Does the 15% SDLT rate apply if a company lets a dwelling to a connected person on commercial terms?

Introduction

This is a difficult Stamp Duty Land Tax question that often arises when a company buys a residential property and then lets it to a family member or other connected person. The issue is whether the company can rely on the property rental business relief from the 15% higher rate in Schedule 4A to the Finance Act 2003, or whether that relief is lost because a non-qualifying individual is allowed to occupy the dwelling.

Readers usually search for this issue after HMRC has issued an assessment, or when they realise that a company-owned residential property has been let to a relative under what they believe is a genuine market tenancy. The key point is that commercial terms and proper documentation may help on the facts, but they do not automatically answer the statutory question.

The Question

A company bought a residential property for use as a rental investment. The purchase was funded on a commercial buy-to-let basis and the property was operated as part of the company’s rental business from acquisition.

After completion, the dwelling was occupied by connected family members under formal Assured Shorthold Tenancy agreements. Rent was said to be at market level, was paid regularly, and was declared in the company’s tax returns. There was no suggestion of informal personal occupation or rent-free use.

HMRC later issued an SDLT assessment on the basis that the 15% rate in Schedule 4A applied, or that relief from it was unavailable, because a non-qualifying individual had been permitted to occupy the dwelling. The taxpayer’s argument was that a genuine commercial tenancy to a connected person should still fall within the property rental business exception in paragraph 5(1)(d).

Nick’s Explanation

Nick’s view was that the core argument in favour of the taxpayer was straightforward: the property had been rented to connected persons for commercial gain as part of a genuine rental business.

In anonymised form, his reasoning was that the facts appeared stronger than a case involving informal family occupation because there were written tenancy agreements, market-style rent, and declared rental income. He also suggested that the real battleground would be the wording of Schedule 4A and what tribunals and courts have said about it, rather than HMRC’s view of the policy alone.

Nick also pointed to two useful lines of research:

• case law on Schedule 4A and related SDLT anti-avoidance provisions; and
• Parliamentary materials, including Hansard, where legislative purpose may have been discussed.

That is sensible. In this area, HMRC guidance is relevant but not decisive. The legal answer depends on the statute as interpreted by the courts.

The Law

The 15% SDLT rate is imposed by Schedule 4A to the Finance Act 2003 on certain acquisitions of high-value residential property by companies and other non-natural persons.

There are reliefs from that charge. One of them appears in paragraph 5.

Paragraph 5(1)(d) provides that the 15% charge does not apply if:

“the chargeable interest is acquired exclusively for the purposes of a property rental business carried on by the purchaser.”

However, paragraph 5(2) then limits that relief. It provides:

“Sub-paragraph (1) does not apply if a non-qualifying individual is permitted by the purchaser to occupy the dwelling.”

That means the analysis has two stages:

1. Was the property acquired exclusively for the purposes of a property rental business?
2. If so, was a non-qualifying individual nevertheless permitted to occupy the dwelling, so that the relief is disapplied?

In practice, the second stage is often the harder one. If the occupier is a connected person or otherwise falls within the statutory concept of a non-qualifying individual, the wording of paragraph 5(2) creates a serious obstacle.

HMRC’s published view in SDLTM09660 is that relief is withdrawn whenever a non-qualifying individual is permitted to occupy the property, even if that person pays a market rent.

HMRC guidance is not law, but where the statutory wording is broad and unqualified, the guidance may reflect the interpretation a tribunal is likely to consider.

Analysis

The taxpayer’s best argument starts with paragraph 5(1)(d). If a company genuinely bought the dwelling as part of a rental portfolio, financed it on commercial buy-to-let terms, granted formal tenancies, collected rent, and returned that income for tax, those facts strongly support the view that the acquisition was exclusively for the purposes of a property rental business.

On that first question, the facts are favourable.

The difficulty is paragraph 5(2). The wording does not say that relief is lost only where occupation is informal, non-commercial, below market value, or designed to disguise personal enjoyment. It simply says that relief does not apply if a non-qualifying individual is permitted by the purchaser to occupy the dwelling.

That language is wide. A formal tenancy is still a form of permitted occupation. In ordinary legal usage, if a landlord grants a tenancy, the landlord has plainly permitted the tenant to occupy.

That is why the taxpayer’s argument has a structural weakness. It asks a tribunal to read paragraph 5(2) more narrowly than its natural wording suggests, by implying that “permitted occupation” should exclude fully commercial lettings to connected persons. But the legislation does not expressly draw that distinction.

There is still a possible purposive argument. One could say that Schedule 4A is an anti-avoidance regime aimed at personal occupation of high-value dwellings through companies, and that a genuine arm’s length rental business should not be disqualified merely because the tenant is connected. If Parliamentary materials or case law supported that narrower purpose, the argument would become stronger.

But without clear authority, a tribunal may well prefer the simpler reading: Parliament created a rental business relief, then expressly removed it where a non-qualifying individual is permitted to occupy. On that reading, the connected-person point is not an exception to the rule; it is the rule that blocks the relief.

So the practical legal position is this:

• commerciality helps prove there was a real property rental business;
• commerciality does not necessarily answer the separate paragraph 5(2) disqualification;
• the taxpayer would need either supportive case law or a convincing purposive construction to overcome the breadth of the statutory wording.

If the taxpayer also argues that the dwelling was unsuitable for use as a dwelling at the effective date, that is a different line of argument. In those cases, it is important to note that the threshold is now relatively high following Amarjeet and Tajinder Mudan v The Commissioners for HMRC [2025] EWCA Civ 799. Ordinary disrepair, inconvenience, or the need for works will often not be enough. The courts now require a genuinely serious level of deficiency before a property is treated as not suitable for use as a dwelling.

Outcome

A reader should take away this practical conclusion: a company letting a dwelling to a connected person on genuine commercial terms may still face the 15% Schedule 4A charge if the occupier is a non-qualifying individual and the company permitted that occupation.

The fact that there was an AST, market rent, and declared rental income is helpful evidence of a genuine rental business, but it does not necessarily defeat paragraph 5(2). On the wording alone, HMRC’s view is not an obviously weak one.

That said, the issue may still be arguable if there is supporting authority, useful Parliamentary material, or factual complexity about whether the occupier truly falls within the non-qualifying category. The strength of the case will depend heavily on the exact statutory definitions and any decided cases on similar facts.

Practical Steps

If you are assessing a case like this, the next steps are usually:

1. Read Schedule 4A in full, not just paragraph 5, so that the definitions of dwelling, non-natural person, and non-qualifying individual are considered in context.
2. Check the SDLT return, the assessment, and any review or appeal deadlines.
3. Gather the tenancy agreements, rent records, mortgage documents, company accounts, corporation tax returns, and any valuation evidence showing market rent.
4. Identify whether the occupier is clearly a non-qualifying individual under the legislation.
5. Research First-tier Tribunal, Upper Tribunal, and appellate decisions dealing with Schedule 4A, paragraph 5, connected persons, and occupation by individuals.
6. Review HMRC’s manual, including SDLTM09660, but remember that guidance cannot override the statute.
7. Consider whether Hansard or other Parliamentary materials shed light on the intended scope of the connected-person exclusion.
8. If arguing that the property was not suitable for use as a dwelling, test that argument against the higher threshold now confirmed in Amarjeet and Tajinder Mudan v The Commissioners for HMRC [2025] EWCA Civ 799.

If a challenge is made, the strongest submissions will usually separate the issues clearly: first, whether there was a genuine property rental business; second, whether paragraph 5(2) nevertheless disapplies the relief; and third, whether any authority justifies a narrower reading of “permitted occupation”.

Conclusion

A genuine commercial letting to a connected person does not automatically protect a company from the 15% SDLT charge under Schedule 4A. The main problem is the broad wording of paragraph 5(2), which can disapply the rental business relief even where the tenancy is formal and market-based. The argument is not hopeless, but it needs to be built on the statute, the case law, and any reliable material on legislative purpose.

Legal References Used

• Finance Act 2003, Schedule 4A
• Finance Act 2003, Schedule 4A, paragraph 5(1)(d)
• Finance Act 2003, Schedule 4A, paragraph 5(2)
• HMRC Stamp Duty Land Tax Manual, SDLTM09660
• Amarjeet and Tajinder Mudan v The Commissioners for HMRC [2025] EWCA Civ 799

This page was last updated on 22 March 2026.

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