Tax Matters – What is Residential Property?

In Modha (2023), the FTT concluded that an 8 acre land adjoining the residential property was classed as part of residential property  and therefore subject to residential higher rate SDLT, and not a mixed use property.

There have been a number of cases in recent years where various tax payers and advisers have claimed purchase of land and buildings as non-residential or mixed use property, and unfortunately all have failed.

We therefore take this opportunity to define what HMRC construes as ‘residential property’:

In most cases it will be relatively straightforward to determine whether property is residential or not. However, in certain cases it will be problematic. For example, a property may have been a public house in the past but is now bought as a residence.

Residential property is defined as:

  • 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; and
  • land that is or forms part of the garden or grounds for such a building (including any building or structure on such land); or
  • an interest in or right over land that subsists for the benefit of a building or land as specified above

and non-residential property is any property that is not residential property,

Where a single transaction involves the purchase of both residential and non-residential property (‘mixed-use transaction’), the non-residential rates of Table B (see below) apply to the whole transaction.

Where six or more separate dwellings are the subject of a single transaction involving the transfer of a major interest in, or the grant of a lease over, them, those dwellings are treated as not being residential property (s. 116(7)) (though see the relief for transfers of multiple dwellings,

Garden or adjoining grounds

The meaning of ‘residential property’ includes land that is or forms part of the garden or grounds for a dwelling (including any building or structure on such land) (s. 116(1)(b)).

A number of cases have arisen lately where taxpayers have claimed that parts of extensive grounds did not fall within s. 116(1)(b) and hence that their acquisitions were of mixed-use and hence non-residential property. Only two of these have so far been successful.

In Hyman & Anor [2019] TC 07271, the FTT dismissed a claim that in a 3.5 acre property, a meadow and bridleway that were untended and not used by the proprietors for their enjoyment and a barn used to store garden-maintenance equipment were not part of the ‘grounds’ and hence that the property was ‘mixed-use’.

In Goodfellow & Anor [2019] TC 07507, the appellants argued that a room above a garage used as an office, a stable yard and paddocks, two of which were let as grazing land to a neighbour at a peppercorn rent, did not form part of the garden or grounds. The FTT found, however, that the grounds as a whole were essential to the character of the property and there was no sign that anything approaching a commercial arrangement for their use had been made at any material time.

In Pensfold [2020] TC 07609, the appellant company was unsuccessful in its claim that grazing land forming part of the grounds was subject to a long-term grazing agreement. The FTT found that at the time of purchase, the land was not being grazed and neither the sale advertising nor the sale contract had made any mention of the property’s being subject to grazing rights.

In Myles-Till [2020] TC 07633, the appellant had purchased a country property comprising a house and garden, a detached garage and an adjoining grass-covered field, all in an area of approximately 1.25 ha. At some point, the appellant amended her land-transaction return to apply the lower Table B rates of SDLT, on the grounds that the adjoining field, known as ‘the paddock’, was agricultural land and hence that the subject-matter of the transaction was mixed-use.

The paddock comprised about a third of the total curtilage, was laid to grass, and enclosed by hedging and post-and-rail fencing. It had historically been part of the neighbouring farm, but by the time of the transaction it had come under common ownership with the property. There was no grazing or other agricultural use at the time of the transaction.

Actual use at the relevant time was critical and there was no evidence of the paddock’s use for pasture on a commercial basis at that time. Nor was the paddock so extensive relative to the dwelling that it could not thereby be considered to form part of the grounds of that dwelling.

In the joined appeal of Hyman, Goodfellow and Pensfold to the Upper Tribunal (Hyman & Ors v R & C Commrs [2021] BTC 515), the UT specifically rejected the argument that s. 116(1)(b) had to be read as requiring an additional test that to constitute part of the garden and grounds, the land had to be needed for the reasonable enjoyment of the dwelling, by analogy with the former disadvantaged-areas relief and former HMRC guidance now archived, although not formally withdrawn (see also para. 35 of the former Statement of Practice SP1/03). That decision has now been upheld unanimously by the Court of Appeal ([2022] BTC 3), in which the appellants in Goodfellow but not Pensfold joined.

In Khatoun [2021] TC 08085, the purchaser of a house situated in a London square thereby became entitled to use and enjoyment of the communal garden in the middle of the square, albeit from a party other than the vendor. The FTT held that his right to the garden, being granted to him only in his capacity as owner of a dwelling, was a right that subsisted for the benefit of a dwelling and hence constituted residential property. The outcome was the same in Sexton [2023] TC 08708, where access to the communal garden in that case was created by the lease on a flat in the square. The right to use the garden was an easement, subsumed within the principal subject-matter of the transaction, which was the acquisition of the leasehold interest. Hence the transaction was one involving entirely residential property.

In Brandbros Ltd [2021] TC 08126, a claim for mixed use was dismissed even though a commercial lease had been granted on a garage in the grounds of a residential property. The lease had been granted on the same day as the transaction was completed but subsequent to completion. The Tribunal effectively ruled that events subsequent to the instant of completion, even if occurring later on the same day, were of no relevance. The main ratio for its decision against the appellant, however, was that the mere fact that the garage was within the grounds of the property was sufficient for it to be treated as residential property, regardless of the use to which it was put. This decision appears to go further than was assumed, e.g. in Goodfellow or Pensfold, that the existence of a commercial agreement might be sufficient for attracting the non-residential label, albeit in those cases it was argued (unsuccessfully) that the land in question did not form part of the garden or grounds. See, however, Kozlowski (below).

The same conclusion as to the irrelevance of work carried out on the same day as the effective date of the transaction but after the point of completion was also reached by the FTT in the joined appeals of Ladson Preston Ltd & Anor [2021] TC 08197.

In The How Development 1 Ltd [2021] TC 08194, a claim for mixed use was made in respect of an extensive area of woodland to the southern edge of the property. The woodland was difficult to access from the main house, was situated on steeply sloping land and traversed by a permissive path. The claim was refused. It was not unusual for the garden or grounds of ‘grander’ properties to include an extensive wooded area. The woodland was not inordinately far from the house and its size and location reflected its purpose in providing privacy and security from the south. It was ‘passively integral’ to the grounds of the dwelling house. Although the Upper Tribunal set aside the First-tier Tribunal’s decision ([2023] BTC 509), it reached the same conclusion.

In Faiers [2023] TC 08768, the presence of a commercial electricity-distribution network on a part of the land adjoining the dwelling was insufficient to alter the wholly residential nature of the transaction.

In Withers [2022] TC 08649, however, the taxpayer was successful. He had purchased a property known as Lane Farm. It comprised a dwelling-house (a barn conversion), an independent annexe and approximately 16 ha (39 acres) of gardens, fields and woodlands.

The historic grounds of the dwelling included land to the south, about 5 ha (12 acres) in area. The remaining land (all to the north) had been purchased by the previous owner over the course of 13 years and consisted entirely of agricultural land, which had remained in agricultural use, and about 3.5 ha of land under the care of the Woodland Trust. The agricultural land was let to a local farmer as grazing land for sheep at a peppercorn rent.

The taxpayer had claimed multiple-dwellings relief (for which see ¶70-200ff), which HMRC accepted was due, and mixed use for the property as a whole, maintaining that the land to the north was not part of the garden or grounds of the dwelling and was in commercial use, and hence that the land was mixed-use.

With reference in particular to Myles-Till (see above), for land to be grounds, it had functionally to serve as an appendage to the dwelling rather than having a self-standing function. In the Tribunal’s view, the grazing land had been and was being used for a self-standing function, to wit a commercial purpose as grazing land. As for the woodland, the taxpayer was required to allow unfettered access to the Trust’s workers, agents etc and was specifically prohibited from carrying out any activities that would lead to loss or damage to the trees and other species.

The Tribunal was satisfied that both these areas did not on that account form part of the garden or grounds of the main house but served a different, commercial purpose. The property as a whole was thus mixed-use.

It seems that what weighed the scales in the taxpayer’s favour were the following factors:

  • The house was not a country mansion, so the 5 ha the taxpayer conceded were part of the garden or grounds were considered more than sufficient for a house of its size;
  • There had been consistent and long-term use of the agricultural land as grazing on a commercial use. The farmer grazing sheep there had installed water tanks, a feeding station and stock fencing and ran a commercial farming operation. The fact that the rent was minimal was offset by other factors, such as the taxpayer’s being relieved of the need for capital expenditure on hedge cutting, fence repair and so
  • The woodland was also under a standard Woodland Trust management scheme, which imposed obligations and restrictions on the taxpayer;
  • The grazing land and the woodland had been acquired separately and piecemeal and had historically not formed part of the property attached to Lane Farm.

Note the contrast with the decision in The How Development 1 Ltd (above), where the taxpayer lost a claim to mixed-use in respect of an area of woodland to which it was difficult to gain access from the dwelling house. There, however, the size of the entire estate was only 7.1 ha and the woodland extended to 0.8 ha only. More significantly, there was no evidence of any exploitation of the woodland for a commercial purpose.

A second success for the taxpayer has come in Suterwalla & Anor [2023] TC 08826. The appellants, Mr and Mrs Suterwalla, had purchased a large property with extensive grounds, including at the rear of the property a paddock not visible from the main house and accessible from it via a small gate only. On the day of completion, the appellants granted a grazing lease on the paddock for a rent of £1,000 per annum.

For the appellants, it was argued that the paddock, although purchased in a single transaction with the rest of the property, was neither used nor functioned as support for the use of the house as a dwelling (per Withers (see above) and Myles-Till (also see above). On the contrary, it was subject to a commercial lease and as such used for a separate commercial purpose (Hyman & Anor). The rent might be modest but it absolved the appellants of the need to cut the grass. The Tribunal should not follow the decision in Brandbros, where a commercial lease granted after completion but on the same day was ignored because it did not exist at the time of completion. The ‘scintilla temporis’ on which HMRC relied to disregard the grant of the lease had been described in the House of Lords as a ‘legal artifice’ (Abbey National v Cann [1990] 1 All ER 1085). The paddock was therefore not part of the garden or grounds.

For HMRC, it was argued that the paddock did form part of the garden or grounds of what was an impressive seven-bedroom house with (an indoor) swimming pool, tennis court, pavilion and paddock. The fact that other people had rights over the paddock did not necessarily stop its being grounds (Faiers). All of the land had been comprised in one title since at least 1978 (in fact, it was registered under a separate title). The fact that the appellants had not been aware of any commercial agreements in place before completion indicated the entire property was domestic prior to the lease. Moreover, the grazing agreement should be overlooked as entry into it took place after completion (Brandbros and Ladson Preston Ltd & AKA Developments Greenview Ltd v R & C Commrs [2022] BTC 534.

The Tribunal judge preferred to follow the approach in Faiers, which had identified nine pointers to be taken into account in determining whether an area of land forms part of the garden or grounds of a dwelling. Having done so, the Judge concluded that the majority of them indicated that the paddock was not part of the garden or grounds.

In allowing the appeal, the Judge listed six reasons why HMRC had been wrong to require more tax to be paid, namely:

  1. (1)The paddock was not visible from the dwelling nor from the gardens;
  2. (2)The only access to the paddock from the gardens was a small gate;
  3. (3)The lessee was able to gain access to the paddock from a bridle path without having to enter the appellants’ garden;
  4. (4)The grazing lease was commercial;
  5. (5)The title to the dwelling, gardens and tennis court was distinct from the title to the paddock; and
  6. (6)The appellants would not have bought the paddock if it had been possible to exclude it from the purchase.

However, with due respect for the Judge, the decision is questionable, to say the least. The Judge seemed to lay considerable stress on HMRC’s erroneous description of the land as comprised in one title. If one looks at the factors that the Upper Tribunal in Hyman & Ors established, and as rehashed by the FTT in Faiers, it would have been perfectly possible to reach the opposite conclusion – that on balance the paddock did form part of the garden or grounds.

For example, the woodland in The How Development 1 Ltd was difficult to access from the house – whereas here there was no such difficulty – but was nevertheless found to be part of the garden or grounds. Also, the taxpayer’s intention or motive when purchasing a property is surely irrelevant. It is the nature of the interest acquired that matters.

That, of course, does not mean that the Judge was not entitled to come to the conclusion that he did on the facts.

More importantly, however, if the transcript is accurate, he twice stated that he was not bound by decisions involving ‘multiple-dwellings relief not SDLT’. Readers will be fully aware that multiple-dwellings relief is a relief from SDLT. The Judge ought therefore to have considered the Upper Tribunal decision in Ladson Preston, where works were carried out after completion. The UT in that case stated, in paragraph [62], that what mattered was the nature of the chargeable interest that the purchaser acquired, ‘as it stood at the very time of completion’. Here, the commercial lease was granted after completion, albeit on the same day, exactly as in Brandbros. There was no evidence that agricultural or commercial use of the paddock was long-standing before its acquisition by the appellants. The cases cited by the Tribunal judge to dismiss the ‘scintilla temporis’ argument (Abbey National and Ingram & Anor v IR Commrs [1998] BTC 8047) were conveyancing and IHT cases, not relevant to SDLT.

In this author’s opinion, therefore, this case is at best an outlier, and we understand that it is currently subject to appeal.

Indeed, in Kozlowski [2023] TC 08902, the FTT expressly cited Brandbros, dismissed Abbey National and Ingram as unhelpful and followed the Upper Tribunal in Ladson Preston, in disregarding a lease granted after completion but on the same day (on the effective date, therefore). What matters is the status of the subject-matter of the transaction at the time of completion. However, the FTT also considered the ‘maximalist’ position adopted in Brandbros that use of a building or structure was irrelevant in every case in which it lay within the garden or grounds of a dwelling. This rather begs the question. The first test must be does it form part of the garden or grounds? If there is separate, clearly non-residential use of it, then it most likely does not.

In Bloom & Anor [2023] TC 08866, a case similar to Faiers, the presence of a sewage-treatment plant in a contiguous plot forming part of the property and the existence of covenants governing its use by adjoining properties were not sufficient to prevent the land on which it stood from forming part of the garden or grounds of the dwelling.

The appellants, Mr & Mrs Bloom, purchased a large property in North London with a total land area of approx. 7.5 acres (3.04 ha). This land was registered under two titles – ‘The Paddocks’, consisting of approximately 1.9 acres (0.77 ha) immediately around the house, and a larger, contiguous area of 5.6 acres (2.27 ha) lying some two metres below The Paddocks and on which stood a sewage-treatment plant serving the appellant’s property and other neighbouring properties. Access to this from The Paddocks was by way of steps and/or an access road from the boundary of the property. The access road was used approximately four times a year by vehicles to remove the effluent.

A number of factors persuaded the Tribunal that there was no mixed use of the disputed area, particularly:

  • the layout and extent of the property was appropriate for a large countryside property with stables, a ménage, a swimming pool, tennis court and extensive gardens and grounds in a traditional setting. When purchasing the property, the appellants had had no option but to purchase the two plots as a single package;
  • the sewage-treatment plant had not been used for a self-standing function. The Tribunal accepted HMRC’s submissions that the plant was an essential facility of the property or of any similar property that had no connection to mains sewage disposal; and
  • there was no genuine commercial agreement for use of the plant. Rather there was a restrictive covenant, providing for a method to split the maintenance costs for each of the users in proportion to the benefit each received from the plant. There was no element of profit for the appellants.

In Gibson [2023] TC 08869, the First-tier Tribunal found that a paddock let for grazing on an informal basis and an office above a garage in the grounds used for running a business nevertheless formed part of the garden or grounds of the property, all of which was consequently residential. In a separate and related matter, the appellant was not entitled to make an alternative claim for multiple-dwellings relief outside the prescribed form and time limit.

The appellant, Mr Gibson, had purchased a large property in Warwickshire under two titles. The land comprised in the first title was a six-bedroom house; a double garage with office above it; a two-bedroom self-contained barn conversion with bathrooms, kitchen and dining area; a movable outbuilding containing two stables and a tack room; and a garden adapted as a market garden, all on 0.2 ha (0.5 acres). The land comprised in the second title was a paddock, approximately 0.85 ha (2 acres) in area.

The whole of the property had previously been used for agricultural purposes, but this use had ceased in 2003, although the garage was still considered for planning purposes to be on agricultural land. Moreover, there was still a right of way over the land by foot or with vehicles for agricultural and gardening purposes. The appellant used the office above it to run a business and intended to run another there also. The paddock was separated from the other land by a ha-ha and elsewhere by a fence. It had been used for grazing sheep belonging to a neighbour before its sale to the appellant, who wished to continue to let it for grazing but had only an informal agreement with another farmer to do so in spring in return for joints of lamb.

The Tribunal considered that:

  • The paddock and the office were continuous with the undisputedly residential 0.2 ha and all the buildings and structures within it;
  • There was no history of use for agricultural purposes after 2003 other than the use of the paddock for four years prior to its acquisition by the appellant;
  • The paddock did not have a self-standing function, namely a commercial purpose such as grazing. Informal grazing in exchange for joints of lamb did not constitute a commercial agreement;
  • Rights over land, particularly in a rural context, could exist without affecting the status of land as residential to a significant extent (Faiers); and
  • The garage was virtually adjacent to the dwelling house and stood on land that was indisputably residential. The use of its upper floor as an office was therefore irrelevant (Brandbros) as was the classification of the land for planning purposes as agricultural.

What probably proved fatal to the appellant’s case was the lack of a commercial agreement to let the paddock. Interesting also that the Tribunal cited Brandbros (dismissed as irrelevant, on spurious grounds as I would maintain, by the Tribunal judge in Suterwalla) to find that use for commercial purposes of a building or part of a building that stands on residential land does not of itself thereby render it as non-residential.

In Espalier Ventures Property (Lansdowne Road) Ltd [2023] TC 08914, garages detached from the living accommodation and the right to enjoy communal gardens shared with other properties both fell within the definition of a dwelling. The appellant had purchased the freehold to three lock-up garages, a long leasehold over a basement and ground-floor flat and a share in the freehold of the building with the intention of developing them for sale. Owners and occupiers of the flat also had the right to use communal gardens for the purpose of recreation. Although the garages were land that was capable of being a separate main subject-matter, the appellant had plainly intended at the point of purchase to develop the property (including the garages) into a substantial single dwelling, incorporating the garages into the fabric of the living space. The garages were thus land that was to be occupied with the dwelling. The interest in the communal gardens was an easement appurtenant to the principal interests in the flat and the freehold share and did not represent an independent main subject-matter, but was an ancillary part of the main subject-matter that was the flat. Even if that were not the case, the gardens were plainly intended to be enjoyed with the dwelling.

In Modha [2023] TC 08936, an eight-acre field to the edge of the property was considered part of the garden or grounds. At the effective date of the transaction, there was an arrangement between the previous owner and a third party for the maintenance of the pasture in the field. This arrangement was continued by the appellant but the Tribunal did not consider it amounted to commercial use of the field. The Tribunal followed the approach in Faiers, and concluded that because:

  • although the field was at the bottom of the garden, manège and paddock of large grounds, it was contiguous with them;
  • its size was significant but it was apparent other houses in the locality, which was a rural area, also had fields;
  • there was nothing to prevent the appellant from using the field with the dwelling at the effective date of the transaction; and
  • the field had no function unconnected with the dwelling – in particular, there was no commercial use of it at the effective date of the transaction,

it formed part of the garden or grounds, so the claim for mixed use was refused.

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