Stamp Duty Land Tax and Mixed Purchases

When purchasing a new property, Stamp Duty Land Tax (SDLT) can often amount to a significant sum which needs to be factored into the overall cost. Where, however, the property is one with land, the possibility of applying the lower mixed-use rate can result in sizable savings.

The residential rate currently amounts to 5% on purchases over £250,000, increasing to 10% on the part of the cost over £925,000 and 12% on the part in excess of £1.5 million. Where a residential property is already owned or the acquisition is by a limited company, there is a further 3% charge on top of this. For mixed-use properties however, there is a 2% charge on the part of the cost between £150,000 and £250,000 and the cost in excess of £250,000 is all liable at 5%, regardless of the total purchase price.

There is a misconception that, provided the property includes some land, the mixed-use rates can apply. However, the rules state that the residential rates should apply to standalone houses, but also to houses with accompanying gardens and grounds that are ‘occupied or enjoyed with the dwelling’. This can include land such as paddocks, woodland or other areas where it is used for the overall enjoyment of the house, regardless, to a degree, of the area. For Capital Gains Tax purposes, the Principal Private Residence Relief, exempting any gain on the sale of a house, also covers up to 0.5 hectares of garden, however no such limit, or clarity, exists for SDLT. Instead, anything that is not used commercially can be deemed to be ‘grounds’, resulting in the residential rates applying to the entire purchase price.

The future intended use is not taken into account when deciding whether a property is mixed-use or residential, only the position at the purchase date. Importantly, the historic use can be considered. As such, a house with 25 acres of paddocks and a small orchard that has always been used privately, e.g. for horses, is likely to be classified as a residential purchase. If the same property had instead been used as a chicken farm, then there is a good chance it would be deemed to be a mixed-use purchase with the lower rates applying, regardless of what the purchaser will do with it.

The recent case of Modha v HMRC related to a farm with 8 acres. The purchaser claimed that the field was used commercially at the time of purchase and applied the mixed-use rates. The tribunal however, determined that the field had ‘no commercial use capable of giving it a separate purpose’ and that it was ‘available for use with the dwelling and therefore part of the grounds’. The higher residential rates therefore applied.

Retaining evidence of the historic use, as well as factors such as the layout of the property, the proximity of the land to the house, the total acreage and whether or not there are any planning or legal constraints, could be important in the event of a challenge by HMRC.