HMRC’s onslaught against those looking to avoid Stamp Duty Land Tax (SDLT) on buying their home continues. A recent case, Mudan, concerns the purchase of a house in very poor condition.
Readers may remember the case of P N Bewley Ltd v HMRC [2019] UKFTT 65 (TC) about the purchase of a dilapidated bungalow as it received coverage in the national press. In that case the bungalow was so riddled with asbestos that it had to be demolished. The First-tier Tribunal (FTT) found that it wasn’t suitable for use as a dwelling and the non-residential SDLT rates applied.
HMRC guidance accepts that a dwelling that has become derelict is no longer residential. However, the relevant section of HMRC’s SDLT Manual draws a distinction between that and a property which is in need of modernisation or repair.
It seems reasonable that a property that can no longer be used as a dwelling should be treated as non-residential. It also seems fair that a property which needs a lick of paint and new carpet to make it pleasant to live in should still be residential. But where is the line drawn?
The facts of the Mudan case [2023] UKFTT 317 (TC) are, in the literal sense, messy. In 2018 people were living in the house who had 10 dogs and there was dog excrement in the house. The tenants knew they were going to be evicted so weren’t taking much care. The property was empty for a few months before Mr Mudan’s acquisition of it in 2019. By then it had been vandalised; there was an ‘unbearable smell … mouse and rat droppings … mice [seen] running around [and] loose wires’. Even squatters would probably have turned their noses up.
Mr Mudan had lots of work to do: rewiring; new boiler; new roof to replace the one that was leaking; dealing with the bad smell and generally making the house fit for a normal family to live in.
Despite the extensive work needed, the Tribunal decided that at acquisition the property was suitable for use as a dwelling! The Judge said:
‘I consider that a building which was recently used as a dwelling, has not in the interim been adapted for another use and is capable of being used [as a dwelling] again will count as a dwelling, even though it is not ready for immediate occupation, unless the reason [for this is] so fundamental that the work required to put these problems right goes beyond anything that might ordinarily be described as repair, renovation or fixing things’.
As examples, he suggested radioactive contamination or where there was a high risk of the building collapsing. He distinguished the Bewley case where things were so bad the bungalow had to be demolished.
The approach of the Tribunals in these cases is clear: if it looks like a dwelling and (excuse the expression) smells like a dwelling, the residential rates will almost always apply.
SDLT and the GAAR Advisory Panel
In more bad news for the home SDLT avoiders, HMRC have referred a case to the GAAR Advisory Panel.
GAAR stands for General Anti-Abuse Rule. The GAAR is a sweep-up provision which can be used as a last resort by HMRC to challenge a tax avoidance scheme. It applies where no reasonable person could say that the action taken by the taxpayer was reasonable in relation to the relevant tax rules.
The case concerned a Mr A who bought a house and sold it on to Mrs A for an annuity stream. Under the special rules relating to annuities, Mr A claimed no SDLT was due. It appears the taxpayer had already accepted that the scheme didn’t work on other technical grounds – the referral to the GAAR Advisory Panel was to allow HMRC to levy a penalty on the promoter of the scheme.
Not surprisingly the Panel unanimously decided that the taxpayer scheme was not a reasonable course of action.
So not a good time for house-buying SDLT avoiders. But it is important that the reliefs are not overlooked in cases where they do apply. If you buy a shop with flats above, or a country estate which includes (genuine) farmland, that is a mixed transaction and the non-residential rates may apply even to the flats and country house. Our previous article, on Faiers v HMRC, looked at questionable annexes [link here] but where the house has a proper self-contained annex or an independent cottage in the grounds, Multiple Dwellings Relief (MDR) can be claimed. In light of the law changes being considered by the Government (also discussed in that previous article), the opportunities may be temporary.
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