Stamp Duty Land Tax (SDLT) legislation is highly complex, particularly so since the introduction from April 2016 of the 3% surcharge on second homes and residential buy-to-let properties.
In England, SDLT rates of up to 15% can be applied to a purchase of residential property, whereas the maximum rate for a non-residential property purchase is limited to 5%. Where both residential and non-residential property is purchased in the same transaction, this is known as ‘mixed use’ and the SDLT liability is calculated using non-residential rates.
For example, the purchase of a farm consisting of both residential dwelling(s) and agricultural land in commercial use, or of a building consisting of both retail units and flats, is a mixed use purchase.
Based on the current SDLT rates, on a £1.5m mixed use farm purchase, SDLT of £64,500 will be payable. Where the farm includes more than one dwelling, for example the farmhouse and a cottage, Multiple Dwellings Relief (‘MDR’) can be claimed where this will lower the SDLT bill.
Until recently, HMRC’s internal guidance manual incorrectly suggested that the 3% surcharge could apply to the residential element of a mixed use purchase where MDR is claimed. On 13 November, HMRC updated its guidance to make clear that the 3% surcharge rates cannot apply to a purchase of mixed residential and non-residential properties (unless the non-residential element of the transaction is negligible or artificially contrived). This will be the case whether the purchaser is an individual or a company.
Whilst conveyancing Solicitors may have correctly claimed MDR when available, it is likely that they will have incorrectly applied the surcharge to the residential element based on HMRC’s previous interpretation of the rules. In my £1.5m farm purchase example above, if the residential property element consisted of 3 dwellings worth £900k and the non-residential element £600k, with a MDR claim calculated at surcharge rates the total SDLT payable is £52,800. Based on the correct application of the rates, the SDLT payable should be £34,800, a reduction of £18,000.
It is likely that a significant number of purchasers are entitled to a SDLT repayment in respect of MDR claims on mixed use properties because they applied the incorrect tax rate. Additionally, some purchasers may have failed to claim MDR as they thought that it was not beneficial to do so based on the surcharge rates.
By Ian Pring, Partner