Assessing as Non-Residential For Stamp Duty Purposes

Warning

When purchasing a property, self-assessing it as non-residential for stamp duty purposes can lead to a reduction in stamp duty liability. However, if not done correctly, HMRC will judge such self-assessments harshly. Incorrectly categorising a property as non-residential can result in severe penalties. It is essential to ensure that your assessment is accurate and compliant with regulations to avoid significant financial and legal consequences.

Disclaimer

This information is for general guidance only and does not constitute legal or tax advice. Always seek professional advice tailored to your specific circumstances before making any decisions regarding property transactions and tax assessments. Regulations are subject to change, so ensure you are working with the most current information.

Comment: If you believe your property qualifies as non-residential for stamp duty due to its condition, use the checklist below to assess. Severe (Category 1) and multiple moderate (Category 2) hazards might indicate non-habitability, justifying a non-residential classification.

Key Points:

  • Properties with severe hazards (Category 1) and multiple moderate hazards (Category 2) may qualify as non-residential.
  • Use the Housing Health and Safety Rating System (HHSRS) to evaluate property hazards.
  • Ensure documentation and plan for addressing identified hazards.

Main Principles:

  • Identify and assess property hazards using the HHSRS.
  • Immediate action is required for Category 1 hazards.
  • Document findings 



Introduction

➤ HMRC considers a property non-habitable, and thus non-residential for stamp duty, if it has hazards severe enough to potentially trigger a prohibition notice under the Housing Act 2004.

When is a Property Considered Uninhabitable:

A property is generally considered uninhabitable if it has hazards that would make a local authority issue a notice prohibiting its use as a home. If a property meets these conditions, it can be classified as non-residential for stamp duty purposes. I

Role of Prohibition Notices:

  • Prohibition notices stem from evaluations carried out by local authority inspectors using the Housing Health and Safety Rating System (HHSRS), which identifies health or safety hazards in residential properties.

Hazard Categories Defined:

  • Category 1 Hazards: Actions local authorities are mandated to take include:
    • Serving an Improvement Notice under Section 11 of the Housing Act 2004.
    • Issuing a Prohibition Order under Section 20 of the Housing Act 2004.
    • Serving a Hazard Awareness Notice under Section 28 of the Housing Act 2004.
    • Commencing Emergency Remedial Action under Section 40 of the Housing Act 2004.
    • Issuing an Emergency Prohibition Order under Section 43 of the Housing Act 2004.
    • In extreme cases, issuing a Demolition Order or declaring a Slum Clearance
  • Category 2 Hazards: Possible actions include:
    • Serving an Improvement Notice under Section 12 of the Housing Act 2004.
    • Issuing a Prohibition Order under Section 21 of the Housing Act 2004.
    • Serving a Hazard Awareness Notice under Section 29 of the Housing Act 2004.

Clarification of HMRC Guidance:

  • HMRC does not require an actual prohibition notice to be in place for a property to be classified as non-residential. The property must simply be in a condition that could potentially lead to the issuance of such a notice.

Assessing Property Condition:

  • Category 1 Hazards: Represent critical concerns that are severe threats to health and safety, such as structural collapses or significant environmental hazards like heavy mould.
  • Category 2 Hazards: Represent significant but less immediate threats, such as minor electrical issues or inadequate lighting.

Justification for Non-Residential Assessment:

  • According to HMRC guidance, if your property exhibits Category 1 or 2 hazards that could lead to a prohibition notice from local authorities upon inspection, it can legitimately be classified as non-residential for stamp duty purposes due to its condition. This classification should be taken into account if the condition of the property is likely to result in such enforcement.



Economic justification

➤ Classifying an uninhabitable property as non-residential can significantly lower SDLT liability by avoiding higher residential surcharges.

Property investors are typically subject to a 3% higher rate SDLT surcharge on top of the standard residential rates. Additionally, non-UK tax residents face a further 2% surcharge. However, non-residential properties do not attract these surcharges, potentially reducing overall SDLT liability.

Assessment of Property Condition for SDLT:

  • If a residential property is uninhabitable, it arguably cannot serve as a dwelling. In such cases, the property should be classified as non-residential for SDLT purposes, which can lead to lower tax obligations for investors.

Residential vs. Non-Residential SDLT Rates:

Residential Rates:

  • Standard Rates for Residential Properties:
    • Up to £250,000: 0%
    • £250,001 to £925,000: 5%
    • £925,001 to £1.5 million: 10%
    • Above £1.5 million: 12%
    • Additional Surcharge: Properties not deemed as a primary residence attract a 3% surcharge.

Non-Residential Rates:

  • Rates for Non-Residential Properties:
    • Up to £150,000: 0%
    • £150,001 to £250,000: 2%
    • Above £250,000: 5%

Example Calculation of SDLT Liability:

  • Scenario: A property is purchased for £600,000.
  • Residential Rate Calculation (Including 3% Surcharge):
    • Total SDLT for Residential: £35,500
  • Non-Residential Rate Calculation:
    • Total SDLT for Non-Residential: £19,500

Conclusion: For property investors, assessing a property as non-residential can substantially lower the SDLT liability, especially when compared to residential rates which include surcharges. 


Reclassification calculator.

Whilst this is primarily designed for stamp duty reclaims, you can calculate the difference between residential rates and non-residential rates of stamp duty for  a property. Remember to adjust the fee percentage to 0%.

Calculating a refund. Stamp Duty Land Tax Reclaim Calculator

Stamp Duty Land Tax Calculator

For calculating reclaims due to reclassification from residential stamp duty rates to non-residential rates, this applies to properties re-classified as mixed-use or non-residential due to uninhabitability.

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Condition Assessment

Comment:  If you think your property qualifies for non-residential stamp duty due to its condition, use the checklist below to assess the property. If a property has severe issues (Category 1) and multiple moderate issues (Category 2), it might not be habitable and could be classified as non-residential for stamp duty purposes.

Key Points:

  • Properties with severe hazards (Category 1) and multiple moderate hazards (Category 2) might qualify as non-residential.
  • Use the HHSRS to evaluate property hazards.
  • Ensure documentation and plan for addressing identified hazards.

Main Principles:

  • Identify and assess property hazards using the HHSRS.
  • Immediate action is required for Category 1 hazards.
  • Document findings and create an action plan for remediation.



Understanding Category 1 and Category 2 Hazards

➤ If a property has one or more severe (Category 1) hazards and at least two moderate (Category 2) hazards, it may be considered uninhabitable and qualify for non-residential stamp duty classification.

The Housing Health and Safety Rating System (HHSRS) is a risk-based evaluation tool used in England and Wales to help local authorities identify and protect against potential risks and hazards to health and safety from any deficiencies identified in residential properties. It is helpful for homeowners, landlords, and property managers to understand how to assess hazards under this system, particularly distinguishing between Category 1 and Category 2 hazards.

Category 1 Hazards

Definition: These are hazards that pose a serious and immediate risk to the health and safety of the occupants. They are considered severe enough that local housing authorities are required to take action to ensure they are addressed.

Examples:

  • Severe Cold: Inadequate heating or insulation resulting in indoor temperatures that are persistently below an acceptable level, leading to risks of hypothermia or pneumonia.
  • Major Structural Risks: Significant risks of building collapse or major structural failures that could imminently endanger occupants.
  • High Risk of Falls: Absence of guardrails on high balconies which could lead to a fatal fall.
  • Carbon Monoxide and Fuel Combustion Products: Presence of a defective boiler or heater emitting high levels of carbon monoxide.
  • Toxic Mould and Excessive Damp: Presence of mould or damp that would exacerbate or lead to respiratory issues over time and may cause immediate harm.

Category 2 Hazards

Definition: These are less severe hazards that still warrant recognition and potential action but do not pose an immediate and severe risk to occupant health and safety. Local authorities may intervene at their discretion.

Examples:

  • Minor Damp and Mould: Presence of some dampness and mould that could exacerbate or lead to respiratory issues over time but is not extensive enough to cause immediate harm.
  • Less Severe Cold: Situations where the property is cool but does not severely impact the health of occupants, such as slightly inefficient heating systems that still maintain a marginally adequate temperature.
  • Minor Structural Risks: Small cracks in walls or loose tiles that do not immediately threaten safety but require monitoring and eventual intervention.
  • Low Risk of Falls: Lower balconies or areas with adequate but ageing guardrails that should be updated but do not currently pose a high risk of severe injury.

Steps to Assessing Hazards

  1. Identification of Hazards: The first step is identifying potential hazards within the property. This involves a thorough inspection of all elements of the building and its surroundings.
  2. Risk Assessment: Once a hazard is identified, assess the likelihood of an occurrence and the probable severity of the outcome if the hazard is not addressed. This assessment should consider the impact on all potential occupants, including those particularly vulnerable due to age, disability, or health condition.
  3. Comparison Against HHSRS Criteria: Use the HHSRS Operating Guidance which includes a scoring system to evaluate the hazard. Each hazard is scored based on the potential for harm and the likelihood of that harm occurring. The scoring ultimately determines whether a hazard is categorised as Category 1 or Category 2.
  4. Documentation and Action Plan: Document all findings and decide on an appropriate course of action. For Category 1 hazards, immediate action is required either by repair, replacement, or another remedy to mitigate the risk. For Category 2 hazards, plan remedial actions as necessary based on their urgency and impact.
  5. Arrange an inspection: If you suspect your property contains category one or category two hazards, it is advisable to schedule a HHSRS inspection with an independent inspector. This inspector can provide a report that supports your claim if you self-assess the property as non-residential.



HHSRS Inspection Checklist

➤ HHSRS inspections assess hazards like dampness, excess cold or heat, asbestos, biocides, carbon monoxide, lead, radon, gas leaks, VOCs, crowding, intruder entry, poor lighting, noise, hygiene, food safety, water supply, falls, electrical risks, fire, hot surfaces, collision risks, explosions, ergonomics, and structural integrity to ensure property safety and health.

Hazard 1: Damp and Mould Growth

  • Description: Damp, humid, and mouldy conditions support the growth of dust mites, mould, and fungi, which can undermine mental and social well-being.
  • Health Effects: Potential for triggering allergies, asthma, and exposure to toxins from mould and fungal infections.
  • Inspection Guidance: Check for visible signs of dampness, water damage, and mould or fungal growth on walls, ceilings, and floors. Pay special attention to basements, bathrooms, and other areas prone to moisture. Assess ventilation and heating systems for adequacy.

Hazard 2: Excess Cold

  • Description: Cold indoor environments can significantly impact health, particularly in inadequately heated homes.
  • Health Effects: May exacerbate or cause respiratory conditions like flu, pneumonia, bronchitis, and increase the risk of cardiovascular conditions such as strokes and heart attacks.
  • Inspection Guidance: Verify that heating systems are functional and adequate for maintaining temperatures between 18°C to 21°C. Check for drafts, insulation quality, and the functionality of windows and doors in retaining heat.

Hazard 3: Excess Heat

  • Description: Overly warm indoor temperatures can pose serious health risks.
  • Health Effects: Risks include dehydration, heatstroke, and exacerbation of cardiovascular and respiratory conditions.
  • Inspection Guidance: Ensure there are mechanisms for temperature regulation such as air conditioning, proper ventilation, and shading devices. Evaluate the effectiveness of these systems in maintaining comfortable indoor temperatures.

Hazard 4: Asbestos and MMF

  • Description: Exposure to Asbestos fibres and Manufactured Mineral Fibres (MMF) used in building insulation and other construction materials.
  • Health Effects: Asbestos can cause severe lung damage including cancer; MMF can irritate skin, eyes, and lungs.
  • Inspection Guidance: Identify potential asbestos-containing materials or MMF in older buildings, especially in insulation, tiles, and roofing. Assess for damage or deterioration which could lead to fibre release.

Hazard 5: Biocides

  • Description: Use of chemicals to treat timber and mould which may linger in the air or on surfaces.
  • Health Effects: Risks from inhalation, skin contact, and accidental ingestion of these chemicals.
  • Inspection Guidance: Review usage history of biocides in the property, check for adequate labelling and storage, and assess for any residual odours or visible residues.

Hazard 6: Carbon Monoxide and Fuel Combustion Products

  • Description: Inadequate ventilation or faulty appliances can lead to accumulation of carbon monoxide and other harmful combustion by-products.
  • Health Effects: Exposure can cause dizziness, nausea, headaches, disorientation, unconsciousness, and severe breathing problems.
  • Inspection Guidance: Test carbon monoxide detectors and ensure they are in working order. Inspect heating systems, stoves, and any fuel-burning appliances for proper operation and venting.

Hazard 7: Lead

  • Description: Exposure to lead through deteriorating paint, plumbing with lead pipes, and other sources.
  • Health Effects: Lead poisoning can affect neurological function, mental health, and blood production.
  • Inspection Guidance: Look for peeling or chipping paint in older properties, inspect older plumbing systems, and consider lead testing in homes built before the 1980s.

Hazard 8: Radiation

  • Description: Radon gas accumulation, particularly in basements and lower levels of buildings.
  • Health Effects: Long-term exposure to radon and its decay products can lead to lung cancer.
  • Inspection Guidance: Recommend radon testing especially in areas known for high radon levels. Assess basement and ground floor for cracks and openings where radon may enter.

Hazard 9: Uncombusted Fuel Gas

  • Description: Leaks from gas lines or fittings can release fuel gases into the property’s atmosphere.
  • Health Effects: Risk of suffocation from oxygen displacement and potential toxic effects.
  • Inspection Guidance: Perform gas leak tests on all accessible gas lines and connections. Ensure adequate ventilation in areas where fuel gases are used.
  1. Volatile Organic Compounds (VOCs)
  • Description: Health risks from volatile organic compounds, including formaldehyde, which are gases at room temperature found in various home materials.
  • Potential Health Effects: Can trigger allergies, cause irritation to eyes, nose, and skin, and lead to headaches, nausea, dizziness, and drowsiness.
  • Inspection Guidance: Check for the presence of materials known to emit VOCs such as certain paints, solvents, carpets, and furniture. Ensure adequate ventilation in areas where these materials are found.
  1. Crowding and Space
  • Description: Hazards due to insufficient space for living, sleeping, and normal household activities.
  • Potential Health Effects: May cause psychological distress, mental disorders, hygiene issues, and increase the risk of accidents and privacy invasions.
  • Inspection Guidance: Measure room sizes and compare against minimum health and safety standards. Observe and note any signs of overcrowding and its impact on the living conditions.
  1. Entry by Intruders
  • Description: Risks associated with failing to secure the property against unauthorised access.
  • Potential Health Effects: Increases fear of burglary, stress, and potential injuries from intruders.
  • Inspection Guidance: Evaluate the effectiveness of locks, security systems, and overall property accessibility. Check for vulnerabilities in windows, doors, and other potential entry points.
  1. Lighting
  • Description: Health risks associated with inadequate lighting that affects both physical and mental health.
  • Potential Health Effects: Leads to eye strain, headaches, and can contribute to depression due to lack of natural light and poor visibility.
  • Inspection Guidance: Assess the adequacy of both natural and artificial light in each room. Consider the placement of windows and the adequacy of existing light fixtures.
  1. Noise
  • Description: Exposure to excessive noise from within or around the property.
  • Potential Health Effects: Can cause sleep disturbances, poor concentration, headaches, and anxiety.
  • Inspection Guidance: Identify sources of noise including traffic, industrial, or neighbourhood noise. Check insulation and window quality to assess noise penetration.
  1. Domestic Hygiene, Pests, and Refuse
  • Description: Risks from poor property design and maintenance that hinder cleanliness and attract pests.
  • Potential Health Effects: Can lead to infections, asthma, allergies, and diseases transmitted by pests.
  • Inspection Guidance: Evaluate the adequacy of sanitation facilities and refuse disposal systems. Check for signs of pest infestations and the cleanliness of the premises.
  1. Food Safety
  • Description: Health risks stemming from inadequate facilities for food storage, preparation, and cooking.
  • Potential Health Effects: Can cause gastrointestinal illnesses such as diarrhoea, vomiting, and other digestive issues.
  • Inspection Guidance: Inspect kitchen facilities for proper storage, cleanliness, and maintenance of appliances and surfaces.
  1. Personal Hygiene, Sanitation, and Drainage
  • Description: Health risks associated with inadequate personal and clothes washing facilities and poor sanitation and drainage.
  • Potential Health Effects: Risks of skin infections, mental health issues, and gastrointestinal diseases.
  • Inspection Guidance: Review the condition and functionality of bathrooms, washing facilities, and drainage systems. Check for signs of mould, damp, and poor water flow.
  1. Water Supply
  • Description: Health risks from water contamination.
  • Potential Health Effects: Can lead to dehydration, fatigue, headaches, skin conditions, and more severe illnesses like Legionnaires’ disease.
  • Inspection Guidance: Assess the water quality, check plumbing for signs of deterioration, and review recent water quality reports if available.
  1. Falls Associated with Baths
  • Description: Risks from slips and falls in bathrooms, particularly involving baths, showers, and similar facilities.
  • Potential Health Effects: Can cause physical injuries such as cuts, lacerations, swellings, and bruising.
  • Inspection Guidance: Ensure that all bath and shower areas have non-slip surfaces and are equipped with appropriate safety features like grab bars. Check the condition of bath mats and overall bathroom layout for safety risks.
  1. Falls on Level Surfaces
  • Description: Evaluating risks from falls on flat surfaces such as floors, yards, and paths. This includes assessing areas with trip steps, thresholds, or ramps where the change in level is less than 300mm.
  • Potential Injuries: Physical injuries could range from bruising and fractures to head, brain, and spinal injuries.
  • Inspection Tips: Check all level changes within the property, ensure that floor coverings are secure and ramps or steps are adequately marked and maintained. Assess the condition of paths and yards for uneven surfaces or potential trip hazards.
  1. Falls Associated with Stairs and Steps
  • Description: Focus on falls that occur on stairs and ramps exceeding a 300mm level change. This includes both interior and exterior stairs and ramps that provide access to the property and shared facilities, as well as falls over protective barriers.
  • Potential Injuries: Bruising, fractures, head, brain, and spinal injuries are common results of these falls.
  • Inspection Tips: Verify the stability and condition of all handrails and guardrails. Check for consistent riser and tread sizes, adequate lighting, and the presence of non-slip surfaces on stairs and ramps.
  1. Falls Between Levels
  • Description: Assess risks of falls from one level to another where the vertical difference is more than 300mm, such as from balconies, landings, or windows.
  • Potential Injuries: Significant risk of physical injuries from such falls.
  • Inspection Tips: Ensure that all windows, balconies, and landings are secured with barriers that meet regulatory heights and strength requirements to prevent accidental falls.
  1. Electrical Hazards
  • Description: Evaluation of the risks from electric shock and burns from electrical sources.
  • Potential Injuries: Electric shock and burns.
  • Inspection Tips: Check the condition and compliance of the property’s electrical installations. Look for exposed wiring, check the condition of outlets and fixtures, and ensure all electrical systems are up to code.
  1. Fire
  • Description: Identification of health threats from exposure to uncontrolled fire and smoke.
  • Potential Injuries: Burns, smoke inhalation, or death.
  • Inspection Tips: Assess the availability and condition of fire detection and suppression equipment. Ensure there are adequate escape routes and that all flammable materials are stored safely.
  1. Flames, Hot Surfaces, and Materials
  • Description: Risks associated with contact with open flames, hot surfaces, and non-water-based hot liquids.
  • Potential Injuries: Burns, scalds, permanent scarring, or death.
  • Inspection Tips: Verify the safety of heating elements, cooking devices, and any industrial equipment. Ensure protective measures are in place to prevent contact with hot surfaces or flames.
  1. Collision and Entrapment
  • Description: Assessing risks from physical injuries caused by trapping body parts in doors, windows, or colliding with structural features like low ceilings.
  • Potential Injuries: Cuts and bruising.
  • Inspection Tips: Ensure that doors and windows operate smoothly without risks of jamming. Check for headroom, protruding structures, and other architectural features that could cause injury.
  1. Explosions
  • Description: Evaluating threats from explosions within the property which may result from gas leaks or chemical reactions.
  • Potential Injuries: Crushing, bruising, puncture wounds, fractures, head, brain and spinal injuries.
  • Inspection Tips: Inspect gas lines, chemical storage, and ventilation systems to prevent accumulation of volatile gases. Ensure all safety protocols for handling and storing explosive materials are followed.
  1. Ergonomics
  • Description: Risks of strain and sprain injuries associated with poor ergonomic design of spaces within the dwelling.
  • Potential Injuries: Strain and sprain injuries.
  • Inspection Tips: Assess the layout and furniture arrangement for potential ergonomic risks. Check for adequate work and living spaces that allow for comfortable movement and usage.
  1. Structural Collapse and Falling Elements
  • Description: The risk of the building or parts of its structure collapsing due to poor maintenance, improper construction, or adverse weather conditions.
  • Potential Injuries: Various physical injuries, potentially fatal.
  • Inspection Tips: Check the structural integrity of the building. Look for signs of distress in the building’s fabric such as cracks, loose elements, and water damage that may indicate potential for collapse or falling debris.

 


Condition Assessment Tool

Use this to help determine if there are serious condition hazards in the property you wish to purchase.



Evidence Gathering

➤ After purchasing a property, conduct a detailed inspection with photographic documentation, settle stamp duty within 14 days, and consider an HHSRS or RICS survey to thoroughly assess and document the property’s condition.

Post-Purchase Actions and Stamp Duty Considerations

Once you are familiar with the Housing Health and Safety Rating System (HHSRS) and have decided to proceed with a property purchase, it’s important to follow a structured post-purchase process:

  • Immediate Actions Post-Purchase: After completing the property purchase, you have a 14-day window to settle your stamp duty liabilities. Conduct a thorough inspection of the property.
  • Detailed Inspection and Documentation:
    • Conduct a Detailed Inspection: Examine the property carefully for any existing or potential issues.
    • Photographic and Video Evidence: Document all areas of the property, focusing on any visible signs of deterioration or damage. This should include taking high-quality photographs and video recordings to support any findings.

Conducting an HHSRS Survey:

  • Booking an HHSRS Survey: For a comprehensive assessment, consider hiring a professional to conduct an HHSRS survey. This provides credible, third-party evidence of the property’s condition.
  • Cost of HHSRS Surveys: These surveys can range from £250 to £750, varying with the property’s size and complexity.
  • Scarcity of HHSRS Inspectors: Note that HHSRS inspectors are less common than regular property surveyors. It may be necessary to schedule this well in advance or seek alternatives if unavailable.

Alternative to HHSRS Survey:

  • Hiring a RICS Qualified Surveyor: If an HHSRS surveyor is not available, the next best option is to engage a RICS qualified surveyor.
  • Requesting a RICS Level II Survey: Ensure the survey includes comprehensive photography to visually document all condition issues alongside the written report. This is crucial for validating the property’s condition.

Final Steps:

  • Prepare Case: Get your documents ready to submit to your conveyancing solicitor. Refer to the section ‘Collaborating with Conveyancing Solicitors’ for guidance.



Collaborating with Conveyancing Solicitors

Comment: Collaborating with conveyancing solicitors is essential when assessing a property as non-residential at purchase for Stamp Duty Land Tax (SDLT) purposes.

Key Points

  • Inform solicitors early about the decision to classify the property as non-residential.
  • Provide clear instructions for the SDLT self-assessment.
  • Anticipate and address any solicitor queries and responsibilities.

Main Principles

  • Effective communication ensures accurate SDLT classification.
  • Solicitors must be fully informed to complete necessary documentation.
  • Be prepared to provide evidence and sign indemnity agreements if needed.



Communicating Intentions for Non-Residential SDLT Self-Assessment

Introduction

When a property investor decides to self-assess a property as non-residential for Stamp Duty Land Tax (SDLT) purposes due to its condition, it is important to effectively communicate this decision to their conveyancing solicitor. This communication is not about justifying the decision but ensuring that the solicitor accurately completes the SDLT self-assessment questionnaire according to the investor’s instructions.

Informing the Solicitor of Your Decision

  • Notification of Intent: Inform your conveyancing solicitor of your intention to classify the property as non-residential for SDLT purposes. This should be a clear directive, ideally provided at an early stage in the transaction.
  • SDLT Self-Assessment Instructions: Explicitly instruct your solicitor on how you wish to proceed with the SDLT self-assessment. It is important that they understand your intentions so they can accurately complete the necessary documentation.

Anticipating Solicitor’s Queries and Responsibilities

  • Expect Queries for Clarification: Your solicitor may query your request to ensure you fully understand the implications of self-assessing a residential property as non-residential. They are likely to discuss the potential risks and legal ramifications involved.
  • Solicitor’s Duty to Advise: While you are not required to justify your decision, the solicitor has a professional duty to advise you on the matter. Expect them to outline the possible consequences, including the risk of an HMRC enquiry.
  • Indemnity Agreement: Be prepared for your solicitor to ask you to sign an indemnity agreement. This is a precautionary measure to protect themselves from any liability arising from a potential HMRC enquiry, especially if the self-assessment is deemed to be promoting a tax avoidance scheme.

Gathering Evidence

  • Evidence Collection: Although not a requirement for conveying your decision to the solicitor, gathering evidence supporting the property’s condition can be helpful. This includes photographs, video footage, and HHSRS property surveys that highlight the non-habitability of the property at the time of purchase.

Conclusion

It’s essential to provide clear instructions to your conveyancing solicitor while understanding that they may require additional measures, such as an indemnity agreement, to proceed. This approach ensures that the SDLT self-assessment reflects your decision accurately and that you are fully informed of the implications of this classification.


Explanation of Letter to Conveyancing Solicitor

➤ The letter instructs a conveyancing solicitor to classify an uninhabitable property as non-residential on the SDLT1 form, providing detailed guidance and agreeing to supply evidence and sign an indemnity agreement to support this claim.

This letter is written by a property buyer to their conveyancing solicitor providing specific instructions on how to complete the SDLT1 form, which is required for the payment of Stamp Duty Land Tax (SDLT). The buyer has decided to classify the property they are purchasing as non-residential due to its condition, which they believe renders it non-habitable at the time of purchase. Here’s a breakdown of the key points in the letter:

Purpose of the Letter

  • Instruction on SDLT Classification: The buyer instructs the solicitor to classify the property as non-residential on the SDLT1 form due to significant condition issues that make it non-habitable.
  • Specific Guidance for Form Completion: The letter provides detailed instructions for specific questions on the SDLT1 form, including not claiming any reliefs unless certain conditions are met that would make the property eligible for such reliefs.

Instructions Provided

  • Question 1 – Type of Property: The buyer instructs the use of code ’03 – Non-residential’ to reflect the property’s classification based on its condition.
  • Question 9 – Claiming Relief: The instruction is to avoid claiming any relief unless there are specific scenarios like eligibility for multiple dwellings relief or first-time buyers relief that apply to this purchase.

Additional Details

  • Evidence Provision: The buyer mentions they are prepared to provide extensive evidence (such as property surveys and photographs) to support the non-residential classification if HMRC requests it.
  • Indemnity Agreement: The buyer acknowledges the unusual nature of classifying the property as non-residential and agrees to sign any indemnity agreement to mitigate potential risks associated with this SDLT classification.

Professional Advice and Compliance

  • Solicitor’s Expertise: The buyer relies on the solicitor’s professional advice and guidance to ensure that the SDLT1 form is filled out accurately and in compliance with tax laws.

Communication and Follow-up

  • Ongoing Updates: The buyer requests to be kept informed of any developments or additional information requirements and expresses trust in the solicitor’s judgement in handling this aspect of the transaction.

Conclusion

  • Closing Thanks and Confirmation Request: The buyer thanks the solicitor for their attention to this matter and looks forward to confirmation and further advice.

Why This Letter Is Being Written

By classifying the property as non-residential due to its uninhabitable condition, the buyer may benefit from lower SDLT rates, which can significantly impact the overall cost of the transaction. The detailed instructions aim to clarify the buyer’s intentions, provide legal documentation of their requests, and ensure that all legal bases are covered, potentially protecting both the buyer and the solicitor in the event of an audit or inquiry from HMRC.


Sample Letter to Conveyancing Solicitor with Detailed SDLT1 Instructions

➤ Write to your conveyancing solicitor detailing your request to classify the property as non-residential for SDLT purposes, provide specific SDLT1 form instructions, and offer evidence to support your claim.

[Your Name]
[Your Address]
[City, Postcode]
[Email]
[Phone Number]

[Date]

[Conveyancing Solicitor’s Name]
[Law Firm’s Name]
[Law Firm’s Address]
[City, Postcode]

Dear [Solicitor’s Name],

I am writing to provide detailed instructions for completing the SDLT1 form for the property I am currently purchasing, located at [Property Address]. As discussed, I have decided to assess this property as non-residential for Stamp Duty Land Tax (SDLT) purposes due to its current condition hazards.


Instructions for SDLT1 Questionnaire:

  1. Question 1 – Type of Property: Please use code ’03 – Non-residential’ for this section. This code is appropriate given the property’s condition and my decision to assess it as non-residential.
  2. Question 9 – Claiming Relief: For the first part of Question 9 regarding relief claims, my instruction is to not claim any relief, unless specific circumstances allow it, such as eligibility for multiple dwellings relief or first-time buyers relief. If any such circumstances are applicable, please proceed with claiming the appropriate relief. However, in the absence of such scenarios, no relief should be claimed.

Additional Details: Please be aware that my decision is influenced by serious condition issues within and surrounding the property which, according to my evaluation using the HHSRS condition assessment framework, makes it non-habitable at the time of purchase. 

I am prepared to provide comprehensive evidence, including property surveys and photographs, to support this classification, should HMRC require it.

I understand the unusual nature of this classification and am willing to sign any indemnity agreement that your firm deems necessary to mitigate you from any potential risks arising from this instruction.

I rely on your professional advice and guidance in ensuring that the SDLT1 form is completed accurately reflecting these instructions and in compliance with the relevant tax laws.

Please proceed with the SDLT filing as per the above instructions and keep me informed of any developments or additional information required. Your expertise in this matter is highly valued, and I trust your judgement in handling this aspect of the property transaction.

Thank you for your attention to this matter. I look forward to your confirmation and any further advice you may have regarding this process.

Sincerely,

[Your Signature (if sending a hard copy)]
[Your Printed Name]

cc: [If applicable, list the names of others to whom you are sending copies of this letter]


Risks with HMRC

➤ Self-assessing a property at purchase  as non-residential to reduce SDLT can lead to HMRC scrutiny, requiring robust evidence to avoid penalties for tax avoidance.

Risks of Self-Assessing Property as Non-Residential at Purchase

When purchasing a property, deciding to self-assess it as non-residential to reduce stamp duty liability can carry significant risks. 

Scrutiny and Evidence Requirements

HMRC Scrutiny:

  • When you self-assess a property as non-residential, your assessment is subject to review by HM Revenue and Customs (HMRC).
  • HMRC Inquiry: If HMRC questions the validity of your self-assessment, they may initiate an inquiry to verify whether the property was truly non-habitable at the time of purchase.

Evidence Requirement:

  • Supporting Documentation: It is imperative to have robust evidence, such as detailed surveys or reports from qualified inspectors, documenting the condition of the property at the time of purchase.
  • Documentation Types: Evidence might include photographs, video walkthroughs, and professional HHSRS assessments detailing the condition issues which make the property uninhabitable.

Legal Implications and Tax Avoidance Concerns

Potential for Tax Avoidance:

  • Self-Assessment and Tax Avoidance: Classifying a property as non-residential to benefit from lower stamp duty rates can be seen by HMRC as a form of tax avoidance, especially if the evidence does not conclusively support the property’s condition.
  • Legislation: Under various anti-avoidance legislations, such as the General Anti Abuse Rule (GAAR), HMRC can challenge arrangements that they perceive to be artificial or abusive in terms of tax reduction.

Consequences:

  • Financial Penalties: If HMRC determines that the self-assessment was used as a means to avoid tax, the property buyer might face penalties, additional tax charges, and accrued interest on unpaid duties.



Reclaiming Stamp Duty as a Safer Alternative

➤ Paying residential stamp duty initially and reclaiming it later based on property condition is safer, reducing risks of tax avoidance accusations and potential penalties.

Paying and Reclaiming Stamp Duty:

  • Reduced Risk of Tax Avoidance Accusation: By initially paying the stamp duty based on the residential rate and subsequently applying for a refund due to the property’s condition, you position yourself within a safer legal framework.
  • Finance Act 2003: This approach is supported by the provisions in the Finance Act 2003, which allow for the reclamation of overpaid stamp duty if it is later evidenced that the property was not habitable

HMRC’s Inquiry Window:

  • Nine-Month Review Period: After a reclaim, HMRC has up to nine months to inquire and possibly reclaim the refunded duty. However, the likelihood of this happening is relatively low, with anecdotal evidence suggesting that very few reclaims are challenged.

Best Practices for Property Owners

Just Cause and Proper Documentation:

  • Evidence-Based Assessment: To justify self-assessing a property as non-residential, ensure you have compelling evidence of the property’s condition that would stand up to HMRC scrutiny.
  • Professional Guidance: Engaging with tax professionals or legal advisors to review your assessment strategy can mitigate risks and align your actions with current tax laws.

Conclusion: Self-assessing a property as non-residential at the time of purchase can offer significant stamp duty efficiencies, but it comes with notable risks. Property owners must be prepared with strong evidence and possibly consider the safer route of paying the due tax and seeking a refund, which carries less risk of being viewed as tax avoidance.

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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.