Tax Tribunal rules that a paddock is non-residential for SDLT purposes

The issue

Non-residential stamp duty land tax (SDLT) rates are significantly lower than residential SDLT rates for expensive properties. This leads to house buyers (often with a nudge from SDLT advisers) trying to argue that non-residential rates should apply to their purchase. Based on the rules, you may think that this should be quite easy because residential rates only apply if the subject matter of what is acquired is entirely residential. If it is not entirely residential then non-residential rates apply. Many of the SDLT cases have revolved around taxpayers arguing that aspects of their properties are not residential because they cannot be categorised as ‘garden or grounds’ and they are generally unsuccessful because a broad interpretation of gardens and grounds prevails. The recent case involving Mr and Mrs Suterwalla’s property Woodland House somewhat bucked this trend.

HMRC v Mr and Mrs Suterwalla

The key points of this case were as follows:

1. The couple purchased a property for £3.6m and returned SDLT of £169,500 at non-residential rates, but HMRC argued that residential rates of £330,750 should apply.
2. The couple argued that a separate paddock to the property was not gardens or grounds either because of its location and function or because there was a commercial grazing agreement in place with a £1,000 annual fee.
3. The Tribunal accepted the taxpayers’ submissions that a paddock next to a garden did not perform any function in relation to the dwelling house and was subject to a commercial arrangement for grazing horses (and was therefore not residential property).
4. It accepted that the grazing agreement could be taken into consideration, even though it was entered into after completion (although on the same day as completion).

Forbes Dawson view

The acceptance that the paddock was not garden or grounds, based on its lack of function, does seem to fly in the face of other decisions which seem to argue that almost anything bought with the property should be treated as grounds. It remains to be seen whether HMRC will appeal this case because the above point is academic if the paddock was non-residential by virtue of the grazing agreement (in any event). They may, however, want to pursue this point because the agreement was signed after completion and was therefore technically not in force at the time of completion. We think that the main message here is that grazing and other commercial agreements which allow the land to be used for something other than a dwelling are a strong argument against residential rates. Our preference here is for the seller to have already entered into an agreement which can be taken over on completion, to avoid any arguments about what the position is at the scintilla of time when completion takes place. We still do not believe that HMRC could have any legislative come-back if a seller were from the outset to include a modest piece of non-residential land in the deal (e.g. a commercial office for £50,000 in Runcorn alongside a £3.5m house miles away) as the tax payer would not have done anything here, except perhaps realise that there is a good SDLT deal to be had. The real point here is that the SDLT rules make no real sense because a very small piece of non-residential land can have a dramatic effect on the SDLT which is paid (in this case a small paddock saved £161,250!).




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