In the case of Tretyakov v Revenue and Customs Commissioners [2024], the taxpayer has had to fork out an additional £484,250 in Stamp Duty Land Tax (SDLT) after the First-tier Tribunal (FTT) refused to accept that the property acquired was partly non-residential.
In June 2021 the taxpayer acquired a building known as the Bacon Factory for £5.75m and paid SDLT of £277,000 on the basis that he considered it consisted of both residential and non-residential elements. HMRC took an opposing view and deemed the building to be entirely residential and assessed the SDLT liability as £761,250.
The SDLT rates for mixed properties (i.e. partly residential and partly non-residential) is significantly less than those for properties considered to be entirely residential.
The Bacon Factory comprised three floors. It was originally used for smoking bacon but had been completely renovated by the seller. The upper two floors consisted of one dwelling and the ground floor was split into two parts. Prior to the renovation works, the use of the ground floor had been as a sand blasting room for the previous owners' sculpture repair business. Following the renovation and at the time of the taxpayer's purchase of the property, the front part of the ground floor consisted of garage space with storage and the rear part contained a large bar area, a games room, a wine cellar, a sauna and further storage. The ground floor was connected to the upper floors by a set of stairs. Caldera Construction who undertook the renovation featured it the property on their website and described it as a “high-end private residence”. The marketing materials produced by Nest Seekers made no mention of any possible commercial use of the ground floor of the property.
The ground floor remained designated for planning purposes as light industrial, it was subject to business rates as it had been since at least 1990 and it had a separate energy certificate to the upper two floors. The sale contract was based on the standard commercial conditions which supported the proposition that the ground floor was suitable for commercial use rather than residential use.
The front area of the ground floor was used by the seller's wife as part of her business. No rent was paid by the business to the seller for the use of area and the business did not require the installation of any plant or machinery.
HMRC accepted that part of the ground floor was used for commercial purposes at the date of completion of the purchase by the taxpayer but argued that it was residential property on the basis that, in conjunction with the remainder of the building (which was clearly used as a dwelling), it was suitable for use as part of a dwelling when the taxpayer acquired it.
The FTT took a multi-factorial approach to determine the suitability of the property for use as a dwelling. It did not accept that the fact that the property has been used for commercial purposes meant that it was not suitable for use as a dwelling. This was just one of the factors to be taken into account.
The taxpayer tried to argue that the ground floor lacked the physical characteristics of a dwelling in that it had a concrete floor, it was not insulated, it had a roller door, restricted natural light and fire-proof glass between the front and rear parts. The FTT did not consider that any of these precluded the ground floor from being suitable for use as a dwelling because a garage with storage should be treated as part of the overall dwelling.
The FTT gave little weight to the historic use of the property and although it accepted that post the renovation works, the ground floor continued to be used in part for commercial purposes, it considered that no modification or adaptation was needed for the ground floor to be used in its entirety as part of the dwelling given that there was no plant or machinery associated with the seller's wife's business.
The FTT did not consider the planning restrictions affecting the ground floor, the non-domestic rates payable in respect of it or the separate energy performance certificate attached to it to be significant factors in determining the status of the ground floor.
The FTT was, it appears, swayed by the actual use of the ground floor of the property by the seller and the fact that it could easily be used a part of the overall dwelling. It is not clear what significance was attributed to the description of the property on the Caldera Construction website or the Nest Seekers marketing materials but the FTT did note that both supported its conclusion.
