
Can a Property Be Assessed as Non-Residential for Stamp Duty Purposes?
In certain circumstances, a property can be assessed as non-residential for Stamp Duty Land Tax (SDLT) purposes, potentially reducing the stamp duty liability for buyers—particularly for buy-to-let investors paying higher rates. One such scenario hinges on whether a property is suitable for use as a single dwelling at the time of purchase. If a property is legally restricted from such use, it may not meet the criteria for residential property under SDLT rules.
The Legal Argument: Legally Restricted from Use
There is an argument to be made that if a property is legally restricted from being used as a dwelling, it should not be considered suitable for use as a single dwelling. This could occur if the property is subject to a prohibition notice due to serious hazards, making it unfit for human habitation. Under such conditions, the property might be assessed as non-residential for SDLT purposes.
The Mudan Case: Emphasis on Property Condition
In the recent Upper Tribunal case of Amarjeet Mudan and Tajinder Mudan v HMRC [2024] UKUT 00307 (TCC), this argument was examined. The Mudans purchased a property in a state of disrepair and claimed it was not suitable for use as a dwelling at the time of purchase, seeking a partial repayment of SDLT on the basis that it should be classified as non-residential.
The Tribunal, however, focused on the property’s condition rather than potential legal hazards or restrictions. It found that although the property required significant repairs—such as rewiring, installing a new boiler, and fixing leaks—it was structurally sound and had been recently used as a dwelling. The need for renovation did not render it unsuitable for use as a dwelling. Consequently, the property remained classified as residential for SDLT purposes.
Legal Restrictions Not Fully Tested
While the Mudan case provides valuable insights, the specific legal argument that a property being legally restricted from use as a dwelling renders it non-residential has not been fully tested in the First-tier Tax Tribunal or the Upper Tribunal. The Mudan decision suggests that courts may prioritise the physical capability of a property to function as a dwelling over legal restrictions that could, in theory, prevent its use.
Demolition and Non-Residential Classification
There are instances where HM Revenue & Customs (HMRC) accepts that a property is not suitable for use as a dwelling. For example, if a property is in such poor condition that it must be demolished because repair is not viable, HMRC may classify it as non-residential, applying lower SDLT rates. This distinction hinges on the property’s inability to be reused as a dwelling at the time of purchase.
Testing the Argument with HMRC
The idea of challenging HMRC on the basis that a legally restricted property should be classified as non-residential is intriguing but unproven. Given the current legal landscape and the emphasis on the property’s condition in cases like Mudan, this argument may lack substantial traction. Property investors considering this route should be cautious and seek professional legal advice.
Conclusion
While theoretically possible, reclassifying a property as non-residential for SDLT purposes based on legal restrictions remains a complex and untested area of law. The Mudan case underscores the importance of the property’s physical condition and recent use in determining its classification. Until the argument of legal restrictions is fully explored in higher courts, investors should be mindful of the risks and uncertainties involved.
Guide to the Homes (Fitness for Human Habitation) Act 2018: Responsibilities and Rights of Landlords and Tenants
- Introduction
- What is the Homes (Fitness for Human Habitation) Act 2018?
- The Fitness for Human Habitation Standard
- Taking Action: What Landlords and Tenants Should Know
- Legal and Financial Implications