Granary and farm owner fails to prove mixed-useby
HMRC has once again succeeded in flattening a taxpayer’s claim that their residential property purchase was mixed-use.
Readers of AccountingWEB do not need to be reminded of the favourable stamp duty land tax (SDLT) rates applied to mixed-use property purchases and the temptation this creates for buyers seeking canny ways to reduce their tax bill. With HMRC continuing to win appeals, the rules are arguably a little stale.
In January 2019 Steven Bowen and his wife purchased, in one single transaction, the leaseholds of Old Valley Farmhouse and The Granary. Although the sites are separate leaseholds registered under two title numbers at the Land Registry, the purchase price of £1,625,000 was a single amount for both and was not allocated between them.
The Old Valley Farmhouse leasehold consists of a farmhouse, outbuildings and over 14 acres of land. The Granary leasehold consists of the granary building and land of less than an acre. Both titles had been acquired by the vendors, the Cowpers, from the National Trust in 1998. Prior to this they had formed part of the Wimpole estate.
Taking advantage of the lower commercial rates of SDLT applied to purchases of property that are not wholly residential, the Bowens filed a single SDLT return with SDLT calculated as £70,750. This was on the basis that The Granary was a separate commercial property.
HMRC disagreed, arguing that The Granary formed part of the grounds of the property and the whole transaction was residential. SDLT was recalculated as £108,750. The Bowens appealed to the first tier tribunal (FTT).
Bowen claimed The Granary was a separate property as it was “commercially farmed by a third party”. Indeed, a local farmer had used the field attached to The Granary to graze sheep since 2016. However, there was no written agreement in place and no fee was paid by the farmer. Crucially, at the time of the transaction, no sheep were kept on the land attached to The Granary.
Although Bowen contested that the use of the land for grazing sheep restricted how the family could use the land, this was not relevant as at the time of the purchase no sheep were kept on the land. The fact that the Bowens had granted permission to the farmer to graze his sheep on the land sometime after acquisition did not alter the status of the property at the effective date of the transaction.
The FTT began by discounting Bowen’s attempt to apply HMRC guidance existing at the time of the purchase that applied a limit to the size of garden or grounds that could be considered residential for capital gains tax (CGT) purposes. Bowen wanted to apply the same principle to SDLT as “the term used to define a piece of land was very similar or the same in both forms of legislation”.
There is no quantitative limit on the size of gardens or grounds falling within the definition of residential property for SDLT purposes, as determined by the upper tribunal and held by the Court of Appeal in Hyman & Ors.
Judge Fairpo also pointed out that the guidance referred to by Bowen related to CGT, not SDLT and in any case HMRC guidance is not binding on the court.
Therefore, the question for the FTT to decide was whether The Granary formed part of the garden or grounds of Old Valley Farmhouse within the scope of the SDLT legislation.
Weighing up the ingredients
The four main factors for the FTT to consider were: historical use; use at the time of the transaction; legal constraints; and geographical factors.
Historically, the two titles had always been in common ownership since The Granary was built as part of the outbuildings of Old Valley Farmhouse a century ago. Bowen argued that as the National Trust had granted separate leases and separate ground rent was paid, the two should be treated as separate.
Judge Fairpo disagreed: “I consider that the grant of the lease had the potential to separate The Granary from Old Valley Farmhouse but, as the leases were granted to the same people (the Cowpers) and subsequently sold together to Mr and Mrs Bowen, I find that the leases were and remain in common ownership.”
Before the transfer of the leaseholds from the National Trust to the Cowpers, planning permission had been granted in 1997 to convert The Granary to residential use. However, at the time of the transaction no development had been undertaken, The Granary remained derelict and the building was used for storage.
Turning to legal constraints, the FTT found that: “The Granary and its land were not in agricultural or other commercial use at the effective date of the transaction.” Restrictions in the lease prevented The Granary from being used for commercial purposes or sublet.
Hedging their bets
Further, a clear link was indicated between the two properties in the suspension of the requirement to plant a hedge between them while under common ownership.
Geographically, The Granary was very close to Old Valley Farmhouse, sufficiently so to be considered grounds. The land attached formed less than an acre, small enough in comparison to the other land attached to Old Valley Farmhouse that it would “not be disproportionate to consider it part of the grounds”.
The FTT reached the same conclusion as HMRC.
Last but not yeast
The upper tribunal in Hyman established that for one property to form part of the grounds of another there must be a connection between the dwelling and the grounds. Judge Fairpo noted that the Bowens had purchased the land, according to their own evidence, to prevent someone else from purchasing it given its proximity to Old Valley Farmhouse. This supported the connection of the two properties. “I consider that this makes it clear that the use or function of that property, at the effective date of the transaction, was to support the use of Old Valley Farmhouse as a dwelling.”
The taxpayer’s appeal was dismissed, the purchase was one of residential property and HMRC’s closure notices were upheld.
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Consulting Tax Editor for AccountingWEB.
I have spent the last 10 years teaching the accountants of the future, mainly ICAEW advanced level corporate reporting. I also cover tax news and write and edit tax updates for other publishers including PTP Limited.