Stamp duty land tax (SDLT) is charged at the residential rates on residential property and at the non-residential rates on non-residential or mixed property. For the residential rates to apply, the building must be ‘used or suitable for use as a dwelling or in the process of being constructed or adapted for such use’. Where the property is derelict and cannot be used as a dwelling, SDLT is charged at the non-residential rates. If the property in question is a second or subsequent residential property, such as an investment property, this may result in a lower bill.

However, before purchasing an investment property in a poor state of repair on the basis that the non-residential rates will apply, it is important to check that your view of what constitutes an uninhabitable dwelling is in line with what HMRC will accept as being uninhabitable. It is important to note that in HMRC’s view, 95% of refund claims submitted on the basis that a property in need of repair is not suitable for use as a single dwelling are incorrect, so the advice here is to proceed with caution.

Mudan case

The question of whether a property was inhabitable was considered recently by the Upper Tribunal in the case of Mudan. The case concerned whether a building which had previously been used as a dwelling and which was in need of renovation and repair at the time of purchase was ‘suitable for use as a single dwelling’.

At the time of purchase, SDLT was paid on the basis that it was a residential property. A refund was subsequently claimed on the basis that SDLT should have been applied at the non-residential rates on the basis that the property was not suitable for occupation as a dwelling. The taxpayer contended that work needed to be done to make the property a safe place to live, as opposed to a pleasant place to live. This included rewiring and other electrical work, a new boiler, water pumps and pipes, a new roof, repairs to broken windows, new pipework and tanking of the basement due to flooding, removal of the kitchen to get rid of a bad smell and vermin and the removal of lots of rubbish.

The First Tier Tribunal found that, despite the fact that the property was not in a state such that a reasonable buyer might be expected to move in straight away, it was capable of use as a dwelling. It had been recently used as such and was structurally sound.

On appeal, the Upper Tribunal also found for HMRC, concluding that the property was suitable for use as a dwelling and liable to the residential rates of SDLT. The following findings are worthy of note:

1.    Being suitable for ‘use as a dwelling’ is not the same thing as a property being ready for immediate occupation.

2.    It is necessary to assess the extent to which the building has the fundamental characteristics of a dwelling and is structurally sound.

3.    If a property has previously been used as a dwelling, this will be relevant in considering whether it is suitable for use as a dwelling.

4.    The question to consider is whether the works of repair and renovation are such that the building no longer has the characteristics of dwelling.

Takeaways

A clear distinction is drawn between a derelict property and one that is in need of modernisation. Work such as replacing kitchens and bathrooms, new boilers, rewiring, substantial repairs to windows, floors or the roof, damp proofing and repairing flood damage do not make a property unsuitable for use as a dwelling, even if the need to do this work means that the property cannot be reasonably occupied until it is done. To count as derelict for SDLT purposes, it would need to be structurally unsound or damaged to the point that normal repair, renovation or modernisation work will not resolve the issue. Most doer-uppers will not fall into this category.