It is not uncommon for us to be asked to advise on whether a purchase property is “mixed use” or “residential” for the purpose of Stamp Duty Land Tax (SDLT) when dealing with properties that comprise various elements used for different purposes.
The definition of the property determines which rate of SDLT is payable, which can result in significant savings, especially if the residential element is in addition to residential properties already owned by the purchaser, either in the UK or abroad. Mixed use properties are subject to SDLT at the commercial rate, which is exempt from the higher rate SDLT for additional residential properties.
The easiest way to consider the potential SDLT liability is by way of an hypothetical example:
Mr X proposes purchasing a former farmhouse for £2,000,000, which comes with land used for agricultural purposes and outbuildings used commercially. Mr X owns a flat, which is currently his main residence but has yet to decide whether he will be selling it to fund his purchase or retaining it and renting it out. Mr X’s SDLT liability would be calculated as follows depending on how the purchase property is defined:
- Standard residential property rate = £153,750
- Higher rate for additional residential property = £213,750
- Mixed use at commercial rate = £89,500
Clearly, if the property can be legitimately defined as mixed use, the saving on SDLT would be significant.
The Legal Position
The difficulty we have is defining a mixed use property.
Section 55(2)(a) of the Finance Act 2003 states that residential SDLT rates apply only where the relevant land is entirely residential. The Act defines the relevant land as the main subject of the transaction for which consideration is paid. As such it seems that if the relevant land includes land or property that is non-residential, then the non-residential rates apply.
Unfortunately, the HMRC guidance confuses matters and states as follows:
A building that is used only partly as a dwelling may nevertheless be suitable for use wholly as a dwelling. Its overall suitability will be judged from the facilities available at the effective date. For example, if two rooms of a house were in use as a dentist’s surgery and waiting room at the effective date, HMRC would nevertheless normally consider this property suitable for use as a dwelling.
Cases involving bed and breakfast establishments or guest houses will be treated on their 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 defining whether a property is mixed-use, we believe any residential element must be ancillary to the main property use for a property to be safely treated as mixed use. The applicability of the mixed-use classification is very much on a property-by-property basis dependent on the individual facts.
Returning to our example, if the farmhouse is part of a working farm, the residential element would clearly be ancillary to the main use of the property and could safely be defined as mixed use. If, however, the commercial units and agricultural land are rented out to third parties it could be argued that the main subject of the transaction is the farmhouse and, as such, the relevant land is entirely residential.
As the categorisation of a purchase property can have a significant impact on the SDLT payable, we urge all purchasers of complex properties to seek specialist advice as to which rate of SDLT will be applicable on completion.
For further advice please contact Farleys property team on 0845 287 0939 or email us today.