SDLT on the acquisition of garden land
24 June 2024
In the Housebuilders Team, we often act for developer clients purchasing parts of garden land for intended residential development. Such land may attract SDLT at residential rates as opposed to commercial rates. The assessment as to which rates will apply is very fact sensitive, and we would recommend that professional advice is taken at an early stage of the transaction to be able to understand, and budget for, the potential SDLT implications of the purchase.
Garden land is a vague concept for SDLT. The statutory definition of it is “land that is or forms part of the garden or grounds of [a dwelling] (including any building or structure on that land”.
So, what does this mean for you if you negotiate a purchase of land from the owner of a neighbouring dwelling?
HMRC confirms only that “the statute should be given its natural meaning” and that “there is no statutory concept of ‘reasonable enjoyment’” to define garden land for SDLT purposes, nor is there a “statutory size limit that determines what ‘garden or grounds’ means”.
As HMRC’s guidance makes clear, you should not assume that the land being acquired will not be treated as garden land for SDLT purposes simply because it appears too remote or too substantial. In general terms, garden land and other grounds forming part of a dwelling will likely be classified as residential property for SDLT purposes in the absence of any genuine commercial use.
Where a developer is a company, the acquisition of a dwelling can have significant SDLT cost implications. For example, the 15% punitive rate of SDLT may apply and, even if a relief from the 15% punitive rate of SDLT is available, the higher residential rates applicable to additional dwellings will always apply. The potential SDLT implications are therefore material. However, it is important to remember that the 15% rate and the 3% surcharge for additional dwellings only apply to the acquisition of dwellings (whether under construction or constructed at the point of acquisition).
Therefore, whilst garden land will likely be classified as residential property for SDLT, HMRC has confirmed that in the absence of an actual dwelling (constructed or under construction) being acquired the standard residential rates of SDLT can apply. This is the case regardless of the identity of the purchaser and does not differ for companies. Additionally, until 31 March 2025, the standard residential rates of SDLT have a more generous £250,000 tax-free band, compared to the £150,000 tax-free band for commercial property (which is the SDLT rate ordinarily paid on the acquisition of bare land). Buying garden land could, therefore, result in a lower SDLT liability compared to the acquisition of simple bare land.
Remember that the position will be different if there is a dwelling either constructed or under construction on the garden land being acquired, and each parcel of land being acquired should be assessed on its own facts. HMRC considers that a building becomes a dwelling for SDLT when construction on top of the foundations has commenced pursuant to a residential build specification. Therefore, as a developer, if you acquire a site that includes a partially constructed property being built to a residential specification it is highly likely that this will be treated as the acquisition of a dwelling rather than garden land for SDLT purposes and the 15% rate and higher rate therefore will be relevant and need to be considered fully.
The key thing for the SDLT assessment, when visiting a site and discussing a potential purchase with your seller, is to gather as much information as possible about the current use of the land you are acquiring (including details of any buildings on that land) so that we can assist you in determining the classification of the land for SDLT. Below we set out three brief examples, which show the potential SDLT implications of the differing classifications.
Example 1 – Acquisition of garden land with no dwelling or dwelling under construction
Developer Ltd, a UK resident company for SDLT, completes small scale luxury residential developments. The company has negotiated the purchase of some paddocks within the grounds of a residential dwelling. The owners of the dwelling use the paddocks as pasture for their horses and there is no commercial use of the land whatsoever. Developer Ltd considers that the land is perfect for a small residential development and agrees to buy the land for £650,000. As the land forms part of the grounds of a dwelling, it will be classified as residential property for SDLT. However, as there is no dwelling on the land, Developer Ltd will pay £20,000 SDLT calculated with reference to the standard residential rates.
Example 2 – Acquisition of garden land with partially constructed dwelling
The scenario is the same as in Example 1 however, here the seller had parcelled off some of the paddock land and commenced construction (above the foundations) of a bungalow for family. They have decided not to proceed with construction and Developer Ltd will acquire the whole site, including the partially completed construction. Here, as a dwelling is under construction on the land being acquired, and the purchase price exceeds £500,000, the starting point is that the 15% punitive SDLT rate will apply. This will result in a headline SDLT liability of £97,500. However, assuming Developer Ltd can reasonably claim relief from the 15% punitive rate, the higher residential rate of SDLT (which includes the 3% surcharge) will apply. Developer Ltd’s SDLT liability will therefore be £39,500.
Example 3 – Example of acquisition of bare land not associated with a dwelling
In this example the paddock land is located 10 miles from the seller’s dwelling. It is in a rural location surrounded by fields and has no connection to any residential dwelling whatsoever. Whilst the seller does not use the paddock land commercially, there is also no residential use of the land whatsoever. It would therefore be reasonable to classify the land as bare land for SDLT purposes, which would attract the commercial rates of SDLT. Again, Developer Ltd agrees to acquire the land for £650,000 but, this time, is subject to the commercial rates of SDLT. The resulting SDLT liability is £22,000. In this case the total SDLT liability is greater than in Example 1, demonstrating why it is important to properly consider the nature of the land when assessing the likely SDLT liability.
If you are considering purchasing garden land and would like some SDLT advice, please get in touch with us and we will be happy to put you in contact with a member of our Tax Team.
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The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at June 2024.