We have written many times about the long line of defeats at Tribunal for taxpayers attempting stamp duty land tax (SDLT) planning through applying mixed property rates or multiple dwellings relief (MDR). So it was a surprise to see a win for the taxpayer in Suterwalla [2023] UKFTT 450 (TC), a mixed property case.
The taxpayers, Mr and Mrs Suterwalla, bought a substantial seven-bedroom house with a large garden. In the same transaction they also bought a paddock which was adjacent to the house. The paddock was separated from the garden by a hedge but could be accessed via a small gate.
Immediately following acquisition, the Suterwallas let the paddock to a Ms Pregnall for one year at a rent of £1,000 for grazing her horses. Although the rent was quite small, the lease was valuable to the Suterwallas as it meant they didn’t have to maintain the paddock.
In their SDLT return the taxpayers claimed the paddock was non-residential so this was a mixed purchase, meaning they could apply the non-residential SDLT rates.
HMRC argued that the house and garden and the paddock were a single residential property. This was on the bases that both were on the same title and that the property was sold as an equestrian property of which the paddock formed part.
It turned out that both the above statements were incorrect. There were in fact separate titles and the property wasn’t marketed as equestrian as there were no stables.
The Tribunal Judge found that the paddock did not form part of the garden and grounds of the house but was land in non-residential use. His reasoning was that:
- The paddock was used for a purpose separate from the main house and it wasn’t visible from the house;
- The paddock could only be accessed from the house through a small gate, and it could also be accessed without going through the house and its garden;
- He also found it relevant that the paddock was in non-residential use through the lease and the Suterwallas had said they wouldn’t have bought the paddock if they had been able to exclude it.
It is surprising perhaps that this particular paddock should be found to be a separate non-residential piece of land when so many paddocks before it had been found to be part of garden or grounds. It can’t have helped HMRC to have got their facts wrong. We will have to see whether HMRC appeal the decision.
The more interesting part of the judgement actually relates to the lease. HMRC’s view as stated in its manuals is that in deciding the status of a property, you look at the position at the time of acquisition. Anything that happens afterwards is not relevant. So the lease to Ms Pregnall, being granted after acquisition, should have been irrelevant.
However this is not quite what the legislation says. FA 2003 s119 says that the effective date of a land transaction is the date of completion. The date of completion goes up to midnight on the day that completion occurs. So it was argued that provided the lease was granted before midnight on the day of completion, it could be taken into account. This argument had been tried and dismissed in a previous case (Brandbros). However in Suterwalla the judge decided that the date of completion meant what it said – up to midnight on the date of completion. Having said that, it should be noted that the judge also said that he would have reached the same conclusion – that the paddock wasn’t part of the grounds – even if he had agreed with HMRC’s contention on the timing of the lease.
The judge’s view on the lease does raise some anomalies. Had Ms Pregnall been on holiday on the day of acquisition and the lease signed the following day, it couldn’t have been taken into account! Again it remains to be seen if HMRC appeal the judgement.
Suterwalla does have potentially interesting implications. Suppose a developer buys a large residential property with a view to demolition and building a care home. If the residential property is demolished before acquisition then the non-residential SDLT rates might apply. However the vendor may not want to demolish his home before acquisition especially if he is living there! Following the logic in Suterwalla if the property is demolished before midnight on the date of acquisition the property might then be non-residential so that the non-residential SDLT rates apply. So the moral seems to be: get the acquisition documents signed early in the morning and move the bulldozers straight in!
We will have to see if HMRC appeal the decision before deciding how far reaching it is. Suterwalla and Brandbros are both First-tier Tribunal decisions which are not binding precedents, so it is important not to over-rely on the judgements which are contradictory anyway. For now it is worth bearing in mind that if something can be done post-acquisition up to midnight on the day of acquisition to bring the property into at least partial non-residential use, it might be possible to argue that non-residential SDLT rates apply.
It is also worth bearing in mind that while the courts have undoubtedly taken a hard line on taxpayers arguing that their residential properties include a non-residential part, some paddocks (and other areas) might actually pass the test! Your paddock could be the lucky one!
For more information on SDLT, MDR and the property tax implications of your situation, please get in touch with your usual BKL contact or use our enquiry form.