Stamp Duty Land Tax on derelict residential properties

A recent Tribunal decision has considered whether derelict residential properties are liable to the 3% surcharged rates for Stamp Duty Land Tax (SDLT). Joe Taylor, Commercial Property Solicitor in our Portsmouth team, considers the outcome of the case and its affect on prospective buyers of residential property.

What is the 3% SDLT surcharge?

SDLT is a tax payable on both residential and non-residential property transactions.

In November 2015, the government announced a 3% SDLT surcharge on second homes, designed to discriminate against buy to let purchases in favour of purchases of a sole residence. The rules introduced a new sub-category within residential property; “dwellings”. Schedule 4ZA Paragraph 18(2) of the Finance Act 2003 states that a “building or part of a building counts as a dwelling if:

1. it is used or suitable for use as a single dwelling, or
2. it is in the process of being constructed or adapted for such use.”

It is important to note that there are other provisions for the definition of “dwelling” which we can provide further guidance on.

There are many complicated rules and exemptions to this surcharge which have vexed buyers, tenants, lawyers and accountants since they were brought in on 1 April 2016, but the over-simplified crux of these rules is that if you are buying a dwelling and you already own an interest in another dwelling, you must pay SDLT at 3% above the normal residential rates. Companies have to pay this even if it is their only dwelling.

The case of P N Bewley Ltd v The Commissioners for Her Majesty’s Revenue & Customs

Mr and Mrs Bewley, through their company P N Bewley Ltd, purchased a derelict bungalow in Weston-Super-Mare. The property had no heating or pipes and the floorboards had been removed. There was asbestos present throughout the property and any refurbishment would have necessitated disturbing this.

HMRC claimed that the surcharged rates of SDLT were due; they claimed that the property was a “dwelling” as it was habitable and suitable for use as one. Mr and Mrs Bewley disagreed and, after going through HMRC's internal appeal system without success, Mr and Mrs Bewley appealed the matter to the Tribunal.

The Tribunal decided that a large part of HMRC’s argument was flawed, as it largely covered ground over whether the property was “residential”. This was not the question up for debate; the key question was whether the property fell under the sub-category of “dwelling”. The later parts of HMRC’s argument did address this, and argued that the presence of asbestos in the building did not prevent its renovation or reoccupation, as the critical health risk to an occupier would have only come during demolition.

Mr and Mrs Bewley disagreed with HMRC and argued that the property was not habitable and simple refurbishment was not viable because of the asbestos. The property had no heating, old electrics, the kitchen and bathroom were dated and the building was in a poor condition in general. Any renovation would have been extensive and would have disturbed the asbestos. It did not comply with homes standards and was unmortgageable.

What constitutes a dwelling?

In deciding whether a property is suitable as a dwelling, the Tribunal considered that at minimum the property must contain facilities for:

• personal hygiene;
• food and drink consumption;
• storage of personal belongings; and
• a place to rest and sleep.

The simple removal of, for example, the bathroom or kitchen facilities, will not make it unsuitable for use as a dwelling. For this particular case, the Tribunal relied on the opinion of a retired chartered surveyor who considered that the property was not suitable for use as a dwelling as it was not fit for human habitation. The Tribunal found in the Bewleys’ favour; the property was not suitable for use as a dwelling, nor was it under construction or adaptation for such use at the time they purchased it, so the 3% surcharge did not apply.

What can we expect?

First of all, expect HMRC to challenge this and seek an appeal.

Many investors, developers or homeowners will see this as an opportunity to either seek a tax rebate or submit a tax return at a lower rate. However, given that the extent of the disrepair of a property and whether it is suitable for use as a dwelling is always a question of fact specific to the circumstances, HMRC will likely argue against most claims by tax payers that the property was so dilapidated that it is not suitable for use as a dwelling.

The threshold is high. Tax payers will need to weigh up whether the potential tax saving is worth the time and cost of the argument or penalties for filing an incorrect return.

This is yet another reason to seek a survey and specialist tax advice from an accountant. It can assist in any arguments, or make sure the right assessment is made in the first place before buying a property; which is even more key now that the filing deadline has been reduced from 30 days to 14 days.

If you are seeking advice for your property needs, contact Joe Taylor on 023 9277 6522 or at joetaylor@warnergoodman.co.uk.  

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.