One of HMRC's current 'hot topics' for SDLT is whether land purchased with a dwelling falls within the definition of "residential property" or whether it can be said to be "non-residential property".
The relevance of this is the applicable rate for SDLT for the purchaser of the land. If you buy a dwelling with land for £2million and the residential rates apply then your SDLT would be £151,250. If the mixed rates applied (on the basis your acquisition is of both residential and non-residential land) then your SDLT would be £89,500*.
The SDLT legislation says that residential property is:
- a building used or suitable for use as a dwelling (or being constructed or adapted for use as a dwelling);
- land that forms part of the garden or grounds of a dwelling, or
- an interest or right over land that subsists for the benefit of a dwelling or garden or grounds of a dwelling.
Non-residential property is then defined as land that is not residential property.
The case law
Unsurprisingly, case law is building on the point of when land purchased with a dwelling can be said to be non-residential or when it is in fact just part of the garden or grounds of that dwelling. Often these cases turn on land that comes with a dwelling that is not subject to a full commercial lease but instead might be used informally for grazing or the keeping of horses either by the seller or a third party.
The latest case
The latest case on this is Suterwalla and another v HMRC  UKFTT 450 (TC) (23 May 2023). Judge Rankin concludes (see paragraph 60):
(1) The paddock is not visible from the dwelling house nor from the gardens;
(2) There is only one small gate access from the gardens to the paddock;
(3) Ms Pragnell [a third party to whom the paddock was let by the buyers immediately following completion of the purchase] was able to access the paddock from the bridle path without having to enter the Appellant’s [purchasers'] garden;
(4) The grazing lease is commercial resulting in the Property consisting of residential and non-residential property;
(5) The title to the dwelling house, gardens and tennis court is distinct from the title to the paddock.
(6) The Appellants would not have bought the paddock if it had been possible to exclude it from the purchase
On the basis of these conclusions it was held that the mixed rates were the correct ones and the tax payer won their appeal. The case is one of a limited number of tax payer wins and it will be interesting to see if HMRC appeal.
What does it mean?
The taxpayers' case included the assertion that a lease granted immediately after their purchase to a third party should be taken into account. It was a lease on commercial terms and added further evidence of non-residential use. HMRC said that the lease was not relevant as at the instant of the acquisition, the lease was not in place and future events are not relevant for SDLT. The Judge held that they would take the lease into account, agreeing with the taxpayer.
Judge Rankin perhaps foreseeing that as an easy target on appeal went on to conclude that even if the lease should not be taken into account (e.g. if he was wrong on that point), he thought the paddock should not be treated as residential (due to reasons 1, 2, 5, and 6 in the excerpt above).
In reality this comes back to the balance of the factors of what makes land garden or grounds. HMRC guidance is helpful in setting out some of those criteria:
- historic use;
- current use;
- layout of land and buildings;
- geographical facts; and
- legal factors and constraints
So what about my horse?
Unlet paddocks or fields are more at risk of being classed as part of the garden and grounds of the dwelling particularly where the dwelling is of a type that one might expect to command a larger area of land around it. The layout and access to that land from the dwelling is also key; if you can see the horse from the kitchen, then it may well be a bit too close for comfort.
* I have made various assumptions here to simplify matters. Higher rates can apply if you purchase a dwelling jointly with a company, you are not buying the property as your main residence, and/or you are not treated as UK-resident under the SDLT legislation. The calculation of both these numbers also uses the rates in force as at 7 June 2023.
Often these cases turn on land that comes with a dwelling that is not subject to a full commercial lease but instead might be used informally for grazing or the keeping of horses either by the seller or a third party.