How does non-residential property attract a lower rate of Stamp Duty Land Tax?

It is unsurprising that taxpayers acquiring dwellings often seek to claim the lower Stamp Duty Land Tax (SDLT) non-residential rates applying to mixed residential/non-residential property where the acquisition includes land within the grounds of the dwelling having an apparently non-residential character (e.g. paddocks or agricultural). Historically, HMRC has won a substantial majority of the cases where it has disputed the taxpayer’s claim for the lower non-residential rates to apply in these circumstances. In the recent judgment of Marie Guerlain-Desai v HMRC TC/2022/13097, however, the taxpayer, Marie Guerlain-Desai (MGD), was successful in her claim on this point.

The case facts

MGD paid £3,160,000 in January 2021 for a large dwelling in the country with a private garden of four acres largely surrounded by 12 acres of woodlands which were part of a 30-acre wooded area. The wooded area was held by a longstanding trust for the benefit of landowners in the area, on the one hand, and the public at large (who also had access to it), on the other. The taxpayer had certain maintenance obligations in relation to that wooded area.

MGD paid SDLT of £372,750 but was then (presumably) advised to claim a refund of £225,250. HMRC, however, assessed the taxpayer to SDLT at the residential rates on the acquisition price. This was on the basis that the 12 acres of woodlands included in the acquisition (the “Acquired Woodlands”) were part of the grounds of the dwelling and so constituted residential property (in accordance with the statutory definition conferring residential property status on the grounds (as well as gardens) of a dwelling). The taxpayer appealed and had the burden of proof in establishing the woodlands were not residential.

In allowing the taxpayer’s appeal, the First-tier Tax Tribunal took account of the following:

• While contiguous with the garden of the dwelling, the Acquired Woodlands performed no positive function for the owner of the dwelling in question.
• Any passive function provided in terms of usage or exploitation was no more than was available to any member of the public and as such was unconnected with the dwelling.
• The public had open access to, and considerable use of, the Acquired Woodlands which were not “passively integral to the grounds of the dwelling house providing exclusivity, privacy and security”.
• The garden of the dwelling was fenced off from the Acquired Woodlands from which it was, in addition, shielded, due to a mature privacy screen of bushes and trees.
• The Acquired Woodlands did not confer any benefit in terms of “view” from the dwelling (beyond the tops of the trees there).
• In short, there was no real link between the dwelling and the Acquired Woodlands.

The Judge also addressed the credibility of the evidence submitted by the parties. Important evidence provided by the taxpayer (who lived in the property) regarding the physical layout of the property was in “complete contradiction” to HMRC’s statements as to that layout. It transpired that HMRC had not visited the property. As a result, it was perhaps not surprising that, in commenting on the amount of documentation included in the 614-page Hearing Bundle, the Judge treated the taxpayer (who had been diligent in providing photographic evidence) as a credible witness, whereas it treated HMRC’s submissions in those matters “with caution”.

The case is, therefore, important in mapping out criteria for whether or not land acquired with a dwelling should be treated as grounds of a dwelling and, for evidential purposes, the importance of, at the very least, a “site visit”. Having a full understanding of the physical attributes of a property (apart from potentially relevant legal attributes) is essential when acting for a client on a land acquisition where the physical layout of the property is key to the SDLT treatment.

It is perhaps unusual for there to be such a disparity (in the taxpayer’s favour) between the quality of evidence provided to a court by the taxpayer, on the one hand, and HMRC, on the other. The case shows that, however strong the legal arguments, there is no substitution for careful and detailed preparation of the relevant evidence.

If you have questions about the issues arising from this case or in relation to SDLT, please contact Michael Fluss.