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Recent Case Law developments

HMRC are now picking up the pace with challenging taxpayers SDLT returns. Here is a short summary of some SDLT cases heard just before the lockdown.

How defective/dangerous can a property be to still be a dwelling?
Fish Homes v HMRC ([2020] UKFTT 180)

Fish Homes had acquired a vacant flat for its property rental business. Following completion, the company discovered that it could not let the flat under a formal tenancy because the block was rendered with dangerous cladding. While remedial work was carried out, the daughter of one of the directors (and majority shareholders) and her friend occupied the flat. After completion of the works, the daughter and her friend moved out and Fish Homes granted a lease to unconnected tenants.
Under FA 2003 Sch 4A para 3, the purchase of residential property over £500,000 by a company is subject to a 15% flat rate over the entire consideration (as opposed to the usual rates of 0% to 12 % applicable to slices of the consideration). Para 5 of the same schedule provides relief where the property is acquired for ‘exploitation as a source of rents…in the course of a qualifying property business’. But, this relief will be withdrawn under para 5G if a ‘non-qualifying individual’ (broadly someone connected with the company’s shareholders) occupies the property.

HMRC considered that the relief should be withdrawn (due to the occupation by the director’s daughter) but Fish Homes argued that the flat was not suitable for use as a dwelling because of the danger created by the cladding. This meant that the flat was not residential property in the first place and the 15% higher rate for residential property did not apply.
So the question was whether the dangerous cladding meant that the flat was not suitable for use as a dwelling.

The First-tier Tribunal found that a defective building could still be a dwelling if it was fit for habitation (with facilities for sleep, storage, hygiene, cooking etc.), and a ‘reasonable person’ would not think that it was too dangerous to live there. In this case, the risk posed by the cladding was low, as evidenced by the fact that the local authority had not served a notice prohibiting occupation.

So, whether a defective property is suitable for use as a dwelling does not depend on whether it complies with building regulations – which as the Tribunal pointed out, vary over time – but the defects in the property are sufficiently serious that no ‘reasonable person’ would consider living there.

When is an annex a separate dwelling?

Fiander and Brower v HMRC [2020] UKFTT 190

The appellants had acquired a property made up of a main house and an annex. Under FA 2003 Sch 6B, where a purchase involves more than one dwelling, multiple dwelling relief (“MDR”) will apply. Essentially, the applicable SDLT rate will be determined, not by reference to the total value of the transaction but by reference to the mean value of the properties purchased, so that a lower rate will be payable.

The First-tier Tribunal observed that whether both parts of a building are ‘suitable for use as single dwellings’ is an objective test which should be based on the physical attributes of the property at the date of completion of the purchase. Like the Fish Homes Case mentioned above, the Tribunal also pointed out that a building remains suitable for use as a dwelling if an objective observer would consider it was and all that has happened is that it has fallen into relatively minor disrepair.

Each of the two buildings accommodated all of a person’s basic domestic living needs (to sleep, to eat and to attend to one’s personal and hygiene needs).

But, in the absence of a door in the short corridor linking the two buildings, neither building would provide its occupier ‘with a reasonable degree of privacy and security’, in the absence of a ‘ special relationship’ between occupiers. The fact that a lockable door could easily be added in the corridor did not help the appellants’ case as this would be an alteration after completion.
There was therefore held to be only one dwelling.

• Where your client is purchasing a property with an annexe it is therefore not just relevant to look at its facilities but how the annexe is or could be accessed.

Which address is the right address?

Troy Homes Ltd and another v HMRC [2020] UKFTT 174

The appellants had purchased bare land and duly filed the relevant SDLT returns on which they had given the address of their registered office. The current SDLT form only requires an address, without specifying the type of address. HMRC had then sent a notice of enquiry to that address and the appellants contended that the notice had not been validly served as it should have been served at their place of business, which was a different address (FA 2003 s 84).

The Tribunal agreed with the appellants and allowed their appeal without considering the substantive issue.

Following this case, we would expect HMRC to check taxpayers’ addresses before serving notices, which may be onerous. It is also likely that the SDLT form will be amended so that taxpayers will have to give the address of their place of business.

What is the date of the transaction for the purposes of transitional provisions?

Ladywalk LLP v HMRC [2020] UKFTT 207

A property sale contract entered into in June 2014 between A and B recorded the key terms of the agreement, and provided that the properties may be conveyed to a person nominated by B and that the completion date would be agreed at a later date.

In June 2015, further agreements were entered into and in January 2015, a limited liability partnership (LLP) was established by two trusts set up for the benefit of B’s children. Finally, in July 2015, the LLP completed the acquisition of the properties.

SDLT had changed from a slab system to a slice system with effect from 4 December 2014. The change meant a much higher tax bill for the appellants. However, under transitional provisions (SDLT Act 2015), transactions effected in pursuance of contracts entered into prior to 4 December 2014 were not caught by the new rules, provided that the purchaser made the relevant election. There were two issues:

• whether the transactions for the purchase of the properties in July 2015 had been made in pursuance of the June 2014 contract, and if so,
• whether anything had happened on or after 4 December 2014 so that transitional protection was lost.

On the first point, the Tribunal found that there was no reason to ignore the June 2014 contract, contrary to what HMRC suggested. The transitional provisions referred to a contract that existed ‘in the real world’ and the June 2014 sale contract was such a contract.

In relation to the second point, the Tribunal found that it was ‘clear that the contract anticipated that the conveyance would be to a person other than the original buyer’. The 2015 contract was therefore not a separate transaction. It was also not a variation of the 2014 contract; it made no change to the person to whom the properties were to be transferred, to the properties themselves, to the price or even to the completion date, which remained to be mutually agreed.

Although it is not clear that this was the case here, parties to a transaction that may be affected by expected legislative changes will often try to agree basic terms so that the contemplated transaction will benefit from transitional provisions. These provisions generally apply when a contract was entered into prior to the changes but completion takes place after them. This case provides a useful ‘how-to’ in this respect. Essentially, provided that key terms (the property, the price etc.) are agreed and that the contract contemplates that other terms will be mutually agreed at a later date, the transitional provisions should apply with the effect that the transaction will fall under the old rules. Tax advice should always be sought to navigate this complex area.

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