Further Reading: Inaccurate SDLT Assessments

Comment: Inaccurate SDLT assessments can lead to significant overpayments or underpayments. Understanding key points and principles helps in correct assessment.

Key Points:

  • Modern Method of Auction: Overpayment due to non-refundable fees.
  • Mixed-Use Development: Misclassified as residential.
  • Bank Conversion: Wrongly paid non-residential rates.
  • Derelict Farmhouse: Correctly assessed non-residential.
  • B&B Conversion: Non-residential, not residential.
  • Foreign Buy-to-Let: Misclassified as residential.
  • Static Caravans: Incorrect MDR application.
  • Employee Relocation: Exempt from SDLT.
  • Property Flipping: Correct non-residential rates due to uninhabitability.

Main Principles:

  1. Identify Property Use: Determine if property is residential, non-residential, or mixed-use.
  2. Check for SDLT Reliefs: Apply MDR and other SDLT reliefs correctly.
  3. Consider Additional Charges: Account for surcharges based on buyer’s situation (e.g., additional property).
  4. Understand Transaction Types: Recognize differences in SDLT treatment for sales, conversions, and assisted sales.
  5. Consult Guidelines: Always verify against HMRC guidelines to avoid misclassification and overpayment.

Property Acquisition and Development Scenarios

(Inaccurate SDLT Assessments)

Scenario: Mixed-Use Property Development Assessed as Non-Residential

(Inaccurate SDLT Assessments>Property Acquisition and Development Scenarios)

➤ A property developer mistakenly pays £361,250 SDLT on a mixed-use property as if it were solely residential, but the correct SDLT for mixed-use is £139,500, resulting in an overpayment and a potential reclaim of £221,750 with the correct classification.

A property developer purchases a £3 million plot containing two houses; one is leased to a charity for office space, and the other is rented to a family. Additionally, part of the land serves as an outdoor storage area for a builders’ merchant. Believing the presence of residential properties and future residential development plans warrant a residential classification, the developer pays the SDLT at residential rates for the entire estate.

Incorrect Assessment:

  • The developer treats the £3 million transaction as entirely residential, applying residential SDLT rates plus a 3% surcharge for additional properties, leading to an incorrectly assessed SDLT of £361,250.

Correct Assessment:

  • However, the proper classification is mixed-use due to the diverse uses of the property:
    • The house used by a charity as office space qualifies as non-residential.
    • The house rented to a family is residential.
    • The land used for storage is non-residential, affirming the mixed-use status of the purchase.
  • The accurate SDLT, assessed as non-residential, totals £139,500.

Conclusion:

The initial misclassification by the developer resulted in an SDLT overpayment, applying residential rates and the additional property surcharge to the entire plot. Recognising the actual mixed-use nature of the property would significantly reduce the SDLT liability to £139,500, offering a substantial reduction of £221,750 from the initial, incorrect assessment.

Scenario: Conversion of a Former Bank into Residential Apartments

(Inaccurate SDLT Assessments>Property Acquisition and Development Scenarios)

➤ A property developer incorrectly pays non-residential SDLT on a former bank being converted into apartments but could save £12,500 by correctly applying residential rates and claiming Multiple Dwellings Relief after the building’s conversion.

Multiple Dwellings Relief (MDR) ceased on June 1, 2024; however, if your property was bought before this date, you have until April 30, 2025, to submit a claim, provided it’s within one year of purchase.

A property developer acquires a former bank with adjoining offices for £1.25 million, planning to convert the building into eight residential apartments. The sale included a 12 month delayed completion, allowing the developer to start the conversion process after exchanging contracts but before finalising the purchase. This allowed the developer to reduce capital outlay by avoiding purchase of the property. 

Incorrect Assessment

The developer pays non-residential Stamp Duty Land Tax (SDLT) rates, believing the property’s use as a bank qualifies the property as mixed use and thus non-residential for stamp duty purposes. 

Correct Assessment

Upon completing the conversion into 5 apartments, the property’s status transitions towards residential for SDLT purposes. HMRC’s guidelines state that:

“The process of construction or adaptation must be physically underway for this category to apply. However, if construction or adaptation has begun at the EDT, then the planning permission would be a strong indicator of what the building is to be used for i.e. whether it should be treated as a residential or non-residential property.”

Buildings under construction or adaptation for residential use qualify as “dwellings.” Therefore, SDLT should be calculated at residential rates, with eligibility for Multiple Dwellings Relief (MDR) due to the development comprising multiple residential units with no commercial element.

Without MDR (Incorrect Assessment for Comparison)

  • Total SDLT without MDR (non-residential) = £50,000

With MDR (Correct Assessment):

  • Since the development is divided into five apartments, the average cost per dwelling is £250,000 (£2 million / 5). Residential rates apply, plus a 3% SDLT surcharge as the property was purchased through a limited company for each apartment:
    • SDLT per apartment = 3% of £250,000 = £7,500
    • Total SDLT with MDR for eight apartments = £7,500 x 5 = £37,500

Scenario: Acquisition of a Derelict Farmhouse with Orchard and Paddock for Development

(Inaccurate SDLT Assessments>Property Acquisition and Development Scenarios)

➤ A property developer pays £71,750 in SDLT by correctly classifying a derelict farmhouse with land as non-residential, contrary to the initial belief it should be taxed under residential rates.

A property developer purchases a derelict farmhouse with an orchard and paddock, spanning 4 acres, for £1,500,000. The land was never used as farmland, and the developer plans to build houses on it.

Incorrect Assessment

Having read the advice from HMRC stating 

Physical proximity of the land to the dwelling will be an indicator that it is more likely to be ‘garden or grounds’, however land which is separated from the dwelling may still fall within this category. 

The developer assumes that the orchard and paddock are integral to the farmhouse’s grounds, leading to the belief that the entire purchase should be taxed under residential Stamp Duty Land Tax (SDLT) rates.

Correct Assessment

Considering the farmhouse is in a derelict state, requiring demolition instead of renovation, and given that the orchard and paddock are integral to the property’s grounds, the entirety of the property should be classified as non-residential for Stamp Duty Land Tax (SDLT) purposes. This classification stems from the non-habitability of the farmhouse.

Examples

Calculation Using Incorrect Residential Rates. If considered as an additional property with a 3% surcharge: Total SDLT with surcharge: £136,250

Calculation Using Correct Non-Residential Rates: Total SDLT (correctly assessed as non-residential): £64,500

Total SDLT reduction: £71,750

 

Scenario: Conversion of a Bed and Breakfast into Serviced Accommodation

(Inaccurate SDLT Assessments>Property Acquisition and Development Scenarios)

➤ Classifying a bed and breakfast conversion as non-residential instead of residential for SDLT purposes results in a £13,600 reduction in cost, underscoring the importance of correct property classification.

A company acquires a bed and breakfast establishment for £520,000 with the intention of converting it into serviced accommodation for holidaymakers. The property’s appearance and functionality closely resemble other residential dwellings on the street. 

Incorrect Assessment

Assumption: The company classifies the property as residential for Stamp Duty Land Tax (SDLT) purposes, influenced by its dwelling-like characteristics and HMRC guidance stating:

“A dwelling is defined [Para 18] as a building, or part of a building, that is
– used or suitable for use as a single dwelling, or
– in the process of being constructed or adapted for use as a dwelling.

Consequently, they apply residential SDLT rates, including a 3% surcharge for purchasing through a limited company.

Residential SDLT Calculation with 3% Surcharge. Total SDLT Paid: £29,100

Correct Assessment

The property is in fact not a residential dwelling. HMRC state: Cases involving bed and breakfast establishments or guest houses will be treated on their own merits. However, a bed and breakfast (B&B) establishment which has bathing facilities, telephone lines etc. installed in each room and is available all year round would be considered non-residential, in line with s.116(3)(f) which states that “a hotel or inn or similar establishment” is not used a dwelling.

Non-Residential SDLT Calculation. Total SDLT Due: £15,500

Bed and Breakfast Purchase:

  • Purchase Price: £520,000
  • Incorrect Assessment (Residential with Surcharge): SDLT = £29,100
  • Correct Assessment (Non-Residential): SDLT = £15,500
  • SDLT reduction: £13,600

 Scenario: Foreign National Buy-to-Let Property Investment

(Inaccurate SDLT Assessments>Property Acquisition and Development Scenarios)

➤ A foreign national incorrectly pays £17,500 in SDLT for a uninhabitable UK buy-to-let property but could reduce it to £4,500 by correctly classifying the property as non-residential due to its unfit state.

A foreign national invests in a UK residential property valued at £300,000 for buy-to-let purposes. The property has significant issues such as dampness, dangerous electrics, and has not been modernised in over 30 years, requiring extensive renovations to make it habitable. Despite these conditions, the property had a tenant in situ at the time of purchase.

Incorrect Assessment

The investor assesses the property as residential for Stamp Duty Land Tax (SDLT) purposes, applying the normal residential rates plus a 3% higher rate surcharge for purchasing through a limited company and an additional 2% surcharge for non-resident purchasers.

Calculation:

  • Property price: £300,000
  • Residential SDLT (0% up to £250,000; 5% on the remaining £50,000): £2,500
  • 3% additional property surcharge: £9,000
  • 2% non-resident surcharge: £6,000
  • Total SDLT due (Incorrectly assessed): £17,500

Correct Assessment

Given the property was uninhabitable when purchased, the investor might pay the stamp duty and seek a refund, arguing for a non-residential SDLT rate based on legal precedents such as PN Bewley vs. HMRC, which classify properties unfit for habitation as non-residential.

Calculation:

  • Property price: £300,000
  • Non-residential SDLT rates (0% up to £150,000; 2% on the next £100,000; 5% on the remaining £50,000): £4,500
  • Total SDLT due (Correctly assessed): £4,500

Conclusion

By paying SDLT at purchase and reclaiming based on the property’s condition, the investor navigates potential tax avoidance issues and saves £13,000 with HMRC’s 9 month enquiry window passing without challenge, allowing the investor to permanently secure the SDLT reclaim. 

Scenario: Development of Land with Static Caravans

(Inaccurate SDLT Assessments>Property Acquisition and Development Scenarios)

➤ The developer incorrectly applies MDR to land with static caravans, thinking it’s residential and pays £175,000 in SDLT, but the correct non-residential rate is £139,500, showing a misunderstanding could lead to overpayment.

Multiple Dwellings Relief (MDR) ceased on June 1, 2024; however, if your property was bought before this date, you have until April 30, 2025, to submit a claim, provided it’s within one year of purchase.

A developer acquired 5 acres of land for £3 million, aiming to transform it into a housing estate. The land hosted 5 static caravans.

Incorrect Assessment

Having read HMRC guidance stating: “A dwelling-house is a building, or a part of a building; its distinctive characteristic is its ability to afford to those who use it the facilities required for day-to-day private domestic existence.” 

The developer is convinced that the inclusion of static caravans on the land makes it subject to residential stamp duty rates, the developer decides to claim Multiple Dwellings Relief (MDR), incorporating the extra 3% stamp duty surcharge as the property was purchased through a limited company.

Stamp Duty Calculation with MDR:

    • Total purchase price: £3,000,000
    • Divided by 5 caravans = £600,000 per dwelling
  • Total SDLT with incorrect MDR application = £35,000 x 5 = £175,000

Correct Assessment

Static caravans are considered chattels, not fixed dwellings, because they can be moved without altering the land significantly. The land purchase should be assessed at non-residential stamp duty rates, without applying MDR.

Stamp Duty Calculation for Non-Residential Land:

    • £150,000 at 0% = £0
    • £100,000 at 2% = £2,000
    • £2,750,000 (remaining amount above £250,000) at 5% = £137,500
  • Total SDLT for non-residential land = £139,500

Conclusion

By correctly classifying the land as non-residential, the developer faces a lower SDLT payment of £139,500 compared to the incorrect lower payment of £175,000 under the mistaken belief that MDR applies and therefore saves £35,500 in SDLT.

Scenario: Company Purchases Employee’s Property for Relocation

(Inaccurate SDLT Assessments>Property Acquisition and Development Scenarios)

➤ Companies purchasing residential properties for employee relocations may be exempt from SDLT, including the 3% surcharge, contrary to the assumption that standard rates always apply.

A company decides to facilitate a key employee’s relocation by purchasing their property for £625,000, planning to hold and later sell the property on the open market.

Incorrect Assessment

The company initially believes that the purchase should be subject to standard residential Stamp Duty Land Tax (SDLT) rates, including the 3% higher rate surcharge applicable to corporate property purchases.

Total SDLT (Incorrectly Assumed): £37,500

Correct Assessment

Contrary to the company’s initial belief, the purchase of the employee’s property under these circumstances is not subject to SDLT. Special considerations or reliefs can apply to transactions involving employee relocations, exempting the company from SDLT. 

Total SDLT: £0

Conclusion

In transactions involving corporate purchase of residential properties for employee relocations, companies are not subject to standard residential SDLT rates, including any applicable surcharges for additional properties.

Buy to let property investor purchases house and resells after renovation

(Inaccurate SDLT Assessments>Property Acquisition and Development Scenarios)

➤ A buy to let investor incorrectly assumes exemption from SDLT for a property intended for renovation and resale, but after understanding it’s non-habitable, applies non-residential rates, reducing the SDLT liability from an initially assumed £13,500 to £5,750.

A buy to let investor acquires a residential property for £325,000, intending to renovate and “flip” it. The property requires extensive renovations to become habitable.

Incorrect Assessment

The investor assumes they are exempt from Stamp Duty Land Tax (SDLT) because the property is bought for renovation and resale, believing this purpose exempts them from SDLT.

Correct Assessment

The property is purchased through a company designed for property investment, not qualifying as a property trading business (SIC code 68100). Thus, the investor does not qualify for specific SDLT reliefs related to property trading businesses. The purchase is subject to standard residential SDLT rates, including the 3% surcharge for owning an additional residential property.

Expected SDLT Liability

  • £0

Residential Rates Calculation (Potential Liability):

  • Purchase price: £325,000
  • £0 for up to £250,000
  • 5% on the next £75,000 (£3,750)
  • Plus 3% surcharge on the entire value: 3% of £325,000 (£9,750)
  • Total SDLT (Incorrectly Assumed): £13,500

Non-Residential Rates Calculation (Correct Assessment Due to Uninhabitability):

  • Purchase price: £325,000
  • £0 for up to £150,000
  • 2% on the next £100,000 (£2,000)
  • 5% on the remaining £75,000 (£3,750)
  • Total SDLT (Correct Assessment): £5,750

Conclusion

Upon realising the property’s condition rendered it non-habitable, the investor correctly opts to classify the property under non-residential rates for SDLT purposes. This reassessment significantly reduces the SDLT liability from the initially assumed £13,500 (under the mistaken belief of residential rates plus surcharge) to £5,750 by applying non-residential rates, reflecting the property’s uninhabitable state at the time of purchase.


Purchase of a Large House with Multiple Dwellings and a Stable Block

(Inaccurate SDLT Assessments>Property Acquisition and Development Scenarios)

➤ Correctly breaking down a £5 million property purchase into parts—3 dwellings and a commercial stable—can save £217,200 in Stamp Duty Land Tax compared to treating it as a single residence.

Multiple Dwellings Relief (MDR) ceased on June 1, 2024; however, if your property was bought before this date, you have until April 30, 2025, to submit a claim, provided it’s within one year of purchase.

An individual acquires a large house for £5 million, which includes two self-contained wings previously rented out by the former owners and a stable block rented to a local business, alongside 5 acres of orchards and gardens intended for personal occupation in a linked transaction.

Incorrect Assessment

The buyer calculates the Stamp Duty Land Tax (SDLT) based on standard residential rates for the entire £5 million property value, treating it as a single residence.

Correct Assessment

  • The property consists of three separate dwellings due to the self-contained nature and separate access of each wing.
  • The stable block, valued at £400,000, is a commercial premise and should be assessed as non-residential.

Scenario 1: Whole Property as Single Residence

SDLT Calculation Total SDLT = £511,250

Scenario 2: Multiple Dwellings Relief Plus Non-Residential Stable Yard

Residential Components:

  • Assume each wing and the main house are valued equally, splitting the £4.6 million residential portion into three, giving £1.53 million per dwelling.
  • Applying MDR as if each dwelling were a standalone purchase:
    • SDLT per dwelling: £94,850
    • Total SDLT for all dwellings = £94,850 x 3 = £284,550

Non-Residential Component (Stable Block):

  • Total SDLT for stable block = £9,500

Combined Total SDLT with MDR and Non-Residential Rate = £284,550 (residential) + £9,500 (non-residential) = £294,050

Stamp Duty Reduction by Evaluating as Multiple Dwellings

Difference: £511,250 (incorrect single residence assessment) – £294,050 (correct MDR and non-residential assessment) = £217,200 

 

Scenario: Linked Transaction Involving Multiple Properties with a “Granny Flat”

(Inaccurate SDLT Assessments>Property Acquisition and Development Scenarios)

➤ Correctly classifying a self-contained annex as a separate dwelling in a property transaction can significantly reduce SDLT liability, resulting in a £121,750 reduction by applying non-residential rates instead of standard residential rates with a surcharge.

Multiple Dwellings Relief (MDR) ceased on June 1, 2024; however, if your property was bought before this date, you have until April 30, 2025, to submit a claim, provided it’s within one year of purchase.

A property investor undertakes a linked transaction to purchase five properties for a total of £2 million. Among these properties, one includes a house with a self-contained annex, previously rented out as a “granny flat.”

Incorrect Assessment

The investor initially applied for Multiple Dwellings Relief (MDR) for the five properties, considering the annex as part of the main house and not as a separate dwelling, and includes the 3% surcharge applicable for limited company purchases.

Correct Assessment

The correct approach recognises the house with the self-contained annex as two separate dwellings, thus increasing the total number of dwellings in the transaction to six. Consequently, the transaction qualifies for non-residential rates of Stamp Duty Land Tax (SDLT), not the standard residential rates plus the 3% surcharge.

Calculation Without recognising the Annex as a Separate Dwelling:

  • Total SDLT with incorrect assessment = £211,250

Correct Calculation recognising the Annex as a Separate Dwelling:

  • Total SDLT with correct assessment = £89,500

Comparison and Cost Reduction:

  • Incorrect assessment total SDLT = £211,250
  • Correct assessment total SDLT = £89,500
  • Financial benefits from accurate assessment. = £121,750

Conclusion

By accurately identifying the self-contained annex as a separate dwelling, the investor significantly reduces the SDLT liability from what would have been paid under the incorrect assumption. This scenario underscores the importance of correctly classifying the components of a linked transaction, particularly when it involves multiple dwellings. 

Scenario: Development of New Housing on Former Garden

(Inaccurate SDLT Assessments>Property Acquisition and Development Scenarios)

➤ Buying land previously part of a garden for housing development is considered a residential purchase for SDLT, leading to a higher tax due to added surcharges, not non-residential rates.

A property developer acquires a plot of land that was previously part of the garden of an existing house, intending to build new residential units on this land.

Incorrect Assessment

The developer initially categorises the land purchase as non-residential, given there’s no existing dwelling on the plot. This leads to the anticipation of SDLT at non-residential rates.

Incorrect SDLT Calculation (Non-residential rates):

  • Assuming the land is purchased for £750,000:
    • £0 for up to £150,000
    • 2% for the next £100,000 = £2,000
    • 5% for the remaining £500,000 = £25,000
    • Total SDLT (incorrectly) = £27,000

Correct Assessment

However, HMRC considers the land residential for SDLT purposes because it was once part of a residential property’s garden. Thus, SDLT is calculated at residential rates, reflecting its past association with a dwelling.

Correct SDLT Calculation (Residential rates):

  • For the same £750,000 purchase price:
    • £0 for up to £250,000
    • 5% for the next £500,000 = £25,000
    • As it’s acquired by a company for development, assuming it’s an additional property, a 3% surcharge applies:
      • 3% on the full £750,000 = £22,500
    • Total SDLT (correctly) = £47,500

Conclusion

When purchasing land previously part of a residential property’s garden for development, developers must recognise HMRC’s classification of such land as residential. 

Scenario: Purchase of a Live/Work Unit by a Property Investor

(Inaccurate SDLT Assessments>Property Acquisition and Development Scenarios)

➤ Buying a live/work unit is subject to non-residential SDLT rates, not residential, saving a property investor significant tax by recognising its mixed-use nature.

A property investor uses a limited company to purchase a live/work unit for £450,000.

Incorrect Assessment

Situation

Assuming the entire property should be classified as residential due to its combined living and workspace, the investor prepares to pay SDLT at residential rates.

Correct Assessment

Reality: The property is classified as mixed-use due to its dual-purpose nature, where 50% serves as residential space and 50% as non-residential workspace. Consequently, it is subject to non-residential SDLT rates.

Calculation Using Incorrect Assessment:

Assuming the property is fully residential and subject to the additional 3% surcharge:

  • Total SDLT (incorrectly assessed as residential with surcharge): £23,500

Calculation Using Correct Assessment (Mixed-Use):

The property’s purchase price is £450,000, divided as 50% residential and 50% non-residential, but classified entirely under non-residential rates for SDLT purposes:

  • Total SDLT (correctly assessed as mixed-use): £12,000

Conclusion: In this scenario, recognising the property’s dual-purpose nature not only aligns with SDLT regulations but also ensures that the investor pays the correct amount of tax. The distinction between residential and non-residential components is essential for properties that serve more than one function, impacting the overall SDLT liability. 


Scenario: Homeowner Purchases House with Home Office

(Inaccurate SDLT Assessments>Property Acquisition and Development Scenarios)

➤ Buying a house with a home office should be classified as residential for SDLT purposes, not mixed-use, despite the office’s presence, leading to slightly higher, but correct, tax payments.

Situation

An individual buys a £1 million house that includes a sizable home office. 

Incorrect Assessment

Believing the presence of the office classifies the property as mixed-use, the buyer assesses and pays Stamp Duty Land Tax (SDLT) at non-residential rates.

Correct Assessment

The property should be classified as entirely residential. The home office, not being separately accessible and not subject to business rates, does not alter the property’s residential nature for SDLT purposes.

Incorrect Calculation (Mixed-Use Assumption):

Assuming mixed-use, the buyer might incorrectly apply non-residential rates:

  • Total SDLT (incorrectly assessed as mixed-use) = £39,500

Correct Calculation (Wholly Residential Property):

As the property is wholly residential, residential rates apply:

  • Total SDLT (correctly assessed as residential) = £41,250

Note: Since this is the only residential property the buyer owns, the 3% surcharge for additional residential properties does not apply.

Conclusion: In this scenario, despite the presence of a home office, the property’s overall use and characteristics support a wholly residential classification. 

Scenario: Investor Purchases an Apartment Used for AirBnB Short-Term Lettings

(Inaccurate SDLT Assessments>Property Acquisition and Development Scenarios)

➤ An apartment used for AirBnB lettings should be classified as residential for SDLT purposes if suitable for long-term use, not non-residential, despite its rental history.

Situation

A limited company acquires an apartment previously utilised for AirBnB short-term lettings, assuming it to be non-residential based on HMRC’s guidance on establishments like hotels and B&Bs which offer services and are available year-round.

Incorrect Assessment

The purchaser assumes the property is non-residential for stamp duty purposes as it is similar to a bed and breakfast. 

Correct Assessment

HMRC Guidance Clarification: While properties used for short stays are not ‘used as’ dwellings by visitors, they may still be ‘suitable for use’ as dwellings. The distinction lies in the property’s suitability for long-term residential use, despite its short-term rental history.

Example: The property, purchased for £350,000, was available for AirBnB lettings year-round but is also fully equipped and suitable as a permanent residence.

Incorrect Non-Residential Assessment:

  • The buyer assumes non-residential rates apply due to its previous use as an AirBnB.
  • Total SDLT (incorrect): £7,000.

Correct Residential Assessment with 3% Surcharge:

  • SDLT is calculated with the residential rate plus a 3% surcharge for being an additional property.
  • Total SDLT with surcharge: £8,000.

Conclusion: This scenario underscores the importance of distinguishing between a property’s previous short-term rental use and its suitability as a dwelling for SDLT purposes. 

Scenario: Purchase of a Retirement Home for Conversion to Residential

(Inaccurate SDLT Assessments>Property Acquisition and Development Scenarios)

➤ Buying a retirement home for conversion is taxed at non-residential SDLT rates, not residential, leading to lower tax costs if assessed correctly.

A retirement home purchased for conversion is classified as non-residential for SDLT purposes, despite its potential as a residence, resulting in substantial tax benefits when assessed correctly.

A property investor, through their limited company, acquires a retirement home for £2.5 million. The building, a large country house, features bedrooms with ensuite bathrooms and a canteen. It previously accommodated residents requiring nursing support, now moving to a new location. The investor plans to renovate and sell it as a single, large residential home.

Incorrect Assessment

The investor assumes the property should be classified as residential for Stamp Duty Land Tax (SDLT) purposes, considering its potential “suitability for use” as a residence.

Correct Assessment

The correct SDLT assessment for this property is as non-residential. According to section 116(3) FA 2003, the property functions as “an institution that is the sole or main residence of at least 90 per cent of its residents” and does not qualify under residential criteria due to its institutional use prior to sale.

Residential Rates (Incorrect for this scenario):

  • Total SDLT (residential with 3% surcharge) = £286,250

Non-Residential Rates (Correct for this scenario):

  • Total SDLT (non-residential) = £114,500

Conclusion

Understanding the distinction between residential and non-residential SDLT rates is important in cases where properties have institutional or specialised uses before conversion. 

Scenario: Purchase of a Large House for Student Accommodation

(Inaccurate SDLT Assessments>Property Acquisition and Development Scenarios)

➤ Buying a house used for student accommodation is subject to residential SDLT rates, not non-residential, even if it’s not university-owned, leading to higher tax costs if assessed correctly.

An investor buys a semi-detached Victorian house close to a university for £675,000. The property, featuring nine bedrooms and shared dining facilities, has been used exclusively as student accommodation for the last 20 years due to its proximity to the university.

Incorrect Assessment

Assumption: The investor considers the property as non-residential, assuming its use for student accommodation qualifies it for non-residential Stamp Duty Land Tax (SDLT) rates.

Correct Assessment

Despite its use as student accommodation, because the property is not owned or managed by the university, it is classified as residential. Being purchased by a company, it is subject to standard residential SDLT rates, plus the 3% higher rate surcharge for additional residential properties.

Incorrect Assessment (Non-residential Rates):

  • Total SDLT (incorrectly assessed) = £23,250

Correct Assessment (Residential Rates with 3% Surcharge):

  • Total SDLT (correctly assessed) = £41,500

Conclusion: The investor’s initial assumption led to an underestimation of the SDLT liability by considering the property non-residential due to its use. 

A tenant has to pay Stamp Duty Land Tax (SDLT) once the cumulative rent exceeds £125,000

(Inaccurate SDLT Assessments>Property Acquisition and Development Scenarios)

➤ Tenants must pay Stamp Duty Land Tax (SDLT) if their cumulative rent exceeds £125,000 over a long-term lease, potentially leading to annual tax bills and fines for non-compliance.

This is a little known fact that few people including a lot of agents and many at HMRC aren’t aware of or don’t know the actual rules. So if you are a tenant and make a rental property your home for the long term and you aren’t careful then you could land yourself with an annual tax bill and penalties if you don’t pay the taxes.

The threshold for not paying the tax is £125,000 which seems a lot but not if you live there for a long time as the UK Government want to encourage now with longer term tenancies

Here’s an example – if someone rents in London and pays the average London rent of £1,800 per month, that’s £21,600 a year. So if they lived in the same property for 10 years then the total rent over that period would be £216,000 which may be over the threshold so you could be be liable for SDLT tax plus fines as they should be paying the SDLT every year from the date they exceeded the threshold.

In order to calculate the tax payable you need to work out the “Net Present Value” of the rent over the term of the lease. The formula for this is quite complicated.

In this example the net present value of the rent would be £194,433 and the tax payable would be £694. This isn’t a lot but it can build a lot with HMRC fines if you don’t pay it each year!

SDLT due by a Tenant, based on 10 years at the average London rent

Net present value of rent £194,433

Exempt £125,000

Liable for SDLT = £69,433

Payable SDLT 1% = £694 PLUS fines which could be very significant

This example assumes that when the tenant renews the tenancy, the renewal terms are linked to the old tenancy.

Scenario: Purchasing a Property for Short-Term Rentals

(Inaccurate SDLT Assessments>Property Acquisition and Development Scenarios)

➤ Properties intended for short-term rentals are considered residential for SDLT purposes, not non-residential, leading to a higher tax liability if correctly assessed.

A property investor acquires a building adapted into three apartments, each equipped with basic cooking facilities, a bathroom, bedroom, and living room, for short-term rentals, at a purchase price of £550,000.

Incorrect Assessment:

The investor interprets HMRC guidance, which states: “Hotels, Inns, Bed and Breakfast or similar establishments. Cases involving bed and breakfast establishments or guest houses will be treated on their own merits. However, a bed and breakfast (B&B) establishment which has bathing facilities, telephone lines etc. installed in each room and is available all year round would be considered non-residential, in line with s.116(3)(f) which states that “a hotel or inn or similar establishment” is not used a dwelling.” Assuming the property’s use for short-term rentals aligns it with hotels or B&Bs, the investor pays SDLT at non-residential rates.

Correct Assessment:

Contrary to the investor’s assumption, HMRC considers properties intended for short-term lettings as residential because they are “suitable for use” as a dwelling, despite not being “used as” a dwelling by short-term visitors. 

HMRC states: “Holiday homes. Holiday chalets or similar (e.g. furnished holiday lettings) that are used for short stays would not be ‘used as’ a dwelling by the short-term visitors. However, they may still be ‘suitable for use’ as a dwelling. This will be a question of fact in each case. More detailed guidance is found at SDLTM00385

This categorisation requires paying residential SDLT rates, including a 3% surcharge if purchased through a limited company.

Calculations:

  • Incorrectly Assessed Stamp Duty Liability: £17,000
  • Correctly Assessed Stamp Duty Liability: £31,500
  • Difference in Liability: £14,500

The proper assessment under residential rates significantly increases the SDLT liability by £14,500 compared to the non-residential rate assumption. This clarification emphasises the importance of understanding how different uses of property affect SDLT categorisation and liability.

 

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This Article Written By Nick Garner
Founder Stamp Duty Advice Bureau
Author of Stamp Duty Land Tax Guide
For Property Investors.