- Applying Stamp Duty Land Tax (SDLT) rates for mixed-use properties in England may not be as straightforward as it seems, nor as straightforward as stamp duty on commercial property, not least when purchasing farms and estates.
- Increasingly HMRC are querying SDLT payments made at commercial or mixed-use rates if they consider that land purchased with a dwelling should be classed overall as residential. Now it may be even more important to take account of the residential element.
Due to the effects of the pandemic on the housing market and economy, the Government has temporarily reduced the amount of SDLT payable on residential properties purchased up to £500,000. The reduction also applies to first time buyers who previously benefitted from discount rates. The reduction applies from 8 July 2020 to 31 March 2021 only.
Three types of SDLT rates are applied to freehold property purchases:
- Residential rates apply to dwellings (unless 6 or more dwellings are purchased together in which case commercial property rates apply). Relief is available for two or more dwellings by which tax is calculated on the average price and applied to each dwelling.
£0 - £500,000 - nil
£500,001 - £925,000 – 5%
£925,000 - £1,500,000 - 10%
Over £1,500,000 – 12%
- Commercial property SDLT rates apply to non-residential property
Up to £150,000 - nil
£150,001 to £250,000 - £2%
Over £250,000 - 5%.
- Since 1 April 2016 a surcharge of 3% on top of residential SDLT applies to second homes or homes intended to be let. A holiday home owned abroad counts as a second home. This rate will continue to apply, so 3% will be payable on the first £500,000, 8% on £501,000 to £925,000, and so on.
Clearer guidance has now been given for houses which include an annexe, confirming that in most cases, these do not attract the surcharge.
Land and buildings that include both residential and non-residential property can sometimes be classed as mixed-use which means that commercial property SDLT rates apply.
However the temporary change to the residential rate is likely to affect how buyers seek to pay SDLT on mixed-use property. Since commercial rates on higher value properties over £500,000 are still lower than those applied to similarly priced residential properties, often significant savings can be made by claiming mixed use. Over recent years, more rural houses have been sold with pony paddocks or grazing land attached with SDLT returns being made on a mixed use basis.
Arguably the ability to claim a property as mixed-use became more important when the 3% residential surcharge was introduced. For instance where a replacement main residence is purchased with a second house, the surcharge is applied to the whole transaction. So a farmhouse purchased with separate cottages could be subject to the 3% surcharge unless one can prove that the property includes non-residential elements, such as farmland or commercially let units. However there can be uncertainty about what qualifies as mixed use, and it will be a question of how HMRC treat such claims
Now, the new rules may encourage buyers to try and take advantage of the nil rate on residential properties under £500,000. Residential SDLT is applied to dwellings, and their gardens and grounds, unless such land is considered to be outside the ’curtilage‘ or amenity of the dwelling. So if additional land such as paddocks, or fields treated as pasture or farmland, is purchased with a farmhouse or estate house, mixed use SDLT may apply.
HMRC will consider purchases on a case-by-case basis and it will be down to the buyer to prove that the property is mixed use, for example by proving the land is being farmed, or supplying copies of agricultural or commercial agreements, or that it is merely residential, for example, with the pony paddock being ancillary to residential use. You need to be prepared to support any claim for mixed use or residential treatment that you make.
In one case an estate consisting of a manor house with parkland did not qualify for mixed use rates, because HMRC considered the parkland to be for the amenity of the house. More recently HMRC considered a house with 250 acres of land used as a working dairy farm to be residential, demanding almost £300,000 more in SDLT. This is surprising since it is a substantial working farm, and is being challenged. In other cases, HMRC may consider that a buyer deliberately acquires a field or commercial plot to be able to claim it is a mixed-use transaction, and may then apply different rates to each part of the transaction. Given the increased scrutiny this area is receiving from HMRC, It is more important than ever to seek specialist tax advice in such circumstances.
Due to the complexities of the SDLT regime and the different facts in each purchase, we cannot give specific tax advice ourselves, and you are advised to seek advice from a tax specialist.