In the recent case of Scotland.P N Bewley v HMRC, the First-Tier Tax Tribunal considered the definition of a “dwelling” for the purposes of stamp duty land tax (SDLT) and how this applies to derelict properties. Although SDLT only applies in England and Wales, the definition of a dwelling is mirrored in the legislation for land and buildings transaction tax (LBTT) in Scotland.
The relevant rate of tax for both LBTT and SDLT depends on whether the subject matter of the transaction is residential or non-residential property. Broadly speaking, residential property transactions are subject to higher rates of tax and to a surcharge for purchases by companies or individuals owning more than one residential property.
The Land and Building Transactions Tax (Scotland) Act 2013 (which mirrors the terms of the SDLT legislation) defines residential property as:
(a) a building that is used or is suitable for use as a dwelling, or is in the process of being constructed or adapted for such use;
(b) land that is or forms part of the garden or grounds of a residential building; or
(c) an interest in or right over land that subsists for the benefit of a residential building.
In the majority of property transactions it will be clear whether a property is a residential property or not, based on its use at the time of the purchase. However, the situation is less clear if a property is not occupied at the time of a purchase, or has number of possible uses. In these circumstances, it is necessary to consider whether the property is suitable for use as a dwelling.
The Bewley case concerned the purchase of a derelict bungalow by a company set up by Mr and Mrs Bewley.The couple intended to demolish the bungalow after the purchase and build a new residential property on the site. On receipt of the SDLT return, HMRC imposed the higher residential rates and surcharge to the purchase and this was appealed by Mr and Mrs Bewley.
Although the property had been used as a private residence in the past, it had been vacant for several years before the purchase and was in a significant state of disrepair. Asbestos was present throughout the property and the heating system, pipes and floorboards had all been removed. Mr and Mrs Bewley argued that it could not be considered suitable for use as a dwelling so did not meet the definition of residential property.
HMRC’s argument was that the property could be brought back into use as a dwelling through renovation and should not be classified as non-residential simply because Mr and Mrs Bewley did not wish to do this. HMRC also noted that the building was in a residential area and was always intended to be a residential property.
The tribunal emphasised that the test is whether the building is suitable for use as a dwelling at the point at which SDLT became payable. This means that whether or not the building could be restored is irrelevant as are the intentions of the particular purchasers. Based on the evidence provided, the tribunal found that the bungalow was clearly not suitable for occupation as a dwelling at the time of purchase and HMRC had incorrectly applied residential rates of tax.
The Bewley case provides welcome guidance on the legal test for investors and developers dealing with derelict properties. It also highlights the importance of keeping accurate records of the condition of the property at the time of a purchase. Provided sufficient evidence of disrepair can be shown at the time of purchase, a considerable saving could be made in the upfront costs of renovating or rebuilding a derelict property.
To read more about the changes to the Land and Buildings Tax regime that came into effect 25 January 2019, click here.