding and "does not differ from a statement by an academic author in a textbook".
The UTT therefore supported HMRC and affirmed all the original decisions of the FTT, finding in each case that the land and outbuildings which accompanied the main houses purchased formed part of the garden or grounds of that house for the purposes of SDLT.
Interestingly, in each case brought before the UTT, the taxpayers had originally paid tax at residential rates and then applied to HRMC to try and claim that non-residential rates should have applied and sought a refund. This suggests that for any claim where there is a hint of grey area involved, it is worth seeking specialist advice prior to exchange of contracts so that you know exactly what rate of tax will be payable – including a barrister's opinion if necessary and cost-effective in the circumstances.
Prior to exchange of contracts, your solicitor can also press the seller's solicitor for information regarding the commercial use of the property (which must be present at the time of completion) which can be lost once contracts have been exchanged. Once this is held, you can confidently submit the SDLT return following completion and pay tax at non-residential rates. What's more, you'll have the necessary ammunition – including proof of commercial occupation, tenancy agreements, details of business rates payable – to justify your position with HMRC, if necessary.
To discuss the issues raised in this article in more detail, please reach out to a member of our Residential & Rural team.