Excerpt from; Stamp Duty Land Tax Guide For Property Investors.

Land With a Derelict Dwelling

(Strategies Using SDLT Reliefs & Classifications)

Section Summary: This section explores how buying severely derelict residential properties and reclassifying them as non-residential can result in substantial SDLT reductions.

Key Points:

  • Derelict properties may be classified as non-residential for SDLT.
  • This classification reduces SDLT compared to residential rates.

Main Principles: The main principle is to document the uninhabitable state of the property and secure planning permissions to support the non-residential SDLT classification, optimising tax liabilities for developers.

One strategy involves purchasing residential properties in a state of disrepair—so derelict that they cannot be used as a residence—and having them assessed as non-residential for stamp duty purposes. This approach can avoid the higher rates of SDLT typically associated with residential purchases.

Purchasing Derelict Residential Properties

Definition and SDLT Implications

  • A property so derelict that it cannot reasonably be used as a dwelling may be classified as non-residential for SDLT purposes.
  • This classification can substantially reduce the SDLT payable on purchase, particularly for developers looking to rebuild or refurbish on the land.

Example Scenario

Imagine a property developer, XYZ Developments Ltd., discovers a derelict building listed for sale at £1 million. The building has severe asbestos contamination, structural issues rendering it unsafe, and it’s beyond economical repair. XYZ Ltd.’s intention is to demolish the existing structure and construct new residential units.

Stamp Duty Calculations

Residential Rates (Including the 3% Higher Rate for Companies)

  • Total SDLT (Residential): £7,500 + £54,000 + £9,750 = £71,250

Non-Residential Rates

For the same £1 million purchase but classified as non-residential due to the derelict state of the building:

  • Total SDLT (Non-Residential): £0 + £2,000 + £37,500 = £39,500

PN Bewley v HMRC: A Real-World Example

The case of PN Bewley Ltd v HMRC illustrates how this strategy can work in practice. In this case, a developer purchased a property with the intention of demolishing the existing derelict house and rebuilding. The key to their SDLT reduction was the property’s condition at the time of purchase—it was so derelict that it could not be considered suitable for use as a dwelling. As a result, the transaction was assessed under non-residential SDLT rates, leading to a lower tax liability.

House purchased by PN Bewley. Source: David James & Partners 

Considerations for Developers

When considering the purchase of a derelict residential property for development:

  • Evidence is Key: Documenting the property’s uninhabitable state through surveys and reports can support a non-residential SDLT classification.
  • Planning Permission: Securing planning permission for demolition and new construction can further justify the non-residential classification for SDLT.

Nick Garner - Land Tax Expert

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