What is the correct rate of Stamp Duty Land Tax?

First-Tier Tribunal, Tax Chamber clarifies the correct Stamp Duty Land Tax rate to apply on a house with adjoining gardens and paddock

The commonly held view when purchasing a residential house with gardens is that the residential rate of Stamp Duty Land Tax (“SDLT”) applies. Generally, that view is indeed correct but there are some exceptions. In those exceptions, despite purchasing a residential property, the non-residential rate of SDLT (commonly known as commercial or mixed-use rate) applies.

This was recently clarified and confirmed by the First-Tier Tribunal, Tax Chamber on 23 May 2023 in their judgment on the case brought by Mr Taher and Mrs Zahra Suterwalla (“Mr & Mrs S”) against the HM Revenue and Customs (“HMRC”).

The Background

Mr & Mrs S purchased Woodlands House, Harpsden Woods, Harpsden, Henley on Thames RG9 4AE (the “Property”) on 11 December 2020 for £3.6 Million. The marketing brochure by joint agents Knight Frank and Savills included the following description of the Property:

• Impressive 7 bedroom family house 

• Indoor swimming pool

• Tennis court

• Pavilion

• Paddock

• In sought after location with far reaching views set in 5.15 acres.

Mr & Mrs S’s self-assessed SDLT Return submitted to HMRC by their solicitor stated the Property as residential and non-residential (mixed use). This resulted in SDLT payable of £169,500.00.

HMRC launched an enquiry into Mr & Mrs S’s self-assessed SDLT Return on 19 August 2021 - almost a year after the SDLT Return was submitted. On 8 November 2021, HMRC concluded that the Property was residential and there was no non-residential element. It therefore calculated the SDLT payable by Mr and Mrs S on the purchase of the property as £330,750.00, an increase of £161,250.00.

Mr & Mrs S requested a statutory review of that decision which eventually led to their appealing the decision to the First-Tier Tribunal, Tax Chamber.

Point of Issue

The Tribunal considered Mr & Mrs S’s appeal and concluded that the main point of issue for their consideration was whether the Property constitutes land consisting entirely of residential property or whether it also includes land that is non-residential property.

It is noteworthy that in such appeals, the burden of proof is on the appellant, seeking to overturn HMRC’s conclusion. It is for the appellant to prove to the ordinary civil standard of the balance of probabilities that the property is not residential and is mixed use. In lay terms, this burden of proof is lower than the criminal standard of proof - where it must be proven beyond any reasonable doubt. The burden in civil standards, whilst lower, is still for the appellant to prove, not for HMRC to prove their conclusion.

The Law

Section 53 of the Finance Act 2003 sets out the amount of tax chargeable. There are differing rates for residential and non-residential or mixed properties. The section contains two tables and Table A applies “if the relevant land consists entirely of residential property”. Table B applies “if the relevant land consists of or includes land that is not residential property.

Section 116(a) of the Finance Act 2003 defines a residential property as:

1. “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, and

2. land that is or forms part of the garden or grounds of a building within paragraph (a) (including any building or structure on such land), or

3. an interest in or right over land that subsists for the benefit of a building within paragraph (a) or of land within paragraph (b);

and “non-residential property” means any property that is not residential property.”

Clearly the statutory definition of ‘non-residential property’ is less than helpful. One would be justified in going as far as saying the legislators were lazy with their drafting!

In this case, the Tribunal was specifically tasked to consider whether the “land that is or forms part of the garden or grounds of a building …” particularly in reference to the paddock.

The Tribunal referred to the judges reasoning in Withers v HMRC [2022], where the Tribunal stated:

“what indicates that a piece of adjoining land has become part of the “grounds” of a dwelling building? Technically, fact that a dwelling building is sold together with adjoining land, as a single chargeable transaction for SDLT purposes, does not make that adjoining land, necessarily, part of the grounds of the dwelling building: section 55 clearly envisages the possibility that the subject matter of a single chargeable transaction will include both residential and non-residential land. Common ownership is a necessary condition for the adjacent land to become part of the grounds of the dwelling building - but not, in my view, a sufficient one.

It is also necessary to look at the use or function of the adjoining land to decide if its character answers to the statutory wording in Section 116(1).

Is the land grounds ‘of’ a building whose defining characteristic is its ‘use’ as a dwelling? The emphasised words indicate that the use or function of adjoining land itself must support the use of the building concerned as a dwelling. For the commonly owned adjoining land to be ‘grounds’, it must be, functionally, an appendage to the dwelling, rather than having a self-standing function.”

Mr & Mrs S’s Case

The marketing brochure by joint agents Knight Frank and Savills showed the paddock beyond the tennis court with a hedge dividing the two pieces of land and only a small gate giving access to the paddock from the main house - Woodlands House and garden. Mr S explained in his witness statement to the Tribunal that after discussions with some people in the village, he agreed to let the paddock to Ms Pragnell for one year at a rent of £1,000.00 per annum. Mr S further confirmed in his witness statement that it was not possible to see the paddock from Woodlands House and that he had never used the paddock. He considered the grazing lease to Ms Pragnell was a commercial one as, although the rent of £1,000.00 per annum was relatively modest, the grazing by Ms Pragnell’s horses meant that he did not have to worry about cutting the grass in the paddock. He confirmed that he would not have purchased the paddock if it had been possible not to do so.

Mr & S’s barrister presented to the Tribunal that the dwelling house with its garden and tennis court forms a coherent whole on its own. The paddock that was acquired with the Property (1) does not perform any function in relation to the dwelling and cannot be seen from the dwelling and so cannot be said to be ‘of the dwelling’, and (2) is subject to the grazing lease which is a commercial arrangement that restricts Mr & Mrs S’s use of the paddock and meets the test in the First-tier Tribunal decision in Hyman v HMRC that: “Land would not constitute grounds to the extent that it is used for a separate, eg commercial purpose.”

The argument put forward by the barrister on behalf of Mr & S is that the paddock does not ‘form part of the garden or grounds of’ the dwelling and as such it is not residential in nature so that for SDLT purposes the Property consists of both residential and non-residential property.

Author’s Opinion: The commercial lease granting grazing rights to Ms Pragnell was entered into on the day that Mr & Mrs S acquired the Property. It is evident that Mr & Mrs S had some tax planning advice with a view to minimising their SDLT exposure prior to completing their purchase of the Property. In my view, the case law is not entirely settled whether granting a lease on the date of completing the acquisition of the property sufficiently justifies treating the land which is the subject of the lease as not ‘forming part of the garden or grounds’ of the dwelling. The Tribunal in Brandbros Ltd v HMRC [2021] for example took a differing view than the Tribunal in this matter.

HMRC’s Case

The main thrust of HMRC’s case was that the paddock formed part of the gardens and grounds of the Property and not separate to it.

HMRC’s barrister stated that Land Registry documents showed that all of the land, including the paddock, was comprised in one title since at least 1978. Mr S’s evidence showed this not to be the case - the paddock is clearly registered on a separate title register. 

The barrister also claimed that the statement by Mr & Mrs S’s tax agent in a letter dated 14 September 2021 that Mr & Mrs S were not aware of any commercial agreements in place for the use of the paddock prior to completion indicated that the entire Property was, prior to the grazing lease, considered as domestic. In any event, HMRC’s barrister claimed the grazing lease is an irrelevant factor as it was entered into after completion. The argument here being, if the paddock was used separately to the main house and gardens, then such commercial arrangement/grazing lease should have been in place prior to completion.

The Tribunal’s Reasoning & Decision

The fact that the Property had two registered titles - one for Woodlands House and gardens, to include the tennis courts and another for the paddock was a key factor in determining that the paddock was separate to the main property.

The grazing lease had some commercial benefit to Mr & Mrs S. Although the rent was not large, the benefit of Ms Pragnell’s horses keeping the grass on the paddock in order was of considerable financial benefit to Mr & Mrs S.

The Tribunal also listed nine pointers identified by the First-tier Tribunal in the case of James Faiers v HMRC [2023] in justifying their decision:

1. “Grounds of a dwelling” in this appeal clearly refers to the garden and tennis court;

2. The discussion in HMRC’s SDLT Manual  refers to historic and future use; layout; proximity to the dwelling. The paddock, although lying alongside the end of the garden and tennis court is not close to Woodlands House and is not visible from it;

3. There is only one small gate between the gardens and the paddock;

4. There is common ownership between the dwellinghouse, gardens, tennis court and the paddock;

5. Although adjacent to the gardens and tennis court the paddock does not form an integral part of the Property;

6. The paddock does not support the dwellinghouse nor the garden nor the tennis court;

7. The paddock is used for a separate purpose unconnected with the dwelling house;

8. Although Ms Pragnell has a right of access to the paddock over the gardens, she does not in fact exercise this right and to do so would cause damage to the lawns.

9. Ms Pragnell’s grazing lease results in the paddock not forming part of the grounds of Woodlands House.

The Tribunal decided that HMRC was incorrect in issuing a notice after their enquiry that the residential rate of SDLT applied to Mr & Mrs S’s purchase of the Property. In so deciding, the Tribunal reasoned:

1. The paddock is not visible from Woodlands House nor from the gardens;

2. There is only one small gate access from the gardens to the paddock;

3. Ms Pragnell was able to access the paddock from the bridle path without having to enter the garden of Woodlands House;

4. The grazing lease is commercial resulting in the Property consisting of residential and non-residential property;

5. The title to Woodlands House, gardens and tennis court is distinct from the title to the paddock;

6. Mr & Mrs S would not have bought the paddock if it had been possible to exclude it from the purchase.

Commentary

There are over 20 different reliefs and exemptions from Stamp Duty Land Tax. There are many factors that could result in the lower ‘non-residential’ rate of Stamp Duty Land Tax applying to your property transaction. If you would like to a no obligation, free initial consultation to explore if you have paid or are paying the correct rate of Stamp Duty Land Tax, please book a suitable time for a Zoom call here: