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

The Homes (Fitness for Human Habitation) Act 2018 is a critical piece of legislation that aims to improve housing standards for tenants across England. It amends the existing Landlord and Tenant Act 1985 and places greater obligations on landlords to ensure that their properties are safe, healthy, and free from hazards that could pose risks to tenants’ health or safety. Equally, tenants are responsible for reporting issues and maintaining the property in a reasonable condition. This guide aims to provide a balanced view of the responsibilities and rights of both landlords and tenants under this Act.

Whether you are a private landlord, a social housing provider, or a tenant, understanding the Homes Act is crucial for ensuring that rented properties meet the required living standards.

What is the Homes (Fitness for Human Habitation) Act 2018?

The Homes Act came into force on 20th March 2019 and is applicable in England. The Act ensures that all rented homes, whether private or social, are fit for human habitation. This means that properties should be safe, healthy, and free from hazards that could cause harm to the occupants.

The Act applies to new or renewed tenancies signed after 20th March 2019. For pre-existing tenancies, it became applicable on 20th March 2020. Tenants now have the right to take their landlords to court if their property is not deemed fit for habitation.

Landlord Responsibilities Under the Act

Under the Act, landlords must ensure that their properties meet the standards of “fitness for human habitation” throughout the tenancy. This responsibility is not limited to just the initial condition of the property but extends to maintaining these standards during the entire duration of the lease.

Key Obligations for Landlords

  1. Fit for Human Habitation at the Start and Throughout the Tenancy: The property must be free from hazards and fit for habitation at the time the lease is granted and continue to be so during the entire term of the tenancy. This includes issues such as structural defects, inadequate heating, damp, and unsafe electrics.
  2. Common Parts Maintenance: If the property is part of a building, such as a flat within a larger block, landlords are also responsible for ensuring that common parts of the building are safe. This includes hallways, staircases, and any shared facilities.
  3. Repairs and Maintenance: Landlords must carry out necessary repairs to ensure the property remains fit for human habitation. However, they are not responsible for issues that arise due to the tenant’s misuse of the property.
  4. Prompt Response to Reports: When tenants report problems, landlords are expected to take prompt action to investigate and rectify the issues. Failing to do so can lead to legal action, including a court order to enforce repairs or compensation claims from tenants.
  5. Exemptions for Unforeseeable Circumstances: The Act acknowledges that landlords may not be responsible for events that are beyond their control, such as natural disasters or delays in obtaining necessary permissions (e.g., planning consent or access to shared property).

Tenant Responsibilities Under the Act

Tenants, too, have an active role in ensuring that their homes remain fit for habitation. While landlords bear the primary responsibility for the safety and habitability of the property, tenants are required to use the property responsibly and to communicate any issues promptly to their landlord.

Key Obligations for Tenants

  1. Maintain the Property in a Reasonable Condition: Tenants are expected to keep the property in good condition. This includes using the property in a tenant-like manner—avoiding damage and taking reasonable steps to prevent issues such as damp by ventilating the property and maintaining cleanliness.
  2. Report Issues Promptly: If a tenant notices a problem with the property—such as a broken boiler, damp, or unsafe wiring—they must report this to the landlord as soon as possible. Failure to do so could lead to the problem worsening, and tenants may have less ground to claim compensation or take legal action if they delay reporting.
  3. Allow Reasonable Access for Repairs: Tenants are required to allow the landlord or contractors access to the property to inspect and carry out repairs. The landlord must give reasonable notice—typically 24 hours—before entering the property, unless it is an emergency situation.
  4. Take Care of the Property: Tenants are responsible for minor maintenance tasks, such as changing lightbulbs or clearing gutters, depending on the terms of their tenancy agreement. Additionally, tenants should avoid causing intentional damage to the property or fixtures.
  5. Avoid Causing Issues: Tenants should not cause issues themselves, such as through irresponsible behaviour or neglect. If a tenant’s actions are the primary cause of problems (e.g., failing to use ventilation, leading to mould growth), the landlord may not be responsible for repairing the damage.

The Fitness for Human Habitation Standard

The definition of “fitness for human habitation” is crucial to understanding the obligations under the Act. A property is considered unfit for habitation if there are serious issues that make it unsafe or unhealthy to live in. Some of the key issues that could make a property unfit include:

  • Damp and mould growth
  • Structural instability
  • Inadequate heating
  • Unsafe electrics or gas installations
  • Inadequate water supply
  • Poor ventilation
  • Lack of natural light
  • Issues with drainage and waste disposal
  • Hazards such as asbestos, carbon monoxide, or lead poisoning risks

The Act refers to hazards that are assessed under the Housing Health and Safety Rating System (HHSRS), a system used by local councils to assess whether a property contains serious risks. If a property contains any of these hazards, the landlord may be required to address them to make the property fit for habitation.

Taking Action: What Landlords and Tenants Should Know

For Landlords: Ensuring Compliance with the Act

Landlords must proactively ensure that their properties meet the standards of fitness for human habitation. Regular inspections, proper maintenance schedules, and addressing tenant complaints in a timely manner are essential steps to staying compliant.

Steps for Landlords

  1. Conduct Regular Property Inspections: Periodic inspections allow landlords to identify and address potential issues before they become serious. During these inspections, landlords should check for common hazards, such as damp, faulty electrics, or structural problems.
  2. Maintain Records of Repairs and Communications: Keeping thorough records of any repairs carried out and communications with tenants can protect landlords in the event of a dispute. These records can also demonstrate that the landlord has taken all reasonable steps to maintain the property.
  3. Respond Quickly to Tenant Reports: Landlords should take tenant complaints seriously and investigate them as soon as possible. Delays in responding to serious issues could lead to the property becoming uninhabitable and increase the risk of legal action.
  4. Understand the Legal Implications: Failing to comply with the Act can result in court orders requiring landlords to carry out repairs or pay compensation to tenants. In extreme cases, landlords may be prohibited from renting out unfit properties until repairs are made.
  5. Consider Professional Help: In some cases, particularly when dealing with complex repairs or disputes, landlords may wish to seek legal advice or hire property management services to ensure compliance with the law.

For Tenants: Understanding and Exercising Your Rights

Tenants have the right to live in a safe and healthy home. If they believe their home is unfit for habitation, they can take steps to enforce their rights under the Homes Act.

Steps for Tenants

  1. Report Issues to the Landlord in Writing: Tenants should report any problems as soon as they are identified. It is advisable to keep a written record of all communications with the landlord, including emails or letters, so there is evidence of the tenant’s efforts to resolve the issue.
  2. Allow Reasonable Time for Repairs: After reporting an issue, tenants should allow the landlord a reasonable amount of time to fix the problem. The timeframe will depend on the severity of the issue. For example, urgent issues such as unsafe gas installations should be addressed immediately, while minor issues may take longer.
  3. Seek Help from Local Authorities: If a landlord fails to act, tenants can contact their local council for assistance. The council can inspect the property and issue enforcement notices, requiring the landlord to carry out necessary repairs.
  4. Legal Action as a Last Resort: If the landlord continues to neglect their responsibilities, tenants may take legal action under the Homes Act. This can result in a court order for repairs and/or compensation. Tenants should gather evidence, such as photos of the problem, medical reports if their health has been affected, and records of communication with the landlord.
  5. Avoid Retaliatory Evictions: Tenants may worry that taking action will result in eviction. However, the Act provides protection against retaliatory evictions, especially if the tenant has contacted the council and enforcement action has been taken against the landlord.

Legal and Financial Implications

Legal Action Under the Homes Act

If a property is found to be unfit for human habitation, tenants can take their landlord to court. The court may issue an order requiring the landlord to make repairs or pay compensation to the tenant. There is no fixed limit on the amount of compensation that can be awarded, and it will depend on factors such as the severity of the problem, the impact on the tenant’s health, and how long the issue has existed.

Both landlords and tenants should be aware of the potential financial consequences of legal action. For landlords, failing to comply with the Act could lead to significant repair costs, compensation payments, and potential legal fees. Tenants should also consider the costs of taking legal action.

See UK government guidance on the act here.

The Housing Health and Safety Rating System (HHSRS)

The Housing Health and Safety Rating System (HHSRS) is a risk-based assessment method used to evaluate potential health and safety hazards in residential properties. It was introduced as part of the Housing Act 2004 and plays a crucial role in ensuring that homes are safe, particularly in the context of the Homes (Fitness for Human Habitation) Act 2018.

Overview of HHSRS

The HHSRS evaluates a range of housing hazards and their potential impact on occupants. It doesn’t set a minimum standard for housing but focuses on the risk to health and safety arising from any identified deficiencies. It aims to identify whether a property poses any serious or immediate risk to the occupants. These hazards are assessed based on their likelihood and the potential severity of harm they could cause.

Key Hazards Under HHSRS

The HHSRS identifies 29 potential hazards, grouped into categories related to physiological requirements, psychological requirements, protection against infection, and protection against accidents. Here’s a brief overview of the most critical hazards landlords and tenants should be aware of:

1. Damp and Mould Growth

  • Description: Damp and mold can cause respiratory issues, asthma, and other health problems, especially for children, the elderly, and those with pre-existing conditions.
  • Relevance: Landlords must ensure proper ventilation and repair any leaks or structural issues causing dampness.

2. Excess Cold

  • Description: Cold homes can exacerbate conditions like hypothermia, cardiovascular diseases, and respiratory problems.
  • Relevance: Adequate heating systems and insulation are necessary to prevent homes from falling below a safe temperature range.

3. Excess Heat

  • Description: Overheated homes can lead to dehydration, heatstroke, and worsening of cardiovascular and respiratory diseases.
  • Relevance: Proper ventilation systems and temperature control measures must be in place.

4. Asbestos and Manufactured Mineral Fibres (MMF)

  • Description: Exposure to asbestos fibers can cause serious lung diseases, including asbestosis and mesothelioma.
  • Relevance: Landlords must assess and manage any asbestos in older properties.

5. Biocides and Carbon Monoxide

  • Description: Carbon monoxide poisoning from faulty appliances or poor ventilation is a serious risk that can be fatal.
  • Relevance: Regular checks of gas appliances and proper ventilation are essential.

6. Lead

  • Description: Lead exposure can harm the nervous system and cause developmental issues, particularly in children.
  • Relevance: Older properties with lead piping or paint require immediate attention.

7. Crowding and Space

  • Description: Overcrowded living conditions can impact physical health and mental well-being.
  • Relevance: Landlords must ensure that properties are appropriately sized for the number of occupants.

8. Entry by Intruders

  • Description: Properties must be secure to prevent unlawful entry, which can cause stress and psychological harm.
  • Relevance: Secure doors, windows, and functional locks are essential for tenant safety.

9. Lighting

  • Description: Inadequate lighting can lead to accidents, poor mental health, and reduced visibility.
  • Relevance: Sufficient natural and artificial lighting must be provided.

10. Dampness, Cold, and Asbestos Hazards in Older Properties

  • Older buildings, especially those built before certain building standards were enforced, may present these hazards. It is the landlord’s duty to ensure that these hazards are assessed and mitigated to meet the required safety levels.

Application and Scoring of Hazards

The HHSRS uses a scoring system to evaluate hazards based on:

  • Likelihood of Occurrence: The probability of an event causing harm within the next 12 months.
  • Severity of Outcome: The potential impact, ranging from mild health effects to fatalities.

Properties are inspected, and each identified hazard is scored according to these factors. This score determines the urgency of required interventions and whether enforcement action should be taken.

Landlord Obligations Under HHSRS

Landlords have a legal responsibility to:

  • Conduct regular inspections to identify any deficiencies or hazards.
  • Take action to remedy any identified hazards that could pose a risk to tenants.
  • Ensure that properties meet minimum standards for safety, warmth, and structural stability.
  • Comply with guidance on ventilation, heating systems, and the removal or management of hazardous substances like asbestos or lead.

Tenant Awareness and Rights

Tenants should:

  • Report any issues or hazards to their landlords promptly.
  • Be aware of their right to live in a safe and habitable home.
  • Seek advice from local councils or organizations like Shelter or Citizens Advice if their landlord fails to address reported hazards.

Enforcement and the Homes (Fitness for Human Habitation) Act 2018

The Homes Act works alongside the HHSRS to ensure that properties are maintained to a habitable standard. Landlords who fail to comply with these requirements can face legal action, including enforcement orders requiring immediate repairs or compensation claims from tenants.

In conclusion, the HHSRS is a comprehensive system that underpins the Homes (Fitness for Human Habitation) Act 2018, ensuring that homes are safe, warm, and free from health hazards. Both landlords and tenants must understand their responsibilities and rights under this system to maintain and ensure habitable living conditions.

See full UK government guidance on HHSRS here (link opens a new tab)