Mixed-Use Property & SDLT: What You Need to Know

With the abolition of SDLT "multiple dwellings relief" (MDR) from June 2024, many purchasers of high-value UK real estate are now focussing on whether or not their new property is entirely "residential". 

If it is “residential”, the price is subject to SDLT at progressive rates up to 12% for consideration over £1.5 million (plus an additional 2% for non-residential purchasers, and/or an additional 5% if the purchaser already owns other residential property anywhere in the world – so potentially up to 19% at the top end).

By contrast, the rates applicable to “non-residential” and “mixed” property are much more benign, rising to only 5% on consideration over £250,000.

At present, there is no apportionment between residential and non-residential parts of a “mixed” property, so the SDLT charge can be a substantially reduced if a property can be classified as “non-residential”.  For example, a London townhouse with a shop or restaurant on the ground floor and flats above would be “mixed” – the flats are plainly residential, but the ground floor is non-residential – so a purchase of the whole building would be taxed at non-residential rates. A more difficult case is a rural house with extensive land holdings, perhaps used for grazing or hay cultivation by a local farmer under a licence or lease.

For instance, the purchase of a £1.5 million “residential” property that complete on or after 1 April 2024 is subject to SDLT of at least £93,750, whereas the purchase of a similar “non-residential” property would incur just £64,500. If the price was £10 million, the difference between the two treatments widens to £1,113,750 (residential) or £489,500 (non-residential).

Residential, non-residential, or mixed?

For SDLT purposes, “residential” means in broad terms a building used (or suitable for use) as a dwelling, or being constructed or adapted for use as a “dwelling”, plus any land that forms the garden or grounds of a dwelling, and any land that subsists for the benefit of a dwelling. Some special categories of building – such as properties in use as residential accommodation for school children or students – are also treated as dwellings, so a purchaser is subject to SDLT at the residential rates. Other types of properties with a residential element are expressly excluded: examples include properties in use as student halls of residence, institutions for the persons needing personal care, hospitals, and hotels.

A property tends to keep its character over time, so a property that was a dwelling will still be a dwelling, even if in substantial disrepair, but concerns can arise when a property is no longer “in use” at the time of a sale.

The term “dwelling” is not defined for the SDLT rules and takes its ordinary meaning. HMRC interprets it as meaning a building or part of a building with the facilities required for day-to-day private domestic life, based on a balanced assessment of multiple factors. Questions to consider include: Does the dwelling include places to live, sleep, cook, and wash? Is there a front door that can be locked to maintain privacy and security for the occupants? Does the occupant have their own connection to utilities with separate bills for electricity, water, gas, etc.? Is it registered separately for council tax? Does it have its own postal address? Is there any legal constraint on permanent residential occupation as a separate dwelling, such as the absence of necessary planning permission, or another legal restriction such as a restrictive covenant?

The words “garden” and “grounds” also take their ordinary meaning. Gardens tend to be cultivated spaces close to and enjoyed as an outdoor extension of the dwelling, but grounds may be much more extensive than gardens, particularly in rural areas, and can include areas used for equestrian, horticultural or other activities consistent with domestic occupation but falling short of commercial activity. In some court cases, areas extending over many acres have been classified as “grounds” of a large rural house, supporting its amenity value and privacy. Cutting of hay or livestock grazing the fields is not necessarily incompatible with the space still being “grounds”.

“Non-residential” means, in short, any property that is not wholly “residential”. A bulk purchase of six or more separate dwellings is automatically treated as “non-residential”. And a property with both “residential” and “non-residential” elements becomes “mixed” and is also taxed at the lower “non-residential” rates.

How does that work in reality?

So how can a buyer be sure whether their purchase is “residential” or “non-residential”? It all depends on the facts – how is the property used and configured at the date of the sale, and how has it been used and configured in the past. HMRC does not consider potential future use to be relevant.

We have seen some trends in recent years. Anecdotally, we hear that many purchasers of residential properties receive calls or letters from tax consultants after their purchase, suggesting that they may have paid too much SDLT, and offering to help the purchaser claim a refund in return for a success fee (usually a large percentage of any refund paid – often much larger than the fixed fees or hourly rates that a lawyer or accountant would typically charge for their advice). HMRC has a policy of “process first, investigate later”, so there is a substantial risk that HMRC will process any refund claim and make a repayment (this happens almost automatically) but then enquire into the position some months later and potentially raise an assessment to reclaim the tax plus interest and penalties.

Some of these cases end up in the tax tribunals. With one or two exceptions, taxpayers have been notably unsuccessful in persuading the tax tribunal that their house purchase is “non-residential” due to some additional peculiarity of the land. Among the cases in which a taxpayer has failed to establish a “non-residential” element to the land, and thus make the whole purchased “mixed”, are:

• Electricity pylons
• Railway ventilation shaft
• Garages used for storage
• Office above the garage for working from home
• Private sewage farm
• Extensive equestrian paddocks and stables
• 20 acres of farmland used informally by a neighbouring farmer to graze cattle
• Areas of land subject to hay cutting by a local farmer
• Legal restrictions preventing residential use but not complied with so the area was used as part of a dwelling

How can we help?

Rather than claiming a refund after the event, it is much better to obtain advice in advance, reach a reasonable conclusion on the SDLT treatment, and file on that basis. In our experience, a well-advised purchaser will already have claimed the reliefs that are reasonably available.

HMRC has nine months to enquire after a return is filed, and longer if they make a “discovery” of facts or circumstances not previously disclosed.  In cases with any unusual features that may mean the property could qualify as “non-residential”, it is often better to explain those features to HMRC in advance through a disclosure letter accompanying the land transaction return.

We have considerable experience of assisting our clients to pay the right amount of SDLT at the right time.