Disclaimer
This information is for general guidance only and does not constitute legal or tax advice. Always seek professional advice tailored to your specific circumstances before making any decisions about property transactions or tax assessments. Regulations are subject to change, so ensure you are working with the most current information.
Warning
When purchasing a property, self-assessing it as non-residential for stamp duty purposes can reduce stamp duty liability. However, if not done correctly, HMRC will take a strict stance. Incorrectly categorising a property as non-residential may result in severe penalties. It is essential to ensure that your assessment is accurate and complies with regulations to avoid significant financial and legal consequences.
HMRC Penalties for Incorrect Land Tax Returns
If a land tax self-assessment is found to be careless or fraudulent, HMRC can impose significant penalties. The likelihood and severity of these penalties depend on the circumstances of the error:
- Careless Error: If HMRC determines the self-assessment was made carelessly (i.e., without taking reasonable care), they may impose a penalty of up to 30% of the unpaid tax.
- Deliberate but Not Concealed: If the error is deliberate but not concealed, penalties range from 20% to 70% of the unpaid tax.
- Deliberate and Concealed: For errors that are both deliberate and concealed, penalties can be as high as 100% of the unpaid tax.
If the self-assessment is arguable—meaning there is a reasonable basis for the position taken—it becomes much harder for HMRC to justify imposing penalties. In these situations, HMRC must prove that the taxpayer’s position was unreasonable. Therefore, it is crucial for taxpayers to ensure their position is defensible, especially if there is ambiguity in the law.
If HMRC opens an enquiry into a land tax return, the taxpayer’s position must be arguable to avoid penalties. HMRC has nine months from the submission of a land tax return to initiate an enquiry. After this period, HMRC can only investigate if there is reasonable cause to believe fraud has occurred. This means that well-documented and carefully prepared self-assessments are less likely to face penalties or further scrutiny beyond the initial nine-month window.
HMRC’s Guidance on Stamp Duty for Uninhabitable Properties
If you are considering declaring your property as ‘not suitable for use as a single dwelling’ at purchase and, therefore, classifying it as non-residential for stamp duty purposes, you should proceed with caution. This approach could reduce your stamp duty liability, particularly if you are subject to the 5% higher rate stamp duty.
If HMRC investigates your self-assessment, they will review the legal arguments and the evidence provided. If they determine your arguments are incorrect, you may be required to pay the avoided stamp duty plus interest. Furthermore, if HMRC believes that you have made a claim without a valid basis or attempted deception, they may impose additional penalties.
HMRC generally views most habitability claims sceptically. So, what constitutes a valid case? According to HMRC guidance, a property is only classified as uninhabitable when it cannot be repaired and must be demolished.
However, HMRC’s satisfaction is not the deciding factor; the key is the correct interpretation of the Finance Act 2003, guided by case law. The question of whether a property should be assessed as residential or non-residential hinges on the judicial interpretation of the phrase from the Finance Act 2003: “suitable for use as a single dwelling.” If a property is not suitable for use as a dwelling, it should not be assessed as residential for stamp duty purposes.
You can read HMRC’s guidance here. (Link opens a new tab)
Property Not Suitable for Use as a Dwelling Based on Mudan Case
Based on the case [2024] UKUT 00307 (TCC) involving Mr. and Mrs. Mudan and HMRC, a property would be considered not suitable for use as a single dwelling if it has fundamental defects that render it uninhabitable, and these defects cannot be remedied through repair or renovation without extensive reconstruction or demolition. Key characteristics include:
- Structural Unsoundness: The building poses significant risks of collapse or failure, such as severely damaged foundations, collapsing walls, or a missing roof.
- Presence of Hazardous Materials: The property contains hazardous materials, such as extensive asbestos contamination, which make it unsafe for occupancy. If remediation is impractical or impossible without demolition, the property is unsuitable.
- Irreparable Damage: The building has suffered severe damage that cannot be fixed through normal repair, such as major fire damage or extensive rot.
- Demolition Required: The only feasible solution to make the property habitable is complete demolition and rebuilding.
- Lack of Basic Facilities and Physical Integrity: The property lacks essential features like floors, walls, roofing, plumbing, or electrical systems, and these cannot be restored without significant construction work.
- Dangerous to Occupy: The building poses immediate risks that cannot be mitigated without fundamental alterations, including severe structural or environmental hazards.
- Not Capable of Being Made Suitable: Even with potential repairs, the property cannot be made suitable for use as a dwelling without substantial reconstruction.
Note: Each case is assessed on its own merits.
Arguable Points for Uninhabitable Property Classification
For uninhabitable properties, what is arguable depends on the property’s specific details and how its condition is interpreted under existing legal frameworks. The Upper Tribunal case involving Mr. and Mrs. Mudan (2024 UKUT 00307 (TCC)) provides guidance on this issue. Below are circumstances that could justify a property not being suitable for use as a dwelling and thus might not be assessed as residential for stamp duty purposes:
- Severity of Defects: If the property has significant structural defects, such as damaged foundations or a collapsing roof, it could be argued that the property is unsuitable for habitation. The argument would focus on whether these defects prevent the property from being used as a dwelling without major intervention.
- Health and Safety Hazards: Presence of hazardous materials, like extensive asbestos, which pose a significant health risk, may make a strong case for non-residential classification. The argument could hinge on whether the necessary remediation to make the property safe is so extensive that it falls beyond simple repair.
- Extent of Damage: If the damage is beyond repair and requires extensive reconstruction or complete demolition, this may be arguable as making the property uninhabitable. Examples include properties severely damaged by fire or flooding, where renovation is impractical.
- Local Authority Notices: If a local authority has issued a prohibition notice or similar warning that deems the property unsafe for occupancy, this provides a strong basis to argue that the property is uninhabitable. The focus would be on whether the necessary repairs to lift such a notice involve substantial reconstruction.
- No Basic Facilities: A property lacking basic facilities such as running water, plumbing, or electricity, and requiring significant construction work to restore these, may also be argued as uninhabitable. The argument must show that the lack of these facilities makes the property unfit for use as a dwelling without major reconstruction.
An arguable case must show that the defects or hazards prevent the property from being used as a dwelling without major repairs. Basic or cosmetic issues will not suffice. Any position must be backed by solid evidence, including expert assessments, to withstand HMRC scrutiny.
Economic Justification
Classifying an uninhabitable property as non-residential can significantly lower the SDLT liability by avoiding higher residential surcharges. Investors are generally subject to a 5% surcharge on top of standard residential rates, with non-UK residents facing an additional 2% surcharge. Non-residential properties do not attract these surcharges, potentially reducing the overall SDLT liability.
Assessment of Property Condition for SDLT
If a residential property is genuinely uninhabitable, it may not serve as a dwelling. In such cases, it should be classified as non-residential for SDLT purposes, leading to lower tax obligations for investors.
Example Calculation of SDLT Liability
Scenario: A property is purchased for £500,000.
- Residential Rate (Including 5% Surcharge):
- Up to £250,000 at 0% = £0
- £250,001 to £500,000 at 5% = £12,500
- Additional 5% surcharge on entire amount = £25,000
- Total SDLT for Residential: £37,500
- Non-Residential Rate:
- Up to £150,000 at 0% = £0
- £150,001 to £250,000 at 2% = £2,000
- £250,001 to £500,000 at 5% = £12,500
- Total SDLT for Non-Residential: £14,500
Scenario: A property is purchased for £2 million.
- Residential Rate (Including 5% Surcharge):
- Up to £250,000 at 0% = £0
- £250,001 to £925,000 at 5% = £33,750
- £925,001 to £1.5 million at 10% = £57,500
- Above £1.5 million at 12% (£500,000) = £60,000
- Additional 5% surcharge on entire amount (£2 million) = £100,000
- Total SDLT for Residential: £251,250
- Non-Residential Rate:
- Up to £150,000 at 0% = £0
- £150,001 to £250,000 at 2% = £2,000
- Above £250,000 at 5% (£1,750,000) = £87,500
- Total SDLT for Non-Residential: £89,500
Conclusion: Assessing a property as non-residential can substantially lower SDLT liability, especially compared to residential rates which include surcharges.
