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Stamp duty trap for mixed use properties

SDLT - someone else’s problem

Stamp duty land tax (SDLT) (and the UK regional equivalents) is unlike other taxes in that most people don’t look any further than the bottom line. The calculation is usually straightforward and made correctly by the solicitor or conveyancer. The trouble comes not with how much is liable to SDLT but which rates apply.

Different rates

Different SDLT rates apply to residential compared with purchases of commercial land and buildings. However, the extra SDLT payable on the former is only £500 for properties costing up to £925,000, unless you’re buying a dwelling when you already own one or more. In that situation the difference can be significant. For example, SDLT for the purchase of a second or subsequent dwelling for £400,000 is £22,000 rather than £9,500 if it were a commercial property.

Tip. Where land and buildings bought in a single transaction are for mixed purposes, i.e. both residential and commercial, the rate for the latter applies to the whole purchase. An example of mixed use would be a flat that’s connected to a shop, doctor’s surgery or an office.

Mixed use

HMRC says a property must be for mixed use before and after your purchase for the commercial rate to apply. Its view is questionable but difficult to overturn. Similarly, land or buildings which aren’t needed for the proper use and “enjoyment” of the residential property mean that it is a mixed use purchase and the commercial rate applies.

Tip. If you buy a home which includes animal paddocks or grazing land this can make the purchase count as mixed use and therefore subject to the commercial rates.

Trap. Since the introduction of the higher SDLT charges for second and further dwellings HMRC has taken a more aggressive approach to the use of commercial rates being used for transactions. For example, the purchase of a farmhouse with a cottage in the grounds where the latter is to be, say, let to someone who will farm the surrounding land. In this case it’s reasonable to apply the commercial rate to the whole purchase but don’t be surprised if HMRC challenges it.

Changing guidance

HMRC appears to have changed its approach and has certainly amended its internal guidance on when purchases can be categorised as mixed use because it includes land or buildings which are in excess of that needed for the enjoyment of the residence (see The next step ).

In an extreme example HMRC argued that a home with 250 acres used for dairy farming was residential and demanded more than £290,000 in extra SDLT.

Tip. Check the calculation of SDLT if there’s any question that your purchase might be of mixed use land or buildings even if it’s only £500 of tax at stake. For more significant differences be prepared to argue your case.

For a link to HMRC’s guidance, visit http://tipsandadvice-tax.co.uk/download (TX 20.03.02).