Lack of kitchen facilities leaves annexe MDR claim half-bakedby
A tax tribunal found that a lack of cooking facilities or the infrastructure necessary to install them in an annexe prevented a house purchase from qualifying for multiple dwellings relief.
Those dealing regularly with stamp duty land tax (SDLT) might have been expecting to hear more from the Chancellor in last week's Autumn Statement in relation to mixed-use properties and multiple dwellings relief (MDR) after HMRC teased us with a consultation which concluded in February 2022, suggesting that much-needed changes to the way the reliefs work were being considered. However, HMRC remains tight-lipped on the issue and cases such as this one continue to reach the tax tribunals.
Jonathan Ralph purchased a property for £3.3m consisting of a main family home and a self-contained garage with rooms above — "the annexe". Contracts were exchanged on 6 November 2020 and the purchase was completed on 4 December 2020, "the effective date". Shortly after completion, works were carried out on the annexe including installing cooking facilities, which are at the heart of the first tier tribunal (FTT) discussion.
Mr Ralph filed an SDLT return on 8 December 2020 on which he claimed MDR on the basis that the house and the annexe were two separate dwellings. This reduced the tax payable from £294,750 to £193,500. HMRC sought to disallow the relief, increasing the amount payable by £101,250.
Multiple Dwellings Relief
Schedule 6B provides for MDR reducing the SDLT payable on chargeable transactions if the main subject matter consists of an interest in at least two dwellings. Paragraph 7 defines what amounts to a dwelling:
“A building or part of a building counts as a dwelling, if:
(a) It is used or suitable for use as a single dwelling; or,
(b) It is in the process of being constructed or adapted for such use”.
It was accepted by all parties that the main house was a dwelling. The tribunal therefore had two questions to decide on:
- Whether the annexe at the effective date was “used or suitable for use as a single dwelling"; and,
- Whether the annexe at the effective date was “in the process of being … adapted for such use”.
On the second point, the case was relatively clear. Although Mr Ralph had taken some steps prior to the effective date, including meeting with an interior designer, agreeing on plans and ordering kitchen units, these were insufficient to render the annexe "in the process" of being adapted on the effective date. This only became true after physical works began on 7th December.
For MDR to apply, Mr Ralph therefore needed to convince the judge that the annexe in its condition at the effective date was suitable for use as a single dwelling. HMRC's main argument was that the lack of cooking facilities, or infrastructure necessary to install them, meant that the annexe was not a dwelling at the effective date.
The annexe at the effective date
At the time of purchase, the annexe had its own separate entrances, a lobby, a main room and a bathroom with toilet and shower. It benefitted from central heating, fibre broadband, mains electricity, gas, water and a separate zone on the house alarm system. The utilities were not on separate meters from the main house and the annexe was not separately registered for Council Tax.
HMRC's argument was two-fold. First, the annexe was not suitable for use as a dwelling at the point of completion as it lacked kitchen facilities including fitted counters, storage, work surfaces and separate sink or high-voltage electricity connections necessary for connecting up a cooker, oven or hob. Secondly, it did not have its own separate utility meter, postal address, title number at Land Registry or Council Tax billing.
While the FTT agreed that the latter was a factor in deciding that the annexe was not a separate dwelling, the discussion mainly focused on the kitchen facilities. At completion, these consisted of a microwave, kettle, toaster, fridge, dustbin, server table, kitchen table and a bench.
Although HMRC accepted that the absence of a hob or cooker did not immediately render the property unliveable (as sometimes vendors take these items with them), it argued that to qualify as a dwelling there should be a high-voltage electricity connection to facilitate the installation of such appliances. The annexe also lacked a separate sink for washing up.
Pot Noodle habit
It was relevant to Mr Ralph's argument that his son had been living in the annexe prior to the purchase. During this time, he did not require a conventional oven and hob and used a microwave for cooking. He found the basin in the bathroom adequate for washing up.
Following the works, which were completed on 19th December 2020, the family moved into the annexe for six months while the main house was renovated. During that six-month period, although a conventional oven and hob had by then been installed, the family never used it. They preferred to eat out or use the microwave. They also noted that the annexe had since been used frequently by family and visitors, none of whom had ever used the oven and hob.
Similarly, although a washing machine and tumble dryer and the necessary plumbing connections had been installed as part of the refit of the annexe, the family and their visitors had not used them, instead sending their washing out to a laundry.
This, according to Mt Ralph, demonstrated that "the definition of cooking facilities should move with the times". His argument was that these days, many inhabitants would not require a conventional cooker and hob requiring high voltage connections and hence the lack of such features did not prevent the annexe from being treated as a dwelling at the effective date and the test should adapt due to changing modern habits.
The judge noted that the test is "that of occupants in general and whether viewed objectively they would find the property suitable for use as a dwelling". He went on to say that although the Ralph family had no use for the cooking and laundry facilities discussed, their lifestyle was not representative of occupants in general.
Mr Ralph also tried to claim that the annexe would be suitable for sale as a holiday let as holidaymakers often don't require cooking facilities, but HMRC pointed out that this was not the appropriate test, per Dower & Anor  UKFTT 170 (TC).
Mr Ralph's appeal was dismissed and SDLT was payable on the whole purchase as a single dwelling.
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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.