Stamp Duty Surcharge:
Derelict properties may be exempt the SDLT surcharge.
The Stamp Duty Land Tax (SDLT) paid by landlords on purchasing a buy-to-let, and for those purchasing a second home, including when a 1st home has not been sold on transition*, attracts a 3% surcharge.
First announced in the 2015 autumn statement, this surcharge became effective from 1st April 2016 for exchanged contracts after 26 November 2015.
However, following a recent ruling by the First Tier Tax Tribunal (PDF) the higher rate of SDLT may not be payable if it can be shown that the purchased property is too dilapidated to live in.
In the case of PN Bewley Ltd against HMRC, the plaintiff argued that where second properties are purchased which are deemed as uninhabitable upon completion of the sale, they do not constitute as a “dwelling’ as defined under the Finance Act 2003.
The property and transaction in question involved a derelict bungalow and plot of land in Weston-super-Mare. A purchasing couple, Paul and Nikki Bewley, had set-up a limited company to acquire the property for £200,000 in January 2017. Their intention was to demolish the bungalow and re-build with a new dwelling on the same site. The couple had acquired the property with planning permission already granted for this change, to the previous owner.
Before, the purchased property had been vacant for several years. The central heating system had been removed, and the wall, ceilings and floors were full of holes following surveyors’ inspections and there was said to be dangerous white asbestos cement present.
The Bewleys argued that they should only pay the standard rate of SDLT since the property was clearly derelict and not suitable for occupation, but HMRC disagreed. It argued that the bungalow was a dwelling despite its dilapidation, and could be renovated to form a serviceable home. It then amended the Bewleys’ tax return applying the higher rate of SDLT.
The Bewleys appealed to the First-tier Tax Tribunal and the ruling went in their favour.
After carefully considering the case Judge Richard Thomas said that the test set out in law is whether the building is “suitable” for use as a dwelling at the point at which the SDLT became payable. After examining the photographic evidence supplied, he decided that in this case it clearly was not.
Accordingly, the judge ruled that the Bewleys had been overcharged, and he reduced the self-assessment SDLT bill.
The case underlines the importance to landlords, developers, agents and conveyancers to establish the condition of a purchased property, and it opens up the possibility that developers and landlords may have paid an inappropriate amount of SDLT and may be in a position to reclaim.
*Not only does owning a new home before the old one is sold expose home owners to the SDLT surcharge of 3%, on the acquisition, it did expose them to potential Capital Gains Tax Liability (CGT) on the eventual sale if the first property remains unsold for 18 months – so the pressure was always on to sell within that 18 month window.
However, the pressure has been ramped up even further now because a new limit applies to property sales on or after April 6 2019. From April 2020, the main residence tax-free window will be cut to just nine months. The change starts this April, in effect, because the new limit applies to property sales on or after April 6, 2019. A homeowner who lets out their old home now, or leaves it empty as they have moved out, would be caught out by the new rules, announced by the chancellor last year.