SDLT mixed use – beware the traps
A recent case has shown how increasingly punishing HMRC are being over the 'mixed-use' rate for Stamp Duty Land Tax.
Many consider that the recent case of Dr David Hyman and another v HMRC  UKFTT 469 (TC) presents another potential tax problem for the farming community. The case again shows how HMRC are being increasingly punishing over the “mixed-use” rate for Stamp Duty Land Tax (SDLT) which can favour the sale of a farmhouse/cottage with some land as part of a farm restructuring strategy with tax efficiency.
Many argue that the future of farming is potentially bleak with the loss of the Basic Payment Scheme (BPS) in 2021, the uncertainty of Brexit and politics. The Agriculture Bill has still to become an Act but with more focus on “public products” than food production there is a worry.
In order to survive, most farms will have to increase diversification and restructuring. Cottage sales could well be part of the planning. SDLT and CGT considerations will be key, especially with the new CGT returns from 6 April 2020. Likewise, the Office of Tax Simplification's (OTS) 2nd report on the review of inheritance tax (IHT) proposed that the trading mix of investment to trading is increased from the current 50% of “Balfour” to the 80% mix of CGT. The disposal of let cottages would therefore seem a positive to try and improve the trading %.
Definition of “garden and grounds”
The facts are that Mr and Mrs Hyman bought the farmhouse with approximately 3.5 acres of land. For farmers restructuring that is an ideal size to increase the value of the cottage. The property comprised two gardens, a duck pond, a barn and a meadow. Mr and Mrs Hyman paid SDLT at the residential rate when they bought it. The problem arose when Mr and Mrs Hyman then sought to reclaim what they considered to be an overpayment of SDLT on the ground that the property should have been classed as mixed-use due to the “non-residential” element, and that they therefore should have paid SDLT at the lower commercial rate for mixed-use.
HMRC argued that “The acquisition of a farmhouse and the surrounding land was found to be subject to the residential rates of SDLT because the land fell within the definition of ‘garden and grounds’. A meadow, bridleway and barn were held to be available to the owners for use, even though they were physically separated from the house and the public had rights over the bridleway”.
Mr and Mrs Hyman presented arguments that the meadow and public bridleway were not residential land, and in addition nor was the derelict barn that had been classified as non-residential by the local council authority. However, they stated that the barn, meadow and bridleway were separated by hedges, and that the bridleway was used by the public and could not therefore be used for recreation or private purposes. They also argued that the barn was a non-residential building and that the meadow and barn were not integral parts of the property. The First-Tier Tribunal (FTT) Property Chamber found against Mr and Mrs Hyman and found that they had correctly paid SDLT at the residential rate and there was therefore no refund for overpaid SDLT due to them from HMRC in respect of the potential mixed rate.
It is generally considered that the land has to be put to strong commercial use in order to enjoy the mixed rate. Ideally the strong business use is documented via the self-assessment tax return.
It is a shame that what would appear a relatively weak case or at least a narrow case when it comes to SDLT mixed use is now the point of reference. A tribunal that tested HRMC’s stance on what is deemed commercial activity would have been more beneficial, for example, if it examined whether it is enough for the land to be grazed by a local farmer before and after completion or perhaps whether having evidence that a business will be undertaken on the land after completion is sufficient where there was no commercial activity before. There seems to be a lot of ambiguity when it comes to the commercial/mixed rate and SDLT with inspectors making strange arguments as to why the favourable rate does not apply.
Size and use does matter – the brochure
The reality is that it is difficult to prove non-residential use on such a small amount of land as was the case here. Obviously a significant amount of non-residential land and evidence of commercial use are ideal arguments to prove eligibility for mixed-use rate.
The FTT Property Chamber were of the view the brochure for the sale of the farmhouse explained that the property was marketed to buyers as an integral whole. “Grounds” has and is intended to have a wide interpretation and its ordinary meaning is land attached or surrounding a house which is occupied with the house or available to the owners of the house to use. For SDLT purposes it is understood that the grounds do not need to be used for any particular purpose as long as that use is non-residential. The FTT considered that it was not relevant that the grounds were separated by hedges or fences and it does not matter that there is a right of way over the grounds. However, arguments to achieve the mixed-use rate are easier if the house and grounds are clearly divided.
HMRC updated their guidance on the meaning of ‘garden or grounds’ just a few weeks prior to the Hyman case, though this was not referred to in the case and fails to provide more clarity. For example, whilst they have removed reference to the traditional ‘reasonable enjoyment’ test in SDLTM30030, when it comes to the extent of land in question and how that plays a part they state:
“A small country cottage is unlikely to command dozens of acres of grounds but a stately home may do. Large tracts of fells/moorland etc. (even if purchased with a dwelling) are unlikely to be residential in nature. The test is not simply whether the land comprises gardens and grounds, but whether it comprises the gardens and grounds of a dwelling...” (SDLTM00470).
This somewhat implies that the reasonable enjoyment test does still apply and concedes that some of these acres are not residential, yet at what point?
Non-residential use of “grounds” that generates income that is, for example, returned on the owner’s tax return as business income has proved to be a strong argument. Agricultural use that does not attract business rates and should have the advantage of agricultural property relief (APR) for inheritance tax (IHT) are ideal combinations with the residential property in order to achieve SDLT.
In the Hyman case the judge noted that land used for a commercial purpose would be land on which a business is conducted and therefore not part of the grounds of the house, hence why the suggestion of the declaration on the tax return. The claim for a repayment of the extra SDLT failed in the Hyman case.
The need to have to record business income at an early stage in order to achieve mixed-use rate is going to be an important point moving forward for tax planners. This is key for advisers trying to help their clients on future sales and purchasers. Both land agents and estate agents presenting the brochures must be aware of the technical detail required for the advantage of the mixed-use rate and the potential negatives of an incorrect brochure and incorrect advice. However, this should not be actioned in a single-minded way without a view to other taxes.
One common pitfall when property with acreage is acquired is the lack of any commercial activity prior to acquisition. For example, despite the intention to create a business from the newly acquired property, with clear business plans and a registered partnership in place, the lack of previous commercial activity on the land is an argument HMRC could still make.
Another area that HMRC may try to attack is any failure to bring the newly acquired land into immediate commercial use, even if there are reasonable grounds for not doing so, such as delays in acquiring planning permission. This issue is less of a problem for farmers acquiring more land than the Hymans, say 10 acres with a cottage/farmhouse, as they are likely to be able to bring this newly acquired land into business usage immediately. That said, there does need to be evidence of this business usage in order to secure these valuable commercial/mixed rates.
The interaction of capital gains tax
The strategy regarding the tax planning on the purchase and sale of property with land must be considered from all tax angles in the round. From the vendor’s viewpoint to have the area greater than half a hectare considered to be garden for main residence relief for capital gains tax (CGT) could be justified as an advantage when arguing a large garden for CGT purposes. For the vendor all these alternatives should be contemplated as part of the marketing strategy and the land agents must be connected to this.
It must be remembered by tax advisers that definitions of property/residences for SDLT and CGT can differ to a large extent. The SLDT decision in the Hyman case seemed to support HMRC’s defence that all land bought with a dwelling is residential unless there is some commercial use. This goes against our usual CGT understanding. It is ironic how in the history of main residence relief cases for CGT, such as Longson v Baker  STC 6, stables were argued as part of the garden and grounds and HMRC argued adamantly that they were not part of the garden but separate. The new SDLT guidance however states that paddocks and orchards will ‘usually be residential, unless actively and substantively exploited on a regular basis’.
The Longson example is not the only time CGT and SDLT definitions differ. For example, in P N Bewley Ltd  TC 06951 it was shown that the residence definition is usage on “point of sale” for SDLT but for CGT it is known that the definition of residence is throughout the period of ownership.
The new CGT returns from 6 April 2020 must be considered in the context of all tax planning. The new requirement to pay tax 30 days after completion will have to be considered in the whole strategy.
There is a general consensus amongst tax advisers that there should be a tax marriage between the farmland ownership and trading vehicle. For example, if the land is purchased/owned by husband and wife then there should be a partnership between the two to trade from it. This has IHT and CGT advantages from trading from the asset owned. Clearly there has to be a commercial trading activity on the land for there to be such benefits.
The Hyman case highlights the importance of ensuring that the correct trading structure is set up from the outset, namely from completion of the sale or before this date. The SDLT return needs to be completed within 30 days from completion and an enquiry can then be made into it within 12 months. Given HMRC would appear to be applying closer attention to almost all mixed-use SDLT claims, having the evidence in place at the earliest opportunity is essential. This would include having the partnership (or sole-trade) registered with HMRC. A clear business plan indicating how the land to which the mixed-use claim applies is going to be used as part of the business would also be hugely beneficial in evidencing the proposed commercial activity.
Ensuring the commercial activity is entered into immediately is also very important to be able to provide HMRC with the evidence they require to allow for a successful mixed-use SDLT claim. The business plan and HMRC business registration mentioned above is additional evidence of commercial use of the land.
There have been instances where HMRC have tried to deny mixed-use relief on let agricultural land attached to a farmhouse for a variety of reasons. One option to ensure the mixed-use rate is to structure the purchase so that the land is purchased by a SIPP and the house by the individuals. As it is not permissible to hold residential land in a SIPP, the land within it must either be let or available to let and not land available for private domestic use. As such, the mixed-use rate must apply in such instances, providing they are linked transactions under FA 2003 s108.
This understanding of a tax marriage between land ownership and trading vehicle has been long established for CGT and IHT reliefs and now mixed-use SDLT relief has to be factored in as well.
The status of main residence relief for CGT continues to trouble the courts, as does SDLT on mixed-use. The answer has to be the professionals working together prior to the sale to maximise both the approach and the tax planning. With CGT and SDLT contradictions in all tax planning, the wording of the brochure, use of the extra land and contemporaneous evidence all need to be considered well in advance.
Supplied by Julie Butler FCA – Joint Managing Partner, and Fred Butler ATT – Tax Manager, Butler & Co, Bennett House, The Dean, Alresford, Hampshire, SO24 9BH. Tel: 01962 735544. Email; firstname.lastname@example.org, email@example.com, Website; www.butler-co.co.uk
Julie Butler F.C.A. is the author of Tax Planning for Farm and Land Diversification (Bloomsbury Professional), Equine Tax Planning ISBN: 0406966540, Butler’s Equine Tax Planning (2nd Edition) (Law Brief Publishing) and Stanley: Taxation of Farmers and Landowners (LexisNexis), and editor of Farm Tax Brief.
14 November 2019