In a First Tier Tribunal case decided in January 2019, P N Bewley Ltd escaped the higher rates of stamp duty land tax (SDLT) on the purchase of a dilapidated bungalow which it bought for demolition and redevelopment. This was on the basis that on the date of completion the building was not “suitable for use as a single dwelling”. The central heating system had been removed, some floorboards were missing and the presence of asbestos made a refurbishment unviable. HMRC have not appealed the decision.
Implications for buyers
A person buying a derelict or semi derelict property can now refer to this case when self-assessing SDLT in making a decision as to whether the property should be subject to SDLT at the higher residential rates or at the non-residential rates. A buyer might seek to use the argument that even if the building is “capable” of use as dwelling, the test of “suitability” requires a higher standard. The decision also suggests that even temporary factors can make a building unsuitable for use as a dwelling.
P N Bewley Ltd bought a bungalow called Rosemount at Bleadon Hill, Weston-Super-Mare for £200,000. The bungalow had been constructed in about 1950 using a prefabricated timber frame and asbestos cement infill panels. It had been occupied by an elderly lady who had moved out by 2014 and it was being marketed as an “ideal refurbishment project” in September 2014. The property had been left empty and deteriorated since, with the heating system, copper pipes and floorboards having been removed.
A survey on behalf of a lender on 16 November 2016 said that there was a “derelict bungalow to be demolished” on the site. It recorded that water, drainage, electricity and gas were connected. A demolition survey of 13 December 2016 for the buyer found the asbestos-containing materials were in good condition but with a recommendation for urgent removal. The survey noted that the heating system had been removed.
There was a simultaneous exchange of contracts and completion on 24 January 2017. The buyer submitted a return and paid SDLT of £1,500.
The HMRC challenge
On 8 November 2017 HMRC opened an enquiry into the return and in due course made an amendment to it, increasing the SDLT payable from the £1,500 paid, to £7,500. This was on the basis that the bungalow was a dwelling, so the higher rates of SDLT (with the 3% surcharge) applied to the purchase.
The statutory provisions
The focus of the case was on the meaning of “dwelling” as set out in paragraph 18 of Schedule 4ZA of Finance Act 2003. The relevant wording reads: “A building or part of a building counts as a dwelling if— (a) it is used or suitable for use as a single dwelling”.
The Tribunal said the sole issue to determine was whether the bungalow was, at the date of completion, suitable for use as a single dwelling. They considered that the legislation could have used other descriptions: e.g. whether the building was capable of being used as a dwelling. Here are some quotes from the judgment:
- “It seems to us that the legislation contemplates that there must be and is a class of buildings that might not meet the test and the likely class is those which are capable of being a dwelling but which are unsuitable for that purpose. The question then is where is the suitable/not suitable boundary.”
- “No doubt a passing tramp or group of squatters could have lived in the bungalow as it was on the date of purchase. But taking into account the state of the building … with radiators and pipework removed and with the presence of asbestos preventing any repairs or alterations that would not pose a risk to those carrying them out, we have no hesitation in saying that in this case the bungalow was not suitable for use as a dwelling.”
Outcome of the case
Having decided that the property was not a “dwelling” the Tribunal went on to consider whether SDLT should be charged at the standard residential rates or at non-residential rates. Oddly the buyer’s return had said the property was “residential” and they had paid SDLT of £1,500 at the standard residential rates. The Tribunal said: “given our decision that the building was not suitable to be used as a dwelling and the fact that it was not so used at the time of purchase, means that it was non-residential”.
The Tribunal reduced the SDLT to £1,000 on the basis that the property (as well as not being a dwelling) should be assessed on the non-residential rates.
SDLT guidance since
HMRC have said very little publicly since the decision, but have addressed the issue to some extent in one of the pages added to the SDLT Manual on 1 October 2019. Here is what they say at SDLTM00385:
“A residential property that is no longer habitable as a dwelling, due to dereliction for example, would not be residential property, on the basis that it is not suitable for use as a dwelling.”
“However, there is a clear distinction between derelict property and a dwelling that is essentially habitable, but in need of modernisation, renovation or repair, which can be addressed without materially changing the structural nature of the property. In this case, if the building was used as a dwelling at some point previously and permission to use as a dwelling continues to exist at the effective date of transaction, it will be considered suitable for use as a dwelling. Whether a property is derelict to the extent that it no longer comprises a dwelling is a question of fact and should only apply to a small minority of buildings.”
“The removal of, for example, a bathroom or kitchen facilities before sale will not be regarded as making a building unsuitable for use as a dwelling. These are internal fittings and would not constitute structural changes to the dwelling that would mean the building is no longer suitable for use as a dwelling. A new kitchen or bathroom suite could be fitted relatively quickly and cheaply and is a common improvement to a dwelling. Likewise, substantial repairs required to windows or a roof would also not make the building unsuitable for use as a dwelling. Other examples of issues which may be easily addressed in the short term include the need to switch services back on and dealing with an infestation of pests.”
Judicial consideration since
The issue of disrepair was considered briefly by the First Tier Tribunal in a decision released on 9 April 2020 in the case of Fiander and Brower v HMRC. The case was mainly about multiple dwellings relief, but the judge referred to the issue of disrepair:
“56. We note that the property was in some degree of disrepair at the time of purchase (the heating was not working as the boiler needed replacing; there were damp problems such that some of the flooring needed replacing). We have considered if this meant it was not suitable for use as a dwelling as at completion. We are clear that “suitable for use” does not mean “ready for immediate occupation”. It would have been obvious to a reasonable person observing the property on the completion date both that the property had been used for dwelling purposes in the relatively recent past and that the things that needed fixing – the boiler, replacement flooring – were not so fundamental as to render the property unsuitable as a place to live. Hence, in our view, the state of disrepair did not render the property unsuitable for use as a dwelling.”
This is also helpful:
“64. We agree (and state as much in our discussion of the property’s state of disrepair at the time of completion at  above) that the test is not whether the building or part was ready for immediate occupation as a single dwelling at completion. As we observed, a building remains suitable for a certain use at a certain time if, at that time, it is clear to an objective observer it was used for such purpose in the relatively recent past, and all that has happened is that it has fallen into relatively minor disrepair.”
In a more detailed analysis of the case and its implications, John Shallcross also looks at what the Tribunal decision might tell us about:
- Assessing whether a property is suitable for use as more than one dwelling (in the context of multiple dwellings relief) including more about the Fiander and Brower case.
- Cases where buyers of a dwelling might have to pay higher rates of SDLT because they already own another property, but that other property is in poor condition
- First time buyers’ relief including the case of someone who has acquired a property before, but when acquired it was not suitable for use as a dwelling.
- Issues around mixed use properties if one of a number of properties is not suitable for use as a dwelling.
- Which HMRC guidance is relevant when looking at whether a property counts as mixed use, especially whether the land with it counts as the “garden and grounds” of the dwelling (making reference to the updated section in HMRC’s manual on 25 June 2019).
- The interpretation of provisions which are intended to prevent the avoidance of tax.
- The interaction between the definitions of “residential property” and “dwelling”.
For professional advice on SDLT, please get in touch.
This article is intended for general information purposes only and does not constitute legal or professional advice. Advice should be sought before proceeding with any transaction.
Originally posted by John Shallcross on 20 February 2019; updated on 23 July 2019, 2 January 2020 and on 16 April 2020.
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