The rates of SDLT for non-residential property purchases are lower than those that apply to residential property, as the following tables show:
Rates of SDLT for purchases of non-residential property
| Purchase consideration | SDLT rate |
| Up to £150,000 | 0% |
| £150,001 – £250,000 | 2% |
| Above £250,000 | 5% |
Rates of SDLT for purchases of residential property:
| Purchase consideration | SDLT rate |
| Up to £125,000 | 0% |
| £125,001 – £250,000 | 2% |
| £250,001 – £925,000 | 5% |
| £925,001 – £1,500,000 | 10% |
| Above £1,500,001 | 12% |
Purchases of residential dwellings by companies, or ‘second dwellings’ by individuals, also attract the additional 3% rate. Significant savings can be achieved where a transaction can be treated as the acquisition of non-residential property rather than residential property.
For these purposes, residential property is defined as:
- A building that is suitable for use as a dwelling; or
- A building that is in the process of being constructed or adapted for use as a dwelling.
As set out in our previous article, Property portfolio incorporation – a cautionary tale – Claritas Tax, the question of what amounts to a dwelling has been the subject of cases heard before the First Tier Tribunal and higher courts. These cases have mainly been in the context of multiple dwellings relief (‘MDR’) cases, and have set down a number of indicators of when a property may be considered a dwelling. The case of Uratemp perhaps sums it up most pithily:
… a dwelling will, as a minimum, contain the facilities for personal hygiene, the consumption of food and drink, the storage of personal belongings and a place for an individual to rest and sleep.
The character of a building can, however, change over time. What was once suitable for use as a dwelling can fall into disuse and disrepair, so that it is no longer used as a dwelling and nor is it suitable for such use. The purchase of such a building can then be subject to non-residential rates of SDLT to reflect its use and suitability at the time of the transaction. This is notwithstanding that the acquirer may carry out refurbishment work to bring the building back into use a dwelling (or alternatively, demolish it and construct a new dwelling).
The First Tier Tribunal (‘FTT’) in Bewley had to consider whether a bungalow had become non-residential property. The bungalow was not in use as a dwelling at the time of the purchase (i.e. it was vacant). The question was therefore whether it was suitable for use as a dwelling. The FTT confirmed that this question had to be considered looking solely at the condition of property at the time of the purchase. Although the bungalow was capable of being used as a dwelling after the carrying out of repair work, this did not mean it was suitable for such use at the time of its purchase.
The bungalow was in a poor state of repair with a number of defects, including missing radiators and pipework , old electrics and a dated kitchen and bathroom. The bungalow’s construction also featured asbestos panels, posing challenges for its renovation. The FTT observed that ‘no doubt a passing tramp or group of squatters could have lived in the bungalow on the date of purchase’ but given its condition, they had ‘no hesitation in saying that in this case the bungalow was not suitable for use as a dwelling’. As such, the FTT agreed with the taxpayer that the purchase of the bungalow should be subject to SDLT at non-residential rates.
The Bewley case can be useful for purchasers of vacant properties in poor disrepair. Of course, each case needs to be viewed on its own facts, but Bewley can serve as a guide as to factors that can be relevant in determining whether a property is suitable for use as a dwelling. If a property has been subject to SDLT at residential rates, taxpayers will generally have 12 months from the submission deadline of the SDLT1, being 14 days after the completion of the purchase, in which to amend the SDLT calculation to non-residential rates. It is usually best practice to include an explanation of the basis on which non-residential rates are deemed to apply. This can protect taxpayers from enquiries and penalties where HMRC ultimately disagree with the taxpayer regarding the applicable rates of SDLT.
We hope that you find this briefing note helpful. However please note that it has been prepared for awareness purposes only and, as such, represents only a high-level and simplified summary of the rules. It does not constitute tax advice and is not a substitute for taking proper advice tailored to your specific circumstances. We accept no responsibility for any action taken or not taken as a result of this technical article.
If you require advice on any of the issues raised in this article, please contact us and we will be happy to advise you.
