When making a return for Stamp Duty Land Tax (SDLT) for the purchase of a property, the purchaser must inform HMRC what category the property falls within: residential; non residential; or mixed use. This is of significance since each of the different categories is subject to different levels of taxation and with residential property, there is also a risk that there may be an additional 3% surcharge on top of the standard rates applicable to the purchase price of the property in the event of any of the owning any other residential property anywhere in the world.
Mixed use property is taxed at the same rate as non-residential property and is never subject to the 3% surcharge, and therefore the tax advantages of a property falling within mixed use can be significant.
The legislation relating to SDLT within the Finance Act 2003 provides that if the main subject matter of a transaction consists of or includes property that is not residential property then tax is charged at non-residential rates.
The definition of residential property within the statute is a dwelling or the garden or grounds of the dwelling.
Traditionally, it has always been thought that properties such as a farm or a property with a non-residential element such as an equestrian centre fell within mixed use because of the significant non-residential element which went with it, but increasingly HMRC are querying applications where mixed use has been selected as the property category. This includes properties such as the above even where there is a significant amount of agricultural land or some other non-residential element.
HMRC appear to justify this on the grounds that, whilst what constitutes a dwelling is generally relatively clear, there is no statutory definition of garden or grounds. The guidance in the SDLT manual provides that garden or grounds includes land which is needed for the reasonable enjoyment of the dwelling having regards to the size and nature of the dwelling.
Practitioners are currently arguing that property such as a large amount of agricultural land going with a dwelling are clearly more than land which is needed for the reasonable enjoyment of the dwelling and therefore clearly mixed use. It appears that, in some cases, HMRC are taking a different approach and challenging such returns.
Accordingly, purchasers are finding that HMRC are making a significantly increased number of queries in relation to mixed used property and laying claim to a large amount of additional tax which they say is due, because they categorise the property as being residential rather than mixed use. This is in particular exacerbated by the 3% surcharge for any additional dwelling which can bite particularly hard in such instances for high value properties.
It seems that HMRC are putting particular importance on the use and occupation of the land before at and after the date of completion and where land has been in third party occupation for non-residential purposes this appears to be satisfying their enquiry, even though there is no statutory basis for any requirement for third party occupation or indeed assessing the position at any time other than at the date of completion itself which is the important date for categorising the property as residential, non-residential or mixed use.
There have not yet been any test cases where any parties have disputed any such claims with HMRC and provided a test of the guidance which they are employing and therefore matters are still very much proceeding on a case by case basis. There should therefore be a significant note of caution when categorising a property as mixed use and our advice to our clients is that whilst we might assess that according to our interpretation of the statute, the property in question falls within mixed use the clients should be prepared for a possible enquiry from HMRC and a possible claim to pay SDLT at residential rate together with any interest and penalties that HMRC may apply.
As a further aside, HMRC have also clarified in guidance that they consider that if a part of the garden or grounds of a residential dwelling is purchased, this must be charged as residential rate rather than non-residential because the subject matter of it is within the definition of residential property.
Unfortunately the uncertainty will continue until either the matter is tested by the court, or the legislation is changed possibly to abolish mixed use altogether and fall back within an apportioned calculation taking the residential elements of a property and taxing them at residential rates, and taking the non-residential elements of the property and taxing them at non-residential rates based on the value within the transaction.