DID YOU SAY MIXED USE?
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What is a ‘mixed-use’ property for SDLT purposes and why does it matter?
The rate at which SDLT is chargeable depends on whether land is wholly residential, wholly non-residential or “mixed-use” (meaning the land has a combination of residential and non-residential elements).
If the land is wholly residential the rate applicable to the top slice of the consideration paid (over £1,500,000) is 12%, and increases to 15% if the additional 3% rate applies (FA 2003 Sch 4ZA) and from April 2021 the potential top rates for non UK resident buyers could be as high as 17%. For non-residential and “mixed-use” properties, the highest rate which could apply is capped at 5% SDLT.
This substantial disparity between the rates of SDLT which can apply, explains why many disputes between taxpayers and HMRC focus on deciding whether the relevant property is ‘wholly residential property’.
‘Residential property’ is defined in FA 2003 s 116 as:
(a) ‘a building that is used or suitable for use as a dwelling, or is in the process of being constructed or adapted for such use, and
(b) land that is or forms part of the garden or grounds of a dwelling’ or
(c) any interest or right over land that subsists for the benefit of that dwelling.
When considering a mixed-use argument, three issues require analysis:
- is the building on the land used or suitable for use in its entirety as a dwelling or are there specific areas of that building that are not? – for example a building comprising a shop under a flat or similar;
- where the property has extensive grounds, is some of the land put to non-residential use?; and
- is the purchase of the land part of a number of ‘linked’ purchases some of which are residential and some are not?
Gardens or Grounds
The issue that appears to be most contentious is whether or not the entirety of the land forms part of the “garden or grounds” of a dwelling, and we have seen a number of cases in the Tax Tribunals dealing with transactions where claims for mixed-use treatment have been made.
In Hyman v HMRC ( UKFTT 469, the taxpayers had bought a property described by the estate agents as ‘a superb country retreat with historic barn set in over 3.5 acres with far reaching views’.
The land included a barn, a meadow and a public bridleway separated from the house and its gardens by a hedge. The Hymans claimed that part of the land was not residential. The Tax Tribunal noted that the SDLT legislation does not define the expression “garden or grounds” but it noted that “grounds” must be something different from and additional to “gardens”. ‘It is an ordinary word and its ordinary meaning is land attached to or surrounding a house which is occupied with the house and is available to the owners of the house for them to use.’
Paddocks, Grazing and Business Use
In the absence of a requirement for actual use of the “grounds”, the Tribunal noted that the fact that the meadow had been allowed to grow wild was irrelevant. Similarly, the existence of hedges did not affect their analysis. These could be “ornamental” or delineate different areas. The barn and meadow were part of the “grounds” and although the existence of a well-used public bridle path meant the land was not exclusively enjoyed by the owners, there was no exclusion for their own use and enjoyment and accordingly the property was not mixed-use.
The taxpayers did not fare any better in Goodfellow v HMRC ( UKFTT 750), indeed the Tax Tribunal commented that their arguments were ‘artificial, strained and contrary to common sense.’
The Goodfellows had purchased a property described by the estate agents as a ‘fantastic family home set in about 4.5 acres within the sought after New Forest National Park. The Property benefited from detached garaging, a stable yard and paddocks’. They contended that as the space above the garage was used as an office for Mr Goodfellow’s business and that the stable yard and paddocks were used by a third party for grazing horses the property was mixed-use.
The Tribunal observed that the facts were similar to Hyman and that the ‘same or closely similar legal arguments’ were deployed in both cases. It noted, ‘looking at the character of the property as a whole, that the land surrounding the house was essential to its character, protected its privacy, peace and sense of space, and enabled the enjoyment of typical country pursuits such as horse riding.’
In relation to the room above the garage, the Tribunal determined this room was no different from him working ‘from a study, spare room or even the dining room table’.
As to the paddocks, there was no evidence of a commercial arrangement for their use by the third party; the current rental arrangement was £1 per month and this was not enough to sway the judges.
Finally, Myles-Till v HMRC ( UKFTT 127) is yet another tale of failure for the taxpayer. Ms Myles-Till had acquired a cottage and an adjoining paddock at the same time and she contended that the property was mixed-use. She argued in particular that the paddock had been historically used as agricultural land as part of the neighbouring farm, that it was overgrown at the date of completion and that it was ‘far too large’ to be part of the property she had acquired.
Following Hyman, the Tax Tribunal commented that the use of the paddock was key for the purpose of s116. In this respect, although the historical, or traditional use of the land was relevant, it was not determinative; only the use of the land at the relevant time (completion) was critical. So, the fact that the paddock had been used as agricultural land in the distant past did not help the appellant’s case. The Tribunal concluded that the paddock was part of the grounds, since there was no commercial use at the time of acquisition, there were no material physical barriers between it and the garden, and its size was comparable with the grounds of other residential properties in the area. The property was therefore residential.
In the words of the Tax Tribunal in Myles-Till, the language of s 116 is both ‘legally imprecise’ and ‘archaic’. Yet, absent ‘strained’ arguments, the test, as refined by recent case law, is fairly straightforward. Grounds adjoining or benefitting a residential property will only be of ‘mixed-use’ character, only if it is used for a clear commercial purpose.
It is of some note that the aforementioned cases were easy wins for HMRC.
In relation to the first limb of the definition in s116 ‘a building that is used or suitable for use as a dwelling’, the guidance, again in line with the relevant case law (Goodfellow), notes that a home office or study will not confer a mixed-use character to a dwelling as the room remains suitable for ‘use as a dwelling’. The guidance accepts however that if, for instance, two rooms of a house are dedicated to use as a surgery, and are only used as such, the property will be mixed-use. Of course, if the surgery has been adapted in some way and is no longer ‘suitable for use as a dwelling’, the taxpayer’s case will be even stronger.
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