No SDLT Surcharge on Purchase of Uninhabitable Dwelling
For three years now, those who buy a second home as an investment or for use as a holiday home are liable to an additional 3% stamp duty land tax (SDLT) surcharge. But can HMRC insist on payment of the surcharge in circumstances where the second property is purchased in an inhabitable condition?
The First Tier Tax Tribunal has answered with a resounding ‘no’, giving significant clarity on the meaning of a habitable dwelling for the purposes of the surcharge1.
What’s the background?
A couple bought a dilapidated bungalow in the name of their company. The property was constructed out of timber and had asbestos containing materials. At the time of the purchase, planning permission had been given for its demolition and the erection of a replacement building. The buyers’ surveyor recommended the urgent removal of the asbestos and, furthermore, their lender’s survey described it as a derelict bungalow which should be demolished. The bungalow was duly demolished and a new home built.
After the purchase, the buyers paid the lower rate of stamp duty land tax. However, HMRC argued that it was a purchase of a second property and it attracted the higher rate, demanding an additional £6,000 from them by way of an amended return.
The Tribunal’s position
The company was not liable for the higher rate as the property was not being used as a dwelling at the time of purchase, nor was it suitable to be used as a dwelling.
Under paragraph 18 Schedule 4ZA of the Finance Act 2003, the test of whether the higher rate is payable turns on whether or not a property is used as a dwelling - at the time of completion.
There is no special definition of ‘dwelling’ for the purposes of SDLT, indeed, it takes its normal everyday meaning as a place in which to live domestically. Also, it must be suitable for habitation as a dwelling. The Tribunal found on the evidence that the bungalow did not fit the bill and the 3% surcharge was not, therefore, payable.
It’s worth noting that crucial to the buyers’ case was their evidence. They had photographs taken of the property at the relevant time showing the true condition of the property when they bought it.
Would the position have been any different had they intended to renovate the property? Not according to the Tribunal. The test is clearly whether the property was suitable to be used as a dwelling at the time of the purchase – “it is not whether it was capable of being so used in the future”. Anything done after the purchase is irrelevant.
What does this mean?
The ruling clarifies the meaning of a dwelling for the purposes of whether or not the 3% is chargeable to the buyers of a second property.
Of greater significance is the potential tax avoidance opportunity for individuals looking to buy a holiday home or an investment property - it will encourage buyers to look for uninhabitable properties to buy and renovate, or demolish and rebuilt.
Why give your cash to the taxman when you can put it into your property? Just make sure you bank plenty of photographs to prove the property is unhabitable when you buy it.
1P N Bewley v Her Majesty’s Revenue and Customs (2019) UK FTT 65
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