Tax tribunal decision is good news for residential developers

It’s been a difficult start to the year for many residential property developers, but a recent tax tribunal offers a small ray of sunshine.

The tribunal said it should be "slow" to apply the surcharge as the government's aim for it was to support the housing market

The Tax Tribunal has held that a dilapidated bungalow bought by a company was not suitable for use as a dwelling and so did not attract the 3% stamp duty land tax (SDLT) surcharge. (The surcharge requires companies that buy residential property to pay an additional 3% of SDLT.)

Following its purchase, the company paid stamp duty on the basis that it had bought a residential property, but it did not pay the surcharge. HMRC challenged this.

The company countered by saying that the bungalow was not habitable and so not suitable for use as a dwelling. The property had had its heating system, pipes and floorboards removed and the presence of asbestos meant it had to be demolished.

HMRC challenged the buyer's self-assessment and claimed that the 3% surcharge should have been applied.

The property was not a "dwelling"

The tribunal agreed with the company. It said that the test of suitability for use as a dwelling must be applied at the time of acquisition. Any past or future use was not relevant. The fact a property is dilapidated does not automatically mean it can't be a dwelling. But in this case, the condition was so serious that it did not constitute a dwelling. (The fact it could be used by squatters was considered irrelevant.)

A further bonus for the developer

The developer received a further bonus when the tribunal decided that the property could not be classed as residential at all. The applicable SDLT rate was therefore for that of a non residential property. This was the case even though the buyer had self-certified the SDLT payable on the basis that it was residential.

The tribunal made in an interesting point about the application of the surcharge. It said it should be "slow" to apply it as the government's aim for the surcharge was to support the housing market.

The case remains subject to appeal so the ray of sunshine may soon be no more.

Rates relief for developers

This is the second relatively recent court decision that has helped hard-pressed developers. In 2017, the Supreme Court held that commercial premises in the course of being renovated should not be liable to business rates.

The decision was based on the application of the "reality principle". This principle is long-established in rating law and means that a property should be valued on the basis of its condition at the relevant valuation date. In this case, the court said it could not be occupied due to the works being carried out and the valuation must reflect this.

If you have any queries regarding development property or SDLT, please contact Daniel Broughton at [email protected].