Residential SDLT rates: Could reform assist in tackling the UK’s housing crisis?
Residential land and SDLT rates
Housebuilders have an SDLT liability when they acquire sites for redevelopment, and the amount of SDLT payable depends on whether the site is ‘non-residential’ or ‘residential’ at the time of purchase. Typically, the SDLT burden is significantly higher in the case of “residential” property.
The issue is that the definition of residential property is quite broadly drawn and does not just include houses which are lived in, but also buildings which are “suitable for use as a dwelling”.
This may make sense from a policy perspective with regard to temporarily vacant homes which are being purchased for letting or living in, but is less rational when applied to the acquisition of an extremely run-down property which would be ripe for redevelopment. Take, for example, an old, long boarded-up, bungalow sitting in the corner of many acres of land – wouldn’t it be ideal for that to be demolished and redeveloped, as opposed to a builder finding a field of the same size on which to construct new homes?
‘Well,’ the sagacious housebuilder might say, ‘surely we shouldn’t have to pay the residential rates of SDLT when the first thing we are going to do is knock the old place down?’. An excellent question.
At this point, we need to consider whether the land is definitely ‘residential’, or whether the building is so dilapidated that it can no longer be said to be ‘suitable for use as a dwelling’.
Clearly, it is not enough for the old place to have an avocado green bathroom suite and a need for some rewiring. By contrast, a dangerous, structurally unsound building should not be considered suitable for use as a dwelling. The issue is that there is a vast middle ground, and this has resulted in an increasing number of taxpayers trying to push the boundary. Consequently, HMRC have increased their focus on this area, and several appeals have been taken to the First-Tier Tax Tribunal in recent years.
The case law: a summary
PN Bewley Ltd v HMRC  UKFTT 65 (TC)
PN Bewley Ltd (‘Bewley’) acquired a property which comprised a bungalow and its garden with planning permission for the bungalow to be demolished and a new house built in its place. On completion, the bungalow remained connected to water, electricity and gas. The heating system, however, had been removed and a demolition survey carried out which meant walls and floors had been broken through. The demolition survey identified asbestos and recommended urgent removal. Bewley claimed the property was not suitable for use as a dwelling on completion and therefore the non-residential rates of SDLT should apply.
The Tribunal found that, due to the presence of asbestos preventing repairs without a risk to those conducting the repairs, the bungalow was not suitable for use as dwelling and therefore the non-residential rates applied – a win for the taxpayer.
Mudan and another v HMRC  UKFTT 317 (TC)
Mr and Mrs Mudan acquired a property which had been vandalised prior to completion, meaning they were not able to occupy the property until renovations had been completed c.7 months after completion. They claimed the property was not suitable for use as a dwelling on the basis that it posed a risk to life due to unsafe electrical wires, a mice and rat infestation, rainwater leaks throughout the property, and no functioning utilities.
HMRC claimed that the disrepair must be so fundamental that no repair would suffice. HMRC also claimed that unsafe electrical wires would not pose such a risk to life that the property was unsuitable for use as a dwelling, referring to the case of Fish Homes Ltd v HMRC  UKFTT 108(TC). This case was also a claim that a property was not suitable for use as a dwelling but due to defective cladding (like the cladding used at Grenfell Towers) being a risk to life. The Tribunal was not persuaded by this and found in favour HMRC, noting that a risk to life may arise from high levels of asbestos, radioactive pollution or a high probability of walls collapsing, rendering a property derelict.
In Mudan, although the Tribunal accepted that the state of the gas, electrics and aspects of the water supply (including the need for a new boiler house roof) made the property too dangerous for a reasonable person to occupy immediately, it was held that the works required to put those right were not fundamental and were not near enough to the “radioactive house/dangerous structure/potentially collapsing walls” end of the spectrum to mean the property was unsuitable for use as a dwelling.
Henderson Acquisitions Ltd v HMRC  UKFTT 739 (TC)
Henderson Acquisitions Ltd (‘Henderson’) acquired a property that had been vacant since the previous owner died, intending to renovate and resell it.
Following completion, it became apparent the property was not structurally sound due to a leak which caused floor joists to rot making it unsafe to access parts of the property including the kitchen and upstairs bathroom. The property also required a new central heating system and electrics. Henderson claimed that the property was not suitable for use as a dwelling on the completion date because the rotten joists made the property unsafe for residential use and therefore the non-residential rates of SDLT should apply.
However, the Tribunal held that the residential rates of SDLT applied in the circumstances. It was noted that the property had facilities for washing, cooking and sleeping which, although unserviceable, could be repaired or replaced and, notwithstanding part of the property was in a state of disrepair, the property as a whole was structurally sound.
Two important points can be taken from the case law in this area:
- A buyer’s intended use of the property following acquisition is not relevant to whether the land can be considered a dwelling or not for SDLT purposes on completion. If the land is considered suitable for use as a dwelling on completion of the acquisition, the residential rates of SDLT will apply even if the buyer intends immediately to demolish the property (resulting in it becoming non-residential following acquisition).
- ‘Residential property’ and ‘suitability for use as a dwelling’ are interpreted broadly. There is an extremely high bar for property to be considered dilapidated to the extent necessary for it no longer to be suitable for use as a dwelling.
Making a case for reform
Whilst the decisions to date (rightly) prevent taxpayers from ‘trying it on’ when acquiring a property that needs a bit of work, they hardly incentivise much needed redevelopment of properties which otherwise lay empty.
This begs a wider question, which is amplified in the context of the UK’s need for increased housebuilding: is it right that housebuilders intending to demolish an existing dwelling should pay SDLT at the higher residential rates? Particularly as the non-residential rates would have applied had that existing dwelling been demolished prior to completion so that any buyer only acquired bare land.
The current position seems counterproductive to the UK’s desire to increase housebuilding and it would be so straightforward to implement sensible reform. Such reform could look like this:
- A housebuilder acquires land with the intention of demolishing the building which is supposedly suitable for use as a dwelling;
- At the time of acquisition, the land is residential for SDLT purposes, and SDLT is therefore charged at the residential rates on the chargeable consideration for the acquisition of the land;
- If the housebuilder actually demolishes the building within, say, 18 months of acquiring the land, the housebuilder becomes entitled to reclaim the difference in SDLT between that paid on acquisition of the land and that which would have been due on application of the non-residential rates.
It strikes us that this reform could incentivise housebuilders to buy land with existing dilapidated property on it for redevelopment, and this could contribute to the broader goal of sustainable urban development, housing affordability and, ultimately, increased housebuilding in the UK.
At the same time, it would no longer be necessary for housebuilders to spend time scrutinising surveyor’s reports to determine whether a building is sufficiently close to the ‘radioactive’ end of the spectrum to be unsuitable for use as a dwelling.
HMRC would be able easily to monitor reclaims and there would be little scope for avoidance, given that demolition would be a measurable, evidenced event.
Reform in the pipeline?
HMRC published a consultation on 30 November 2021 on the SDLT treatment of mixed-use property purchases and multiple dwellings relief. That was partly borne out of perceived unfairness arising from the mixed-property rules, questionable claims and abuse. It provided examples of unreasonable interpretations of the law advanced by SDLT ‘reclaim agents’ and suggested potential changes to the approach to mixed-property to ensure fairer outcomes between those buying residential property.
Whilst any such reform in that area may ‘clean up’ the wrongful or borderline categorisation of residential properties as mixed-used when there is not sufficient non-residential use, it would not stop reclaim agents from approaching taxpayers who bought properties in need of work and trying to persuade them to seek a refund of SDLT on the basis that the property was ‘dilapidated’ on completion. Wider changes are needed to stop that particular ploy.
We would say that making changes to the SDLT treatment of mixed-use property presents HMRC with the perfect opportunity to address this particular issue.
In the meantime
As much as we would like to think that legislative changes could be implemented in this area, we must make do with the current framework for now.
This is clearly a complicated, fact-sensitive area of law, and mistakenly suggesting a transaction should benefit from the non-residential rates of SDLT can be a costly mistake.
Please do get in contact if you need any advice in this area.
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