Although it is often viewed as a relatively straightforward charge, SDLT can give rise to complexity in practice, particularly where a transaction involves more than the purchase of a single dwelling.
Stamp Duty Land Tax: An Overview
Stamp Duty Land Tax (SDLT) is a tax payable on the acquisition of land and property in England and Northern Ireland above a specified threshold.
SDLT is charged by reference to the consideration paid for the property and is calculated on a tiered basis, with different portions of the purchase price taxed at different rates. The rates that apply depend on how the property is classified, which broadly falls into one of three categories:
- Residential property
- Properties intended for use as a dwelling, including houses and apartments, which attract the highest SDLT rates.
- Non-residential property
- Any interest in land that is acquired for purposes other than residential use, such as commercial and agricultural property, incurs lower SDLT rates.
- Mixed-use property
- Properties comprising both residential and non-residential elements fall into this category. For SDLT purposes, the lower non-residential rates apply to the total purchase price.
Additional SDLT charges may apply, including whether the purchaser already owns another residential property or if the purchaser is a company. Since SDLT is a self-assessed tax, it is the purchaser’s responsibility to ensure that the transaction is correctly classified and that the correct amount of tax is paid.
Sehgal v HMRC: The Key Issue
The recent case of Sehgal brought into sharp focus the question of how SDLT applies when residential and non-residential interests are acquired together. The dispute concerned whether buying a flat and a separate storage unit lease should be treated as a single SDLT transaction, or as two connected but legally distinct transactions.
The tribunal examined whether the storage unit lease was so closely connected to the flat that it could be treated as part of a single residential transaction. Ultimately, the case hinged on the concept of benefit: did the storage unit lease exist solely for the benefit of the flat, or merely for the owners personally?
How the Tribunal Ruled
The First-tier Tribunal’s decision rested on the interpretation of section 116 of the Finance Act 2003, which governs SDLT treatment of residential property. In particular, the tribunal analysed the meaning of an interest in land that “subsists for the benefit of a building.” It concluded that this benefit must attach to a single, clearly identifiable dwelling, rather than to a building containing multiple flats.
The storage unit lease did not meet the statutory test for being residential because it was not tied to a specific flat. Although only flat owners could use it, the lease was legally separate and could be sold or rented on its own. The tribunal therefore treated the flat and the storage unit as separate acquisitions, meaning the purchase was classed as mixed-use for SDLT purposes and allowing the applicants to reclaim £1.7 million.
Practical Takeaways
The Sehgal decision demonstrates the exacting nature of SDLT law. Even relatively minor elements closely associated with a residential unit, such as a storage unit, can influence how a property is classified for tax purposes.
The case illustrates that the boundary between residential and mixed-use properties can be narrower than many anticipate. For example, where a property contains genuinely distinct residential and non-residential interests, mixed-use treatment may apply, potentially yielding significant tax advantages. Crucially, the non-residential element must be substantive and legally separate as nominal or ancillary features are unlikely to suffice.
However, purchasers should exercise caution when relying on Sehgal as a precedent. The ruling was issued by the First-tier Tribunal and is not binding. HMRC has also indicated that it intends to appeal, and the ultimate determination may be made by the Upper Tribunal or Court of Appeal.
Ultimately, Sehgal reinforces the importance of careful planning and specialist advice in SDLT matters where residential acquisitions include non-residential components. Mixed-use treatment remains a valuable tool, but its effective application requires clear legal distinction.
Guidance from Dunn & Baker Solicitors
At Dunn & Baker Solicitors, whilst we are not tax advisors, we recognise that attention to detail can make all the difference. We closely monitor developments in areas such as SDLT and all other property-related legal changes, ensuring we are able to highlight any complexities as soon as possible and recommend when you should seek independent advice from a professional SDLT advisor.
Please contact our property team if you would like to discuss developments in areas such as SDLT and all other property-related legal changes.
01392 285000
*This article is intended as a general overview only and does not constitute tax advice.