Mixed up about mixed use?

A major addition to the cost of any property comes in the form of land transaction tax. Whether it’s SDLT in England and Northern Ireland, LBTT in Scotland or LBT in Wales, the highest rates of tax are charged on property transactions which consist entirely of residential property. Rates for non-residential transactions are much lower – and these more favourable rates also apply to any mixed use transactions where the property has both residential and non-residential elements.

This means that if a property purchase includes a non-residential element, upfront SDLT/LBTT or LBT costs can be significantly reduced.

Mixed use property

For SDLT purposes (the focus of this article) any non-residential element can shift the SDLT from a rate of 12% (or even 15% where higher rates apply) to the maximum non-residential rate of 5%.

Clear examples of mixed use properties include a shop with a flat above, or a farmhouse purchased with farmland. But what about a large house with a paddock or a sizeable garden?

In recent years, media coverage about mixed use property has led to an increase in SDLT reclaims as buyers, who initially paid residential rates, identify non-residential elements to their purchase. Estate agents and some boutique tax firms are also mentioning to buyers the possibility of a favourable treatment if non-residential elements can be identified.

A reclaim may appear to be successful initially because HMRC operate a ‘process now and check later’ approach. In many cases, it is not until an enquiry is opened that the purchaser might realise that HMRC has concerns.

An example of a mixed property problem can be seen in the case of Hyman, which reached the First Tier Tribunal earlier this year.

Hyman case

In 2015, Mr and Mrs Hyman purchased a large Georgian house set in 3.5 acres of land at a cost of £1,515,000. They paid an SDLT bill of £95,550 calculated using the residential rates. In 2017, they were advised that the property could be considered to be mixed use and they made a claim for a refund of over £30,000.

The key issue considered in this case was the meaning of residential property. If the property acquired included elements which fell outside this definition then it would be mixed use, and lower rates of SDLT would apply.

Residential property is defined for SDLT purposes as a building which is used, or suitable for use, as a dwelling, together with any land that is or forms part of its garden or grounds. Any buildings or structures on the garden or grounds can also count as residential property.

The Hymans’ case was that their property included a number of non-residential elements including:

• A barn used to store tractor/mowing gear for which planning permission would have been needed to convert to residential use.
• A meadow used for dog walking and keeping hens where the grass was allowed to grow long and through which defined paths were maintained.
• A bridleway to which the public had access rights.

These elements of the property were separated from areas of formal garden by hedges.

In response, HMRC highlighted the term grounds included in the definition of residential property. While the term ‘garden’ brings to mind a managed area used for growing vegetables and flowers as well as for recreation, ‘grounds’ takes a wider meaning and could be more extensive.

Unlike the position for private residence relief (PRR) in CGT, where there is a concept of ‘reasonable enjoyment’ of garden or grounds, for the purposes of SDLT the use of the grounds is not relevant and grounds can be left to grow wild. (There is also no concept in SDLT of the permitted area which can restrict the area of land considered to be garden or grounds for PRR.)

The Tribunal therefore accepted that any land surrounding a house available as an amenity for the dwelling could come within the definition of grounds.

The Tribunal also considered that the separation of areas such as the meadow from the more formal parts of the garden by hedges and fences was not relevant.

Ultimately, the Tribunal concluded that the whole of the property was residential, the higher rates of SDLT applied and no refund was due.

HMRC Guidance on garden and grounds

The decision in Hyman was published just a couple of weeks after HMRC updated their guidance on what is garden or grounds, which will be useful to anyone advising on the potential for mixed use. This updated guidance can be found from SDLTM00440 onwards.

Once it has been determined that the property includes a dwelling, the guidance indicates that factors to consider in determining whether any associated land falls within the definition of ‘garden or grounds’ include:

• Historical use prior to the date of the transaction.
• Evidence of commercial use.
• Layout, extent and proximity of the land.

The guidance notes that a balanced judgement needs to be reached, and it is not necessary to give equal weight to each factor.

It also notes that the future use by the purchaser will not generally be relevant. So an intention by the purchaser to use some element of the property in a commercial venture will not affect the SDLT position at the time of the transaction.

The guidance also reiterates the point in the Hyman case – that the definition for garden or grounds in SDLT is not the same as the definition used for CGT PRR.

As the SDLT at stake can be substantial due to the rate differences, anyone advising in this area will need to be aware of HMRC’s view of gardens and grounds.