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Wanting to avoid SDLT through purchasing run down property?

Thinking of purchasing a ‘run-down’ property to redevelop in order to avoid SDLT?

Residential SDLT rules stipulate that where you buy a second property, you pay an additional 3% tax on top of the usual rate. This means that you could be paying between 5% and 15% tax depending on the value of the property. However, where you buy ‘non-residential’ property you only pay between 0% and 5% tax depending on the value of the property, regardless of whether this is your first or one hundredth property. This makes buying ‘non-residential’ properties an attractive venture.

Whilst it is often thought that ‘non-residential’ property means ‘commercial’ and only applies to shops or offices, this is not the case. In fact, the Finance Act 2003 makes it clear that ‘non-residential’ simply means properties which are not inhabitable for residential purposes.

Previously, this meant that run down properties, which had to be redeveloped to be ‘habitable’, fell into this bracket. This caused interest in these properties to increase for the purposes of buying, redeveloping and selling whilst avoiding higher rates of SDLT.

Effectively, there was a ‘loophole’ which many developers have been taking advantage of. However, HMRC have now effectively closed this loophole.

PN Bewley Ltd V Revenue and Customs Commissioners (2019)

In this case, the claimant purchased a property which was badly damaged by asbestos and which could not be inhabited safely by anyone. It had to be demolished and rebuilt in its entirety. In this situation, it was decided that this satisfied the meaning of ‘uninhabitable’.

Despite the outcome of this case, the tribunal took it upon themselves to tighten the loop in the law and make it clear what type of property will be considered ‘non-residential’. The test was decided as follows:-

  1. Is the property going to be used as a single dwelling, within the meaning of Sch.4 ZA Part 3 Para 18.1 of the Finance Act 2003, at the date of completion?

    This part of the test is binary in that either the property is going to be used as a dwelling on the completion date or it is not. If it is, then it is residential property for the purpose of SDLT.

  2. If a building is not used as a single dwelling on completion, the next question is ‘is it suitable for such use at the date of completion’ (not whether its last use had been as a dwelling or whether it was designed for such use). If it is suitable as a dwelling, it will be classed as residential property for the purpose of SDLT.
  3. The final question is where exactly the ‘suitable/not-suitable for habitation’ boundary lies. It was decided this would be a question of fact on the basis of each case.
  4. In deciding whether a property is suitable for use as a dwelling, the court decided that the following factors would need to be seen:-

    • facilities for personal hygiene;
    • the ability to consume food and drink;
    • the storage of personal belongings; and
    • a place for an individual to rest and sleep.

Where these factors are in existence, the property will be considered residential for the purposes of SDLT.

How does this apply to me?

If you are considering buying a ‘run-down’ property to redevelop and sell, you need to assess whether the property is capable of being deemed ‘uninhabitable’. This is a strict test and misapplying it could result in the wrong tax being paid and HMRC taking action to recover this from you. You should consult an experienced Commercial Property Solicitor who will be able to advise you on the application of this test.

For further information relating to any of the points contained in this article, please contact Oliver Zaki on 01329 282 841.