Is your property mixed use? Commercial buyers beware of higher residential SDLT

This article discusses a recent case in which a property buyer calculated the Stamp Duty Land Tax (SDLT) due on the purchase at a lower rate, due to the mixed-use purpose of the property, but ended up having to pay the higher rate as the First-Tier Tribunal (Tax Chamber) agreed with HMRC and found that the property was in fact residential only.

Under Section 42 of the Finance Act 2003 (FA03) SDLT is charged on ‘land transactions’, which are defined as being the acquisition of a chargeable interest, which in turn is an estate, interest, right or power over any land in England. The rate at which SDLT is charged in respect of any such land transaction depends on whether the interest being acquired is residential property.

Section 55(1B) FA03 provides that there are ‘Table A’ and ‘Table B’ rates of SDLT, the former being applicable to a transaction consisting entirely of residential property and the latter applying to a transaction that ‘consists of or includes land that is not residential property’.

Paragraph 4 Schedule 4ZA FA03 provides that higher rates of SDLT are payable in respect of transactions over £40,000, involving major interests in a single dwelling, where the purchaser is a company.

Recent Case

Espalier Ventures Property (Lansdowne Road) Ltd v The Commissioners for His Majesty’s Revenue and Customs [2023] UKFTT 725 (TC), 2023 WL 05760850

This case was an appeal against HMRC’s decision to apply a higher rate of SDLT to the purchase of a property by Espalier Ventures Property (Lansdowne Road) Ltd (“Espalier”). Espalier had purchased three separate property interests registered with the Land Registry, for £5,350,000 in total. The interests consisted of:

• the leasehold of a basement and ground floor flat;
• a share of the freehold of a property (the communal garden); and
• a freehold in three garages, which are detached from the living accommodation.

Espalier filed its SDLT return on the basis that the property was mixed-use, i.e., it was both residential and non-residential, as it considered that the garages and gardens were separate elements of the transaction and not falling within the definition of a dwelling. HMRC disagreed and increased Espalier’s SDLT liability arguing that the purchase was of a single dwelling and so the higher SDLT rates applied.

The Tribunal judge had to determine what the main subject matter of the transaction was, and stated that if the garages and the communal garden did not represent a main subject matter independent of the leasehold interest in the flat, so they are interests pertaining to the flat, then the higher rate of SDLT should apply.

What is interesting in this case is that the Tribunal accepted that the garages were a main subject matter, however, it concluded that any structure on the land intended to be enjoyed with the dwelling, is part of the dwelling. The focus was on Espalier’s intention at the point of purchase. Espalier operates a real estate business and was established specifically to purchase the properties for development and onward sale, and Espalier intended to demolish the garages and to develop the property and garages to form a single and substantial dwelling.

Espalier’s case demonstrates that purchasers of a residential property cannot circumvent the higher SDLT rates by acquiring interests in other properties that are not residential, if the intention is to use these properties as part of the redevelopment of a residential property.

If you have any further questions relating to mixed use properties please contact our Commercial Real Estate team here.