Sewage treatment plant causes a stink in FTT rulingby
HMRC has yet again come up trumps in a dispute over whether a sewage treatment plant in the grounds of a residential property qualified as non-residential for SDLT purposes.
When Andrew and Delia Bloom purchased their £4.4m property in North London complete with 6-bedroom house, cottage, swimming pool, stables and equestrian facilities in September 2015 they self-assessed and paid stamp duty land tax (SDLT) of £441,750. The couple subsequently claimed a refund of £265,750 in overpayment relief as they believed that the existence of a sewage treatment unit rendered the property mixed-use.
Mixed-use properties and SDLT
An otherwise residential property is 'mixed-use' if any portion of it is non-residential. The whole property is then taxed as non-residential at much lower SDLT rates (5% vs 12% for the top slice of a residential property). The 3% surcharge for additional dwellings, where the taxpayer purchases a second or subsequent property, does not apply to non-residential property.
There is no lower threshold for the non-residential element, hence the tribunals are frequently called upon to determine cases where the boundaries of what constitutes a non-residential element are stretched, sometimes beyond belief.
Examples of such claims rejected by HMRC include:
- right of access to a communal garden accessible only by fellow residents at the centre of a high value residential square in London;
- leasing a garage attached to a semi-detached property for storage; and
- allowing a neighbour to graze their horse on an informal basis in a field on the property.
All of these, according to the taxpayer, rendered the entire property mixed-use resulting in SDLT savings.
It comes as no surprise that a lucrative industry has grown around helping buyers to identify features of their property that could qualify as non-residential and assisting them in claiming SDLT refunds. In many cases, such as this very similar case to the Blooms', where the same Barrister and SDLT expert, Patrick Cannon, was instructed by the same company, Cornerstone Tax Ltd, HMRC comes out on top.
The Blooms' property comprised of two registered titles:
- 'The Paddocks' which was the main residence including the house, cottage, swimming pool, garage and equestrian facilities; and
- another 5.6 acres of land on a small part of which a sewage treatment unit was situated.
The unit dealt with waste produced in the Blooms' property and in ten other flats in a converted property adjacent to 'The Paddocks', as is common to residential properties in rural settings that are not connected to mains sewage.
It comprised a series of underground chambers connected by piping with the only visible features above-ground being manhole covers; a storm drain; two small wooden structures housing equipment; and an access road to allow service vehicles to remove matter approximately four times a year.
When the Blooms originally purchased the property, they had attempted to buy it without the disputed 5.6 acre area, however this was not permitted. The property came as a 'package' and land registry documents showed a strong historical connection between the two titles.
Commercial arrangement or essential maintenance?
The Blooms argued that the fact that they were responsible for maintaining the plant and recuperating the costs from the owners of the flats – as stipulated in the title deeds - constituted a commercial arrangement.
However the FTT agreed with HMRC that the plant served an essential purpose to the dwellings and, as there was no indication of profit arising, there was no commercial element to the arrangement. The covenant in the title deeds simply provided a method to split the maintenance costs for the plant in proportion to the benefit received by each property.
The FTT observed that the obligation to have the tanks emptied and maintain the plant was a burden, but not enough to render the area non-residential. This was similar to the findings in James Faiers v HMRC (another involving Patrick Cannon) where an electricity distribution network did not prevent the land from being residential.
The other main argument was that 'repugnant smells' and occasional leaks from the plant prevented the Blooms from using that part of the property.
According to HMRC, 'instances involving human excreta' did not prevent the area from being residential. Indeed, they had constructed a tennis court at least partially within the area under dispute.
Given the space available in the vast grounds of the property, the decision to build the tennis court in close proximity to the manhole covers above the plant indicated that the unpleasant smells were neither as constant nor as offensive as claimed. In any case there is no 'reasonable enjoyment' test applicable to mixed-use property.
The FTT found in favour of HMRC that the property was wholly residential and dismissed the Blooms' appeal.
Change on the horizon?
HMRC is well aware that the rules on mixed-use property are due a re-think to reduce the number of dubious claims. To that end a consultation was opened in November 2021 in which two options were proposed to tighten up the rules on mixed-use property. These were, broadly speaking:
- Apportionment – the applicable SDLT rates would be applied to the residential and non-residential elements of the property respectively.
- A minimum threshold for the non-residential element (if, say, over 50% of the property was residential then the whole property would be taxed at the residential rates).
This consultation closed in February 2022 and 18 months later we are still waiting for an update on what, if any, changes will be made. As Jason Croke pointed out, there was no mention of this in the Spring Budget but 'increasingly tenuous' cases continue to eat up valuable tribunal hours. Perhaps we can hope for an update in the Autumn Statement.
You might also be interested in
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.