Once a month I send you a more informative email regarding recent decisions, regulatory or legal changes or other matters that need your attention.

Over the course of the first quarter of this year, I am dividing my focus. This month I turn to surcharges and reliefs, the changes for additional residential properties and the increases for Corporate and non-natural persons acquiring residential property over £500,000.

I am excited to be recording an update session this month with the renowned leading tax Barrister and SDLT expert Patrick Cannon on 18th February 2025, so look out for that episode which will be released week beginning 24th February 2025. He appeared for the appellant in the case I have highlighted this month (Tretyakov v HMRC, 2024 UKFTT 1144 TC).

With clients looking to minimise their SDLT wherever they can, a topic of conversation is being able to classify a purchase as mixed use or non-residential for SDLT purposes. An obvious example of mixed use would be a ground floor shop and apartments above and therefore subject to the non-residential rates. But a recent FTT decision has thrown a spanner in the works – literally, with considerable financial consequences.

In June 2021 the taxpayer and appellant Mr Tretyakov purchased a building known as the ‘Bacon Factory’ for £5.75 million. An SDLT 1 was submitted on the basis that the building was mixed use and a liability of £277,000 was paid.

HMRC disputed this contention, claiming that the building was entirely residential and that the SDLT liability was £761,250 – a difference of £484,250. The question was not procedural, the Tribunal was simply asked to determine if the building was wholly residential or mixed use, with the burden of proof sitting with Mr Tretyakov.

The court heard that in 1985 permission had been granted to convert the upper two floors of a three-storey building into residential accommodation with the ground floor remaining designated as light industrial, having originally been used to smoke bacon. The ground floor was subject to non-domestic rates and the seller's wife had run her home accessories business from there, which restored salvaged items and repurposed them for the home.

However, when the property was marketed in 2021, the agents described the ground floor by reference to a private bar, gym and sauna, with no mention of any commercial use. The agents however reassured Mr Tretyakov that mixed use rates would apply.

Residential property is defined in s 116(1) Finance Act 2003. To the extent relevant, this provides as follows:

‍"(1) In this Part 'residential property' means

 –‍a) a building that is used or suitable for use as a dwelling, or is in the process of being constructed or adapted for such use

.‍…

‍and 'non-residential property' means any property that is not residential property."

There was no suggestion in this case that the Bacon Factory was in the process of being constructed or adapted for use as a dwelling. HMRC accepted that part of the ground floor was used for commercial purposes (and so was not "used…as a dwelling) at the date of completion of the purchase (which, in normal circumstances, is the "effective date of a land transaction" (see s 44(3) Finance Act 2003)).

The only question for the Tribunal to determine was whether the ground floor was a residential property on the basis that (in conjunction with the remainder of the building) it was "suitable for use as a dwelling" at the date of completion of the purchase.

In reaching their conclusion to classify the whole building as residential and deny the appeal, the FTT made reference to the lack of separation between the ground and upper floors and previous uses did not exclude the ground floor from being suitable for use as a dwelling. In addition, they stated that the location of the sauna on the ground floor could be for no other reason than to be used as part of the dwelling. A breach of planning restrictions (the ground floor had planning for commercial use) did not make it ‘unsuitable for use as a dwelling.’

The conclusion was that the higher rates of SDLT applied by HMRC in their closure notice were therefore due, landing the taxpayer with a further tax bill of £484,250. Ouch.T

To ensure you are managing you and your firm’s risk in a highly complicated area of tax law, let us take the weight of that decision. Send me the details of the complex transactions on your desk and I will send you a quote for moving them onto mine.