SDLT: Penal rate applies to hazardous-clad flat
The purchaser of a flat in block clad in a material similar to that used on Grenfell Tower claimed this made the property not suitable for use as a dwelling and sought to apply the non-residential rates of Stamp Duty Land Tax (SDLT).
Fish Homes Limited (TC07666) is owned and run by Mr and Mrs Fish. It holds a small portfolio of residential properties to let.
In August 2017 Fish Homes completed the purchase of a two-bedroom flat in Greenwich to add to its existing property portfolio. The block in which the flat was situated was covered in cladding, similar to that used on the Grenfell tower block, which in June 2017 burned down with tragic consequences. Fortunately, in this case, the developer of the block completed remedial works to remove the cladding in July 2019.
The original claim
The company filed an SDLT return applying the residential rates of SDLT and claimed a relief from paying the flat rate of 15% as the property had been acquired for its rental business. This flat rate of SDLT at 15% applies to the entire consideration, where a company or “non-natural person”, purchases a residential property with a value of more than £500,000. The flat rate of SDLT can only be reduced where a relief or exemption can be claimed.
At the effective date of the purchase, the flat was vacant. Due to the cladding, Fish Homes found that it was unable to let the property under a formal tenancy and so it let the property to the shareholders’ daughter and friend on an informal basis. The daughter and her friend moved out some 18 months after the purchase and once the remedial works had been completed.
HMRC raised an enquiry and concluded that the SDLT flat rate of 15% applied to the entire purchase price as the condition for the rental business relief had not been met. One of the conditions for that relief is that within three years of the transaction a non-qualifying individual does not occupy the dwelling. A non-qualifying individual includes a relative connected to the owner of the property and in this case, it was the daughter of the shareholders of the company.
Fish Homes argued that SDLT should have been charged at the non-residential rates as the flat was not suitable for use as a dwelling because of the cladding and the health and safety risks. However, the company never submitted a revised SDLT return.
There was no dispute between the parties that the 15% flat rate of SDLT would apply and relief would not be available as the letting condition had not been met. However, the flat rate of SDLT would not apply if the residential apartment was determined to not be a dwelling.
Dwelling or not
The FTT considered whether the flat met the definition of a dwelling for SDLT purposes. The legislation states that a residential property means a building that is used or is suitable for use as a dwelling, or is in the process of being constructed or adapted for such use. At the effective date of purchase, the flat was vacant and therefore could not have been in use at the effective date of purchase. The judge, therefore, needed to determine whether the flat was suitable for use as a dwelling.
Would the flat remain a dwelling on account of the danger created by the cladding? In this case, the local authority had not served a prohibition or enforcement notice requiring residents to move out of the block. The daughter and her friend lived in the flat whilst the cladding remained on the block of flats, which suggested a reasonable person did not consider it too dangerous to live there.
The judge found that the risk imposed from the cladding did not prevent the flat from being a dwelling or being suitable for use as a dwelling. As such the residential rates for SDLT applied, which meant the penal rate of SDLT applied as the purchase was by a corporate body and the condition for the rental business relief had not been met.
The appeal was dismissed and Fish Homes was liable to pay SDLT at the 15% rate. HMRC had also charged penalties in respect of an incorrect SDLT return, but those penalties were withdrawn before the FTT hearing.
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Reshma Johar is a Tax Consultant at Carter Backer Winter. She is both ATT and CTA qualified with experience gained from practice and her involvement with the CIOT. She has a particular interest in OMB and private client taxes.