What is ‘residential property’?
Residential property means, for SDLT purposes, any land and buildings used as a dwelling, suitable for use as a dwelling, or in the process of being constructed or adapted for use as a dwelling. If a property meets any one of these three separate tests it will be treated as residential property, as will any garden or grounds belonging to it (including any building or structure on such garden or grounds) and any interests or rights attaching to it. A dwelling is a building or part of a building that enjoys facilities required for day-to-day domestic existence (e.g. bathroom, kitchen and living room).
HMRC has confirmed that the purchase of a garden, separate from the related dwelling, will be subject to the residential rates of SDLT (albeit at the normal rates shown in Table 1 as no dwelling is purchased). Once the garden has been separated from the dwelling, subsequent purchases of the land should be subject to commercial SDLT rates (Table 2) unless a dwelling has been built on the land (or where one has started to be constructed).
A special 15% rate of SDLT may apply when a company purchases an individual dwelling worth more than £500,000. However, reliefs are available and we would usually expect a company acquiring a residential property for the purposes of its development trade, or for letting to unconnected third parties, to be able to benefit from these. Please see our previous article on the 15% rate. For the purposes of this note, we assume that the 15% rate does not apply.
Reducing the SDLT liability
The overall SDLT payable can be legitimately reduced in certain situations, for example;
Mixed-use properties: the lower non-residential rates of SDLT in Table 2 below, apply to these transactions. A property is treated as mixed-use if it comprises both residential and non-residential elements. Examples of mixed-use transactions may include a shop with a flat above or a house with farmland or commercial buildings. It will depend on the precise facts but it is worth considering what you are purchasing, and obtain evidence of non-residential use in preparation for an HMRC enquiry. Please note that we are aware that HMRC has enquired into a number of mixed-use transactions, albeit that, in our experience to date, it usually agrees with the analysis once additional information has been provided demonstrating the non-residential use. We would be more than happy to assist you with an HMRC enquiry in this (or other) situations.
Buying six or more residential properties in a single transaction: where six or more dwellings are purchased in a single transaction, the purchaser can choose to treat all of the properties collectively as a non-residential transaction so that the commercial SDLT rates in Table 2 will apply. HMRC has clarified that the term 'single transaction' refers to the purchase of six or more individual dwellings pursuant to a single contract; even if the acquisition of each dwelling completes ar separate times. Although commercial rates often result in less SDLT being paid, it is still worth considering the total SDLT cost and comparing it with using Multiple Dwellings Relief (see below). In most cases it is worth running both SDLT calculations to check which will provide the best SDLT result as the taxpayer can ‘elect’ to pay SDLT on the most efficient basis.
Multiple Dwellings Relief: where a company is buying more than one property as part of a single deal, arrangement or series of transactions between the same vendor and purchaser (or persons connected with them), the purchases are treated as ‘linked’ SDLT transactions. This means that SDLT will be calculated on the basis of the total consideration paid for the linked transactions. Multiple Dwellings Relief reduces the amount of SDLT that would be otherwise payable, as it works by calculating the SDLT on the basis of the average price paid per dwelling, which is then multiplied by the number of dwellings (rather than calculating the SDLT on the entire purchase price).
- Big House Limited buys a property comprising a large main house, two small cottages and a flat above the garage. Each of the four properties is a dwelling for the purposes of SDLT. The total purchase price is £1.2m
- the SDLT payable on a purchase of £1.2m, applying the higher residential rates, is £99,750
- if multiple dwellings relief is available, the total SDLT due is £56,000 (i.e. £1.2m divided by 4 and then multiplied by the SDLT rates = £14k, then multiplied by 4 (the number of dwellings) = £56k).
However, changes to the number of units (such as a redevelopment), which takes place within three years of the original transaction, can lead to a further tax charge. The amount payable will reflect the amount of SDLT that would have been payable if the reconfiguration had taken place at the time of the transaction. If, in the example above, the two cottages are knocked into one within three years of the purchase, the SDLT would have to be recalculated as if there were three properties rather than four. In this case the SDLT due, applying multiple dwellings relief, would be £66,000 (i.e. £1.2m divided by 3 and then multiplied by the SDLT rates = £22k, then multiplied by 3 (the number of dwellings) = £66k).
Changing use: residential or non-residential SDLT?
Do be aware that, if you buy a residential property with a view to converting it to commercial use, for example if you convert a bungalow into a dentist surgery, you will most likely have to pay SDLT at the residential rates. If you purchase bare land or a commercial property (such as a barn) with the benefit of planning permission to build/convert into residential properties, then this will usually be treated as commercial property and the SDLT rate will be applied accordingly. If, however, construction of a dwelling or conversion to a dwelling has already begun, this will be treated as residential for SDLT purposes. Sellers and buyers should be aware of the potential increase in the SDLT liability should building work start prior to a sale. Off-plan purchases of residential property will also be subject to SDLT at the residential rates.
Care is always needed as slightly different facts may alter the nature of the transaction for SDLT purposes and have a material impact on the total SDLT payable. Take advice at the earliest opportunity to avoid any nasty tax surprises.
The content of this article is for general information purposes only. For further information please contact Karl Pocock or John Kahn from Birketts’ Corporate Tax Team.