For higher value property transactions, it is generally preferable to be able to apply non-residential rather than residential stamp duty land tax (SDLT) rates. Since the September 2022 Budget changes (where the residential 0% band was increased from £125,000 to £250,000) non-residential rates give rise to lower SDLT for acquisitions over £965,000 (assuming that no residential surcharges are applicable). At £1.5m the SDLT payable is at least £26,750 lower at non-residential rates. The savings become greater if surcharges would apply to the residential rates (for example the 3% surcharge for a second home).
The rules are somewhat generous (at least in theory!) because if any part of a transaction includes non-residential land (even a small, low value part) then the whole transaction is subject to non-residential rates. This has led to a cat and mouse game between taxpayers and HMRC, with taxpayers arguing that a property includes a non-residential element, while HMRC seeks to apply a very wide meaning to ‘gardens and grounds’ with a view to concluding that residential rates are applicable.
The recent case of Withers v HMRC was won by the taxpayer who convinced the Tribunal that his £2.5m house did include some non-residential land.
The Withers case
Here, the question which was considered was whether there was any non-residential land in the transaction. Although the tax-payer had made a multiple dwellings relief claim, the non-residential question was relevant to the application of a 3% surcharge in the calculation.
The Tribunal ruled that both land used for grazing sheep for a nominal fee and woodlands that were designated for ecological purposes were non-residential. In reaching this decision much was made of the ‘self-standing’ nature of the grazing land and the woodlands. The existence of commercial agreements was also important, and the Tribunal was clearly impressed by the scale of the grazing activity.
The Tribunal rejected HMRC’s argument that all 39 acres of land were needed for the property to maintain its status as a large country house and broadly suggested that a ‘self-standing’ commercial use could displace any status of gardens and grounds. It also ruled that an arrangement could still be commercial if only small monetary consideration was involved (here, the grazing agreement was for £800 per annum).
Forbes Dawson view
This is an encouraging case, although we have always believed that a robust and genuine grazing agreement should be enough to justify using non-residential rates. The fact that this may seem unfair and contrary to common sense does not deflect from the fact that it is a position clearly stated in law – albeit it is something that HMRC complained about in a recent consultation document. An interesting point of this case was that the grazing agreement was only formalised just over a month before sale, and it seems reasonable to assume (although no mention is made of this in the case) that this was done with an eye on SDLT. This case should therefore point to the importance of a high-value buyer seeking to ensure that any informal arrangements with farmers are formalised by the seller before completion, and that any such agreement is assigned to the buyer. No doubt this case will encourage HMRC to speed up its mission to bring changes to SDLT rules……………..
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