Applying Stamp Duty Land Tax (SDLT) rates for mixed-use properties in England may not be as straightforward as it sounds. 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.
Three types of rates are applied to freehold property purchases:
- Residential rates apply to dwellings (unless 6 or more dwellings are purchased together in which case commercial 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 - £125,000 - nil
£125,001- £250,000 - 2%
£250,001 - £925,000 – 5%
£925,000 - £1,500,000 - 10%
Over £1,500,000 – 12%
- Commercial 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. Clearer guidance has now been given for houses which include an annex, 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 SDLT rates apply.
Since, commercial rates on higher value properties 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, and this may have alerted HMRC to what they see as a loophole.
Arguably the ability to claim a property is mixed-use has become even more important since the 3% 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 you 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.
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. You need to be prepared to support any claim for mixed use 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 have 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.