Should non-residential SDLT rates be applied to scruffy dwellings?
7th October 2024
Posted in Articles, Stamp Duty, Stamp Duty Land Tax by Andrew Marr
‘Tax refund outfits’ have been making hay over the last few years. Their ‘game’ works roughly as follows:
1. Sift through Rightmove and similar sites, looking for expensive properties which are in various states of disrepair.
2. Contact the buyers (often through a marketing letter) claiming that SDLT has been overpaid and charge a success-based fee for a refund.
3. Reclaim is made and invariably house purchaser receives refund from HMRC (and thinks it is all agreed).
4. Refund outfit gets paid their fee.
5. Often HMRC will raise an enquiry within nine months of the reclaim application and the house buyer will have to pay back the refund (with interest at least) and may have difficulty recovering the fee from the refund outfit.
The basis for such reclaims arises from what can be a huge disparity between residential rates and non-residential rates of SDLT.
Broadly residential rates apply to a property if ‘a building is used or suitable for use as a dwelling, or is in the process of being constructed or adapted for such use’. Any reclaim will only be valid if the property does not fall within this definition.
Residential rates are as follows:
0% up to £250,000
5% from £250,000 to £925,000
10% from £925,000 to £1.5m
12% over £1.5m
While non-residential rates are
0% up to £150,000
2% from £150,000 to £250,000
5% over £250,000
Prima facie this means that non-residential rates will only be lower once a property costs more than £965,000. This will often be the case for main residences, but a 3% surcharge can apply to second homes under the residential rates but not under the non-residential rates (and other surcharges may also be applicable). Certainly, for expensive properties you can see that the SDLT differential can be significant.
Attitude of the courts
A very recent Upper Tribunal case has been released (Mudan and Mudan v HMRC) and the taxpayers lost. The case involved them reclaiming £99,750 of SDLT in respect of a £1,755,000 house. The broad basis for the reclaim was that the property had been badly vandalised at completion and the wiring was in a dangerous state. The main reason for the taxpayers’ loss was that it was decided that there had to be something very serious wrong with the property before it could be treated as not suitable for use as a dwelling and that the facts of the case did not meet this benchmark. The judge found HMRC’s argument a compelling one that it would be strange for a dwelling in the course of construction to be subject to residential rates while something that has historically been a dwelling is not subject to such rates just because some relatively minor work is required.
Forbes Dawson view
It is likely that many inappropriate reclaims have been made over the past few years. Anecdotally, we have had calls from buyers who were under the impression that ‘slightly shabby’ houses should benefit from non-residential rates. This is clearly not the case but there are some reclaim companies that will happily put forward such reclaims. Our view is that if something has historically been a dwelling then there has to be something fundamentally wrong with the property to put forward a robust non-residential rates argument. For example, there may be a good basis for claiming these rates if an aborted development is acquired and certain external walls are missing. Even here, there could be an argument that the building is in the course of construction and so it is important that the project really has been aborted.
If a buyer is really keen on accessing non-residential rates, then perhaps a more fruitful course of action is to explore whether some bona fide non-residential property can be included in the transaction from the outset. I have said before that I am not sure what anti-avoidance legislation can be employed if a buyer generally undertakes a mixed-use transaction. Strangely, if only a small part of a transaction is non-residential then non-residential rates apply to the whole transaction. Don’t just take my word for it. HMRC made this very point in their November 2021 consultation document on the subject where they said:
This treatment applies even where only a small proportion of the property is non-residential in nature. There is no lower limit on the amount of non-residential property in a purchase to take advantage of this treatment. In addition, there are currently no rules requiring that the residential and non-residential property be closely located to each other.
I may have jinxed this as the Budget is quickly approaching and this would be an easy rule to change!
