The rates of Stamp Duty Land Tax (‘SDLT’) are generally higher for ‘residential’ property than for ‘non-residential’ property. But if the subject matter of a property transaction includes any ‘non-residential’ element, the ‘non-residential’ rate applies to the whole transaction. Hence, demonstrating that what you have bought includes something (however small) that is not ‘residential property’ saves you SDLT: sometimes very significant amounts of SDLT.
There have thus been a number of cases in which purchasers have sought (unsuccessfully) to identify within the purchase of what is substantially a family home the magic ‘non-residential’ element. Things like an office above the garage, a letting of the paddock or even the letting of a domestic garage for storage. In fact, HMRC have lost patience with what they consider to be an avalanche of spurious claims made by boutique ‘reclaim agents’ to such a degree as to have issued a consultation document at the end of 2021 proposing a change in the law: the outcome is awaited.
Meanwhile, the Court of Appeal in Hyman & Others v HMRC [2022] EWCA Civ 185 addresses a more ambitious argument that could potentially have greatly widened the scope for claiming the ‘non-residential’ rate.
‘Residential property’ is defined as ‘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’ (which itself has led to some interesting litigation) together with land that is or forms part of the garden or grounds of such a building (or an interest in or right over land that subsists for the benefit of such a building or such land). ‘Non-residential property’ is defined by exclusion – it’s anything that isn’t residential.
Hyman was all about ‘garden or grounds’. Specifically, it was about whether ‘garden or grounds’ simply meant what it appeared to say; or whether there was to be read into the legislation a restriction to garden or grounds required for the reasonable enjoyment of the dwelling having regard to its size and nature – a concept familiar from the Capital Gains Tax ‘main residence’ exemption.
Such a restriction would mean that many houses with land attached would include some ‘non-residential’ land so would attract the lower rate of SDLT. It would also, incidentally, put buyers into something of a quandary – for if as a buyer I contend that some of the grounds are not required for the reasonable enjoyment of the dwelling, I would save some SDLT on purchase but diminish any Capital Gains Tax ‘main residence’ relief on sale.
Readers may wonder on what basis it might be thought possible to restrict the plain wording of the legislation in this way. They would be in good company.
The answer is that in 2003 (so before the introduction of SDLT) HMRC had published a Statement of Practice regarding what it would treat as ‘garden or grounds’ for the purposes of a particular recently-introduced Stamp Duty provision. This had said that:
‘The test the Inland Revenue will apply is similar to that applied for the purposes of the capital gains tax relief for main residences (section 222(3) of the Taxation of Chargeable Gains Act 1992). The land will include that which is needed for the reasonable enjoyment of the dwelling having regard to the size and nature of the dwelling.’
From that, it was argued that the SDLT provision must also as a matter of law be interpreted in the same way.
The Court of Appeal was dismissive:
‘There is no reason, therefore, why Parliament should have intended that the guidance given in relation to stamp duty should apply to SDLT. Second, the guidance given by HMRC did not, even in its own terms, purport to be an interpretation of section 92B. At best it amounted to guidance on how HMRC would, in practice, apply a test. Third, HMRC did not explain why they decided to apply a test derived from the express wording of section 222(3) of the Taxation of Chargeable Gains Act 1992 to section 92B. Section 222 was in very different terms.’
Thus, to secure the lower rates of SDLT, it is not sufficient (nor ever has been) to show that the purchase includes land which is not required for the reasonable enjoyment of the property; what must be shown is that the land is not part of the garden or grounds of the property at all – an incomparably more difficult task, as is shown by cases such as The How Development 1 Ltd [2021] UKFTT 248 (TC).
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