02 Oct 2023

HMRC go to the garage! Kozlowski, Espalier and SDLT

Insights, Publications

HMRC’s onslaught on taxpayers seeking to reduce the stamp duty land tax (SDLT) on buying residential property continues.  We have reported previously on cases involving paddocks which have almost invariably been found to be part of the residential property such that the higher residential rates apply.  A notable exception was Mr Suterwalla’s paddock, which although quite similar to other paddocks considered was found to be non-residential – see our article here.

In an apparent break from paddocks, HMRC are now turning their attention to domestic garages.  This was demonstrated in two recent First-tier Tribunal (FTT) cases: Kozlowski and Espalier Ventures Property (Landsdowne Road) Ltd.

Kozlowski v HMRC

In Kozlowski [2023] UKFTT 711 (TC), the taxpayer bought a substantial house which had its own integral garage.  On a separate title he also bought a small piece of land adjoining the garden on which stood another garage.

After his acquisition, Mr Kozlowski let the separate garage to S4 Financial Ltd (S4) for £50 per month.  The lease arrangements were a bit vague, but it appears that Mr Kozlowski was a minority shareholder in S4 and the company provided him financial services.  It appears S4 used the garage for storage.  The taxpayer claimed this meant that the garage was in commercial use.

The FTT decided that the garage lease was irrelevant as it wasn’t in place at the time of Mr Kozlowski’s purchase of the property.  This was at odds with Suterwalla where the judge decided on a strict reading of the legislation circumstances: date of acquisition went up to midnight on the day acquisition occurred. As First-tier Tribunal cases, neither of these cases is a binding precedent; but it seems likely that future cases will follow the logic in Kozlowski.  Absent the lease, the FTT said that the garage was a normal domestic garage.

The FTT then considered the position if the lease had been relevant.  It decided that the lease wasn’t a normal commercial arrangement and didn’t alter the residential nature of the garage.  While in the circumstances this wasn’t surprising, it does the beg the question of what the position would be if a domestic garage were let under a genuine commercial arrangement to a third party (ignoring minor matters like possible breach of planning permissions!).

Espalier Ventures Property (Landsdowne Road) Ltd v HMRC

The second garage case was Espalier Ventures Property (Landsdowne Road) Ltd [2023] UKFTT 725 (TC)The company bought at 43 Landsdowne Rd on three separate titles:

  • A lease over the basement and ground floor flat
  • The freehold of three lock-up garages
  • A share of the freehold

It planned to develop the property into a single dwelling including the garages as part of the living space.

The garages were physically separate from the house, being about three metres away, and were accessible only from a neighbouring road.  Since 1960 the garages had always been in the same ownership as the house.  They were small for modern cars and it appears they had previously been used for storage.  The taxpayer argued that the owner of the flat had no right to use the garage and therefore it couldn’t be regarded as part of the residential property.

The FTT said that under the normal SDLT definition of residential property, the garages were part of the grounds of the house.  They had been built as normal domestic garages; they were very near to the house and there were no restrictions on the owners of the flats using them.

In this case it turned out that the special annual tax on enveloped dwellings (ATED) rules for companies applied.  Under these rules the normal definition of residential property is extended to include land that subsists or is to subsist for the benefit of a dwelling.  As the taxpayer was intending to create a single dwelling including the garage land, this land would in future subsist for the benefit of the dwelling.  So under this definition the garages would be residential, even had they not been residential under the normal definition.

So it seems garages are going the same way as paddocks.  It would have to be a really special garage to persuade a tribunal to apply the non-residential rates of SDLT.

Other SDLT decisions: Henderson Acquisitions Ltd and Warner

In further blows for SDLT planners, in Henderson Acquisitions Ltd [2023] UKFTT 739 (TC) a company bought a property with a partially collapsed kitchen ceiling and other damage.  The FTT decided, following the line of similar cases, that to qualify as non-residential a property had to be in such a bad state of repair that it had to be demolished.  This wasn’t the case here and indeed the taxpayer had renovated the property into a dwelling.

And in Warner [2023] UKFTT 751 (TC) the taxpayer made a claim for Multiple Dwellings Relief later than the 12-month filing deadline for the SDLT return.  The FTT found no grounds for permitting a late claim.  This is in line with the decision in James George Gibson [2023] UKFTT 648 (TC).  It does demonstrate the need to get SDLT claims in on time.  Unlike other taxes which sometimes permit late claims following an HMRC enquiry, there is no such latitude in the SDLT legislation and it appears the courts won’t take a sympathetic line.

For more information about SDLT and other property taxes that may affect you, please get in touch with your usual BKL contact or use our enquiry form.

Another of our recent articles about a case involving SDLT: Would you want to live in an option agreement? Landmaster and SDLT