Justifying residential stamp duty land tax (SDLT) rates

The issue

The heading is not a typo! There has been much recent commentary and many cases where taxpayers have sought to reduce their SDLT bill by arguing that their property is non-residential or ‘mixed use’. The legislation is very clear (and surprisingly generous) in saying that residential rates only apply if the main subject-matter, i.e. the chargeable interest being acquired under the chargeable transaction in question, consists entirely of residential property. Therefore, many tax payers have sought to access the lower rates by arguing that some of their purchase is non-residential. For example, there may be a grazing agreement with a farmer, or there may simply be many acres of farmland or forest.

I mention ‘lower rates’ above, however currently non-residential rates are not always lower, due to the SDLT ‘holiday’.

SDLT ‘holiday’

The SDLT holiday (where the first £500,000 of an acquisition is subject to 0% rates of SDLT) has been with us for a while now and is set to continue in its full form until 30 June 2021 and then in a more diluted form until 30 September 2021.

Before the ‘holiday’, SDLT at residential rates on a £1m house would have been calculated as follows:

0% of £125,000
2% of £125,000
5% of £675,000
10% of £25,000

This gives rise to £43,750 of SDLT. During the holiday this reduces to £28,750, saving £15,000.

Before and during the ‘holiday’ non-residential rates would result in a liability of £39,500. Therefore non-residential rates gave rise to £4,250 less SDLT before the holiday and £10,750 more SDLT after the holiday. During the ‘holiday’ it is therefore in the purchaser’s interest to use residential SDLT rates.

Incidentally, I have calculated the breakeven point where both sets of rates give the same result. This is at £1,215,000 when £50,250 of SDLT is payable under both sets of rates.

Justifying residential rates

Thankfully, HMRC’s agenda has focussed on resisting attempts to use non-residential rates. This makes it fairly easy for a house buyer to use HMRC’s own arguments to justify using residential rates. HMRC have made it very clear that they believe transactions are residential unless land is being put to some commercial use on the day of completion. Therefore buyers who acquire property with a significant amount of land (and who want to use residential rates) should ensure that there are no grazing agreements in place with farmers on the day of completion. They can also take comfort from any marketing material which refers to expansive gardens and grounds (which falls within the definition of ‘residential’).

Forbes Dawson view

Where SDLT rates are concerned, HMRC does sometimes seem on a mission to use a definition which collects the most tax rather than a definition that follows the legislation. This can be frustrating for those who feel justified in using non-residential rates when they lead to a lower SDLT rates. However, it seems reasonable that SDLT ‘holidaymakers’ should use HMRC’s stance to make hay while the sun shines. Given the wider context it seems unlikely that HMRC will have an appetite to argue that transactions should be subject to non-residential rates.




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