When you buy a house, you normally have to pay SDLT at rates between 2% and 15% under Table A. However, if you purchase a property that is classed as mixed residential and non-residential use then you pay SDLT at rates between 2% and 5% under Table B on the entire price. The difference between the two Tables can be eye-watering: on a £2.5m purchase, the SDLT under Table A can be £288,750, but under Table B it will be £114,500, a difference of 174,250!
Until recently HMRC followed their own published guidance on what was non-residential use so that land that was not required for the reasonable enjoyment of the house could be treated as non-residential so that with the purchase of a house with a large area of land the lower rates of SDLT were charged.
For instance, the purchase of a house in the country with, say, 7 acres of land divided into a garden, stabling, an exercise yard for horses and spare land for amenity and privacy was accepted as mixed use. This was also consistent with HMRC’s approach for capital gains tax which would allow any gains on a subsequent sale to be exempt under the main residence exemption to the extent of the house and say, 1-2 acres but with the gains on the rest of the land being taxable.
HMRC have however recently changed their attitude to what constitutes mixed use in order to try to restrict the number of claims by buyers to mixed use property and thus the lower rates of SDLT. No public announcement of this charge has been made but it is clear from enquiry correspondence that unless there is an actual business or other non-residential type activity taking place on the surplus land both before and after the purchase, then HMRC will assert that all the land sold with the dwelling is part of its garden and grounds and is therefore residential use only so that the 2% to 15% rates in Table A apply.
There are several reasons why HMRC’s change of approach is wrong and should be resisted. Not only is decided case-law against them, but parts of their own current published guidance still supports their previous classification of surplus land as non-residential.
Ultimately it is a matter of statutory interpretation (section 116, Finance Act 2003 – meaning of “residential property”) and fairness – it previously suited HMRC to restrict the meaning of residential property in the context of the old disadvantaged areas relief when it applied only to residential property in order to limit the scope of that relief.
HMRC still rely on their previous interpretation when seeking to restrict the scope of the “granny annex” exemption from the 3% additional rates of SDLT on second homes by arguing that the annex must be within the grounds of the main home.
However, when that the boot is on the other foot and taxpayers are themselves claiming the same restricted statutory definition in order to apply the Table B rates, HMRC are having none of it and have invented a new wider definition in order to raise more tax.
HMRC are increasingly challenging the claiming of Table B rates when a dwelling is purchased or when a taxpayer who originally paid Table A rates realises their mistake and submits a repayment claim to the Table B rates.
Depending upon the facts, where they have a good basis for Table B to apply, taxpayers should push-back on any challenge by HMRC.
Patrick Cannon has extensive experience of dealing with HMRC on this issue and can correspond direct with HMRC on your behalf and litigate against them when necessary.