An important decision was made at a First Tier Tribunal last month in the case of PN Bewley Ltd V HMRC.
The facts:
PN Bewley Ltd purchased a bungalow and a plot of land in Weston-super-Mare for £200,000 in January 2017.
The intention was to demolish the existing bungalow and build a new dwelling, planning permission for this had been obtained by the previous owner.
The property had remained empty since 2014.
Demolition survey conducted in December 2016, identified asbestos. The recommendation of these materials was “urgent removal”.
The survey conducted by a chartered surveyor on behalf of Lloyds Bank described the property as “a derelict bungalow to be demolished”.
The property was connected to water, gas, drainage and electricity.
The heating system, copper pipes and floorboards had been removed.
The initial estate agent marketing in September 2014, described the property as “an ideal refurbishment property”.
The tax implications:
HMRC amended the submitted SDLT1 return increasing the Stamp duty land tax from £1,500 to £7,500.
This increase was based on 3% of £125,000 and 5% of the remaining £75,000.
As we know, higher rates of SDLT normally apply when an individual is purchasing a second home or a company is making a purchase.
The Appeal:
PN Bewley Ltd appealed on the basis that the property was not “habitable at the time of purchase and unviable as a renovation or refurbishment”.
Therefore they argued that SDLT due should be based upon the non-residential rate of SDLT on the property.
HMRC argued that the bungalow was a dwelling regardless of its dilapidation and could be brought back into use via renovation.
The decision:
There was a lengthy review of statue and case law, but ultimately the decision was based upon the questions as to whether the property was “suitable” for use as a dwelling at the time SDLT became payable.
I couldn’t help but smile at the introductory line of the closing remarks “No doubt a passing tramp or group of squatters could have lived in the bungalow…….we have no hesitation that in this case, the bungalow was not suitable for use as a dwelling.”
The tribunal ruled that both the submitted and amended return showed overstated taxation figures and so tax due was reduced to £1,000 meaning a £500 refund was due to PN Bewley Ltd.
This case led me to have a discussion with Julie Trimble, Commercial Property Solicitor who specialises in development property. I asked the following:
Should the SDLT1 return have been completed differently?
Yes, the issue here is one of which code should have been used 01 or 04. In fact, neither should have been used as the property was not suitable for use as a dwelling and was almost derelict. The code 03 non-residential would have been more appropriate.
What do you think helped the appeal against the additional stamp duty?
PN Bewley Ltd were fortunate to have photographic evidence of the state of the property to show that it could not be inhabited.
Do you think this case is of importance for developers?
Yes, many developers think that planning consent for a replacement dwelling is sufficient evidence that the property they are acquiring does not fall into the category of “residential”. There is a presumption that if a dwelling has been lived in then it is suitable for habitation unless it can be shown on the date the property was acquired that it was not suitable for habitation.
What are the deadlines for an SDLT return?
An SDLT return must be submitted within 30 days of a transaction, but I would normally complete a return as soon as possible. A late return will result in penalties and interest being payable. It is important to note that the time limits are being reduced to 14 days from 1 March 2019.
Can an SDLT return be amended?
An amendment can be made to a return up to 12 months from the date of the filing deadline (28/14 days as the case may be from the effective date of the transaction). Making an amendment to a transaction (under similar circumstances to this case) would require a written application. I would advise proceeding with some caution unless there is good evidence that at the date of the transaction the property was clearly uninhabitable. The solicitor acting at the time of the transaction should enquire as to the status of the land when making the return on the buyer’s behalf and advise on the different rates of SDLT payable in each scenario.
My comments:
Again, this case highlights the need to take photographs from the outset. The judgement refers to being “immensely helped by Mrs Bewley showing us the original photographs”. As I’ve discussed in other tax cases, photographic evidence can often prove vital.
A sensible decision by the tribunal, we should be encouraging people to invest in this type of property and develop to bring more environmentally friendly properties into fruition.
The development of this site would have added significantly more to the public purse than the additional stamp duty.
I can think of several similar properties to the one in this case, it is important for estate agents and surveyors to understand the tax implications of the wording in their reports and marketing.
Please note at the time of writing, the case is still within the appeal period and HMRC could appeal against this decision.
If you would like to read the full case it can be found here