SDLT for property developers: golden brick and broken brick


23rd August 2023

Stamp duty land tax (SDLT) for property developers varies, depending on whether the property counts as residential or as non-residential. Different rates of SDLT apply accordingly, and significant amounts of money can be at stake.

For example, there were two transactions in the Ladson Preston Limited and AKA Developments Greenview Limited v HMRC case, where a Court of Appeal judge has refused permission to appeal from a decision of the Upper Tribunal (UT). The case involved purchases by two different buyers. AKA had acquired a property with existing commercial buildings and with planning permission to build nine houses. Before completion AKA made bore holes to test the ground conditions. On the day of completion, AKA commenced work to demolish the existing buildings. They claimed multiple dwellings relief (MDR) in combination with mixed property treatment. In both cases the UT held that non-residential rates applied and that MDR was not available.

The decisions do not give the purchase price, but for illustration, using today’s rates of SDLT, if AKA paid £2.7M then SDLT:

  • At the non-residential rate would have been £124,500.
  • With MDR (assuming it was all residential property and working on an average price per dwelling of £300,000 and applying the 3% surcharge) it would be £103,500.
  • AKA at the First Tier Tribunal (FTT) was arguing for the SDLT to be much lower, saying that part of the site would remain undeveloped, so overall the purchase counted as mixed property.  That would have meant the 3% surcharge did not apply, even claiming MDR. This approach would have meant slightly more SDLT on the non-residential part (because the non-residential rates would be used for that part), but this would be greatly outweighed by the saving on not having to pay the additional 3% on the residential part. The exact amount of tax would depend on the breakdown of the price, but it could be closer to £30,000.

The reason for the 3% surcharge not applying to a mixed property transaction where MDR is applied is explained in my blog.

A building in the process of construction

The FTT in Ladson Preston  and the UT on appeal had to address whether there were “dwellings” on the properties. This was relevant to MDR, because for each buyer the amount of SDLT worked out lower if the property counted as residential if MDR could be claimed. A key point for decision was whether there was “a building in the process of construction” as referred to in the MDR legislation. In neither case had the physical construction of new buildings begun:

  • The purchase by Ladson Preston was of bare land with planning permission.
  • The purchase by AKA was of land with commercial buildings with planning permission; some bore holes had been made. On the day of completion, but after completion, AKA commenced the demolition of the buildings.

The UT confirmed that it is significant that the statutory definition of “dwelling” for MDR refers to “a building”. It decided that the activities carried out, such as obtaining planning permission, were not enough; there needed to be some “physical manifestation” of a building on the ground. The boreholes were not part of the buildings to be constructed; they were there to test the ground.

Golden brick

The boreholes were found not to count as a physical manifestation of a “building”. The UT left it open however as to what work would count. The HMRC manual at SDLTM00400 indicates that there needs to be some work on top of foundations; this is similar to the “golden brick“ formulation which is relevant in the VAT context. Sometimes for SDLT, it is referred to as a “muddy brick”, because the work above foundations could be below ground level. HMRC’s manual says that “more than a hole in the ground” is required.

An example, given by the UT in the Ladson Preston case of what would be enough, was of “foundations and the beginnings of a wall” (provided that it was established that the building being constructed was for use as a dwelling).

The reasoning in the case, however, suggests it could be possible that making a hole for foundations, or laying foundations, could be a sufficient physical manifestation. The UT and the judge of the Court of Appeal who refused permission to appeal did not feel it appropriate to give guidance on this point.

The Court of Appeal judge said that to come within the definition of dwelling for MDR “there has to be something which is or is in the process of becoming a building in order to come within these words; i.e there has to be some sort of physical presence or manifestation. The mere grant of planning permission or the existence of an intent to build, at some future point, is insufficient”.

Moment of completion for MDR

The Ladson Preston decisions also deal with the issue of the point in time at which one assesses the nature of the property for MDR purposes. This is of particular significance for many property developers and their SDLT position. In the AKA purchase, some physical work had been done (in starting the demolition of the existing commercial buildings) after the time of completion, but on the day of completion. AKA argued that one should take into account anything which happened on the day of the “effective date” of the transaction.

The UT disagreed, saying that the interest acquired “was the chargeable interest as it stood at the very time of completion”. A judge of the Court of Appeal, in refusing permission to appeal, said that “the statutory requirements in this case should be tested at the moment of completion. Activity after that moment is irrelevant”.

Moment of completion for mixed property analysis?

The Ladson Preston case dealt with the definition of “dwelling” for the purposes of MDR. Similar issues of timing can arise when assessing whether a property counts as residential or as non-residential property on account of the granting of a lease. In the Kozlowski case the FTT applied the decision in Ladson Preston. Following that logic, the Tribunal in Kozlowski said that a lease of a garage granted on the day of completion should be ignored. The FTT in Kozlowski quoted the Court of Appeal order refusing permission to appeal in Ladson Preston and the FTT decision in Brandbros Limited (which also involved a lease of a garage).

This contrasts with the earlier Suterwalla decision of the FTT where one reason for the decision (that a property with a paddock counted as mixed property for SDLT) was that a tenancy at will granted by the buyer on the day of completion should be taken into account (although the FTT then said the answer would be the same, whether or not the tenancy at will was taken into account). The judge in that case declined to follow the Ladson Preston UT decision, saying that applied to MDR cases, rather than to SDLT more generally.

Broken Brick

I have seen a suggestion, following the Suterwalla case, that property developers who buy a house, but demolish it by midnight on the day of completion, can say they have bought non-residential property. That does not appear right applying the logic of Ladson Preston as applied in Kozlowski and Brandbros. Those cases say that one has to test the nature of the property by reference to the nature of the property as it is at the moment of completion.

What is the SDLT position if the property developer demolishes the building on the property after exchange of contracts, but before completion? In such a case the “effective date” is before completion; it is the time of substantial performance of a contract (for example by taking possession of a property in order to demolish the building on it). At the point of taking possession there is still a dwelling on the property, so the property would count as residential for SDLT.

Arguably if a buyer agrees to buy land (not a dwelling) and completion is conditional on the dwelling having been demolished prior to completion, then the purchase is of bare land only, so non-residential. It would be risky if the buyer is employed to carry out the demolition. In practice many sellers are reluctant to demolish their own house and some have capital gains tax reasons not to entertain the idea.

Conclusion

The Court of Appeal judge (in an order sealed on 26 June 2023) refused leave to appeal the decision of the UT in Ladson Preston even though she noted there “many other cases standing behind this one”. She said “the desired clarity on the meaning of the statute has now been given by the UT”. The reasoning of the UT was approved, so giving it increased weight. This still leaves grey areas as to the SDLT payable by property developers.

We can expect to see the Ladson Preston decision considered in the appeal in the Suterwalla case (the decision in Kozlowski says Suterwalla is being appealed). It will be interesting to see if the same principles are applied as laid out in Ladson Preston about judging the property as it stands at the moment of completion.

There are issues about MDR and a property with two dwellings, one of which had been let as an artist’s studio two weeks before the purchase, in the Ridgway FTT case. That is listed for a hearing at the UT on 6 November 2023. The decision in Ladson Preston might be of incidental relevance for that, as to the point of time at which one tests whether a building is suitable for use as a dwelling.

UPDATE 25 September 2023

On 22 September 2023 HMRC updated the pages in the Manual to make it clear that the test is made at the time of the land transaction, so changes after that time (even on the effective date) are irrelevant.  Changes have been made to:

  • SDLTM00360 about residential and non-residential land generally, to include a new section: “Establishing the nature of the relevant land at the time of the land transaction”;
  • SDLTM00380 about testing whether a property is used as a dwelling or is suitable for use as a dwelling;
  • SDLTM00395 about testing whether a building is used or suitable for use as a dwelling; and
  • SDLTM00450 about whether land with a dwelling counts as the garden and grounds of the dwelling.

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