What counts as residential, commercial or mixed‑use for Stamp Duty Land Tax?

It is not easy to determine whether premises are commercial, residential or mixed use. A common sense attitude does not always work. It is much better to review all of the facts relating to the property including its physical characteristics and its use as of the effective tax rate and this may mean even inspecting the property.

What is the definition of a residential property?

Under s116 of the Finance Act 2003 a building that is used or suitable for use as a dwelling (or is being constructed as such) (together with any land that forms any part of its garden or grounds) is residential. However, any property that is not wholly within the residential property definition is non-residential – with different SDLT rates.

How do you assess whether a property is not just residential?

It is important to assess whether a purchase relates to a property that is not wholly residential. This could be because there are substantial grounds and paddocks with forestry, farming, livery stables or commercial uses – perhaps even installations such as electricity and telecommunication aerials. Hotels, bed and breakfasts etc. which have their own bathrooms, telephone lines etc. installed in each room and are available all year round for lettings could be considered to be non-residential.

Attempts to mitigate SDLT: Case law developments

Certain attempts to alleviate the level of SDLT payments have been closed. In Brandbros Limited v HMRC (2021) the First Tier Tribunal dismissed an appeal refusing a refund of SDLT stating that the mixed SDLT rate did not apply where a lease was granted over a garage at the rear of the premises on the day of completion.

In the case of Modha v HMRC the growing of grass for use by a local farmer which did not provide any income was not a commercial use of the land.

Home offices and suitability for use as a dwelling

Many people nowadays work from a home office but these are still suitable for use as part of a domestic dwelling. The home overall remains for tax purposes as a dwelling. If alterations have been carried out so that the rooms cannot be used for residential purposes (such as the installation of dentist chairs or other equipment) then it is likely that the relevant area will no longer be suitable for use as a dwelling.

Mixed-use Sehgal case: A surprising interpretation

The recent case of Raj Sehgal Varsha Sehgal v HMRC has caused some surprise but has not been challenged by HMRC. The Sehgals purchased an apartment in Grosvenor Square for over £18 million in 2022. They claimed that the SDLT should be lower than the usual residential rates as the property was mixed-use. The basis of their argument was that there was a separate storage unit measuring only about 8 square metres and as a result the First Tier Tribunal Tax (FTT) reduced their liability by approximately £1.75 million.

The Tribunal admitted that the interpretation was strained but gave a huge discounted SDLT bill the residential rates only apply to premises that the whole of the premises would be used for entirely residential purposes as stated in the Finance Act.

Implications and potential residential property loopholes

However, in the writer’s eyes it is apparent that residential property includes a class of uses which are linked to and are for the benefit of a dwelling. All of us appreciate that other uses such as offices include not only the offices themselves - but also ancillary storage areas, catering and refreshment areas, training rooms etc so surely HMRC will take steps to close this loophole?

How we help

We advise on all aspects of SDLT classification and compliance, supporting clients with accurate analysis and practical solutions on complex property transactions.  If you would like to discuss how these issues may affect your purchase, please contact us.