Introduction

The distinction between residential and non-residential property for SDLT purposes is very important because it determines whether non-residential stamp duty with its top rate of 5% applies to the purchase or whether the rates of residential stamp duty apply with rates as high as 12, 15 or 17%. Under section 116(1) FA 2003 “residential property” means a building that is used or suitable for use as a dwelling, or is in the process of being constructed or adapted for such use and “non-residential property” means property that it not residential property.

The key point here is that the statutory definition of the residential property refers to actual use and suitability for use at the effective date of the transaction. It follows from this that the intended future use of the building is not relevant so if an office building or a hotel is offered for sale with the benefit of planning permission for conversion to a dwelling then the property will still be classed as non-residential and the rates of non-residential stamp duty will still apply. This represents a potentially huge saving in stamp duty for a buyer who is looking for a dwelling and intends to convert the property to a residence and is quite legitimate.

What if conversion to residential accommodation is underway?

Care should be taken if the property is in the process of being constructed or adapted for residential use because it will then fall within the second part of the definition of residential property. In this case, the intended or anticipated future use will be relevant. In their published guidance HMRC says that:

“The process of construction or adaptation must be physically underway for this category to apply. HMRC do not consider obtaining planning permission on its own to be part of this process if work on the property in line with the planning permission has not yet commenced at the effective date of transaction (EDT). However, if construction or adaptation has begun at the EDT, then the planning permission would be a strong indicator of what the building is to be used for i.e. whether it should be treated as a residential or non-residential property.

Relevant properties that are in the process of being constructed will be treated as dwellings at the point where building works on top of the foundations have begun. This will be more than a hole in the ground. Furthermore, preparatory works, including demolition of previous buildings, site preparation etc., are not considered sufficient to determine that construction of a dwelling has started. These may be considered ‘construction works’ but they do not involve the construction of the building for use as a dwelling, as the legislation specifies.”

What are the current residential property Stamp Duty rates?

A useful guide to the rates of stamp duty on residential property can be found here. This guidance reveals truly eye-watering rates of SDLT of 12% on the portion of the purchase price above £1.5m plus an additional 3% on the full amount of the price if the property is an additional dwelling plus a further 2% if the purchaser is not UK-resident for SDLT purposes. This compares with a top rate of 5% for non-residential property.

Is a holiday let classed as a non-residential property?

The SDLT status of holiday lets is currently a matter of debate with HMRC. Holiday let accommodation that meets the definition of a dwelling (i.e. it has a living and sleeping area, somewhere to prepare meals and to consume them and a bathroom) and is otherwise suitable for use as a residence can in principle be regarded as residential property. However, the presence of one or more of the following factors may mean that the property is correctly regarded as non-residential: 

(1) the commercial use: Judge McKeever said in Hyman v HMRC [2019] UKFTT 0469 (TC) at [62] that “Land would not constitute grounds to the extent that it is used for a separate, eg commercial purpose. It would not then be occupied with the residence, but would be the premises on which a business is conducted.”

(2) liability for and payment of business rates instead of council tax

(3) planning or other legal restrictions that prevented settled occupation of the accommodation by the same person e.g. a bar on occupation by the same person for more than a three-month continuous period in any 12 month period

(4) whether the owner/operator provides breakfast to guests

In their published guidance at SDLTM00210 HMRC state that:

“For example, a holiday chalet that is used for short stays would not be ‘used as’ a dwelling by the short term visitors. However, the chalet may still be ‘suitable for use’ as a dwelling. This is a question of fact in each case and depends on the wider context. So for instance, if restrictions of planning exist whereby chalet use is not permitted out of season or where only short stays are permitted then this would be a factor indicating that the chalet will also not be ‘suitable for use’ as a dwelling. This is further discussed under ‘Mixed Residential/Non-Residential Property’ at SDLTM00390.”

Is a plot of land classed as a residential property for Stamp Duty?

Section 116(2) FA 2003 provides that land that is or forms part of the garden or grounds of a residential building is also treated as residential property. This means that land that forms a part of the garden or grounds of a residential building will still be residential property even though it is sold off separately from the dwelling. Conversely, if there is no dwelling that is used or suitable for use as such or under construction on the land, then the land will not be residential property.

Is a hotel classed as residential property for SDLT?

Section 116(3)(f) FA 2003 provides that a hotel, inn or similar establishment is not used as a dwelling for stamp duty purposes and so is not residential property. HMRC state at SDLTM00210 that:

“Cases involving bed and breakfast establishments or guest houses will be treated on their own merits. However, a bed and breakfast (B&B) establishment which has bathing facilities, telephone lines etc. installed in each room and is available all year round would be considered non-residential, in line with s.116(3)(f) which states that “a hotel or inn or similar establishment” is not used a dwelling.”

What rate of stamp duty do you pay if you turn an office from commercial to residential?

The actual conversion itself will not give rise to a stamp duty charge but does mean that the purchaser will be liable to pay residential rates of stamp duty instead of non-residential rates – see above for the actual rates of stamp duty.

What rate of stamp duty do you pay if you change a property from non-residential to residential?

As for the previous question the actual conversion itself will not give rise to a stamp duty charge but does mean that the purchaser will be liable to pay residential rates of stamp duty instead of non-residential rates – see above for the actual rates of stamp duty.

Can you reclaim stamp duty if you have paid stamp duty on a residential property that is later found to be a non-residential property?

Yes you can submit a refund claim to HMRC within 12 months of the purchase using what is known as an amendment to your SDLT return which will reclassify the property as non-residential. If you do this you can expect HMRC to open a check into the amendment to ensure that they agree that the property was actually non-residential at the date it was acquired.

Conclusion

The key message is that there is a significant SDLT savings opportunity for someone intending to buy a dwelling if they purchase an office, hotel or other non-residential building with planning permission to convert it to a dwelling. This is because the intended future use of a building is not relevant so if an office building or a hotel is offered for sale with the benefit of planning permission for conversion to a dwelling then the property will still be classed as non-residential and the rates of non-residential stamp duty will still apply. This can represent a huge saving in stamp duty for a buyer who is looking for a dwelling and intends to convert the property to a residence which is quite legitimate. 

A good example of this stamp duty savings opportunity can be found here.

If you have any questions or need advice about SDLT on residential and commercial property contact Patrick Cannon now.