A taxpayer was unable to convince the first tier tribunal (FTT) that a pair of properties in the process of being combined was not a “residential property” for stamp duty land tax (SDLT) purposes.
The individual owned two adjoining residential properties, called Elvaston, with their company owning a nearby mixed-use property, called Queens. The entities had received planning permission to combine Elvaston into a single, five-bedroom house and Queens into five residential units.
However this permission was on the condition that, in order to meet council plans to increase the available housing in the area, Elvaston could only be occupied once the Queens development was complete.
Work commenced at Elvaston, but in June 2020 a freezing order was imposed on the owner and their company. As such, both sites were offered for sale by the receivers.
This was good timing for Bemal Patel, as in early 2021 he was looking for a central London home. He visited each site and, at the time of the viewing, Elvaston was “essentially a building site”, although steps had already been taken to create internal access.
Patel decided to buy Elvaston to occupy as his home and took legal advice as to the conditional planning permission. He concluded that the best way forward was to also acquire Queens, complete the work and sell the properties on, allowing him to occupy Elvaston and (hopefully) sell Queens for a profit. However, Queens was instead subsequently acquired by another party.
After crunching the numbers Patel decided to continue with the purchase of Elvaston, reasoning that if the Queens works dragged on he could restore Elvaston to being two residences and still make a profit. He completed the purchase in May 2021.
Patel paid £6,679,616 for Elvaston, along with SDLT of £799,422 on the basis the property was residential and that multiple dwellings relief (MDR) applied. His agents then submitted a claim for an overpayment of £475,961 of SDLT, due to them asserting the property was non-residential.
HMRC opened an inquiry and discovered MDR was not in fact due, and raised a discovery assessment. It then issued an inquiry closure notice, refusing the overpayment claim on the basis the property was already correctly classified as residential.
Patel appealed against both the assessment and the closure notice, but subsequently accepted that if the property was in fact residential, MDR was not available.
The only matter the FTT needed to consider was therefore whether the property was residential at the effective date of the transaction (EDT).
The definition of “residential property” is set out at FA 03 s116 and includes “a building that is used or suitable for use as a dwelling, or is in the process of being constructed or adapted for such use”.
Both parties agreed that Elvaston was not suitable for such use at the EDT, however HMRC argued it was in the process of being constructed or adapted for such use. Patel argued in turn that, due to the unusual circumstances created by the planning permission conditions, the property that would ultimately result was not a dwelling within s116.
Patel’s representative argued that the test as to whether the finished building would be suitable for use as a dwelling after the works were completed should be based on factors derived from plans/permissions as at the EDT.
As there existed, at that date, a clear restriction on the future occupation of the property, this meant Elvaston was not therefore in the process of being constructed or adapted for use as a dwelling at the EDT.
HMRC accepted that the legal restrictions were relevant, but argued that a multi-factorial approach was needed. The prevention from occupation, based on the position at the EDT, did not alter the fact that the physical attributes of the building meant it would be suitable for use as a dwelling when completed.
HMRC cited Mudan and another, where the upper tribunal found that the terms “use” and “occupation” were not synonymous and so “suitable for use” did not necessarily have to mean “ready for immediate occupation”.
The FTT found that building work had commenced on the site and the construction process was expected to result in a dwelling, which would undoubtedly be suitable for use as a family home. It also agreed with the upper tribunal decision in Mudan, and so with HMRC’s stance, that the restriction on occupation did not alter the nature of the building, which remained suitable for use as a residence, despite the current and potentially future inability for it to be occupied as such.
Elvaston was therefore, at the EDT, a building in the process of being constructed or adapted for use as a dwelling and so subject to the residential rates of SDLT.
The appeal was dismissed.
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