When is a building a dwelling for SDLT purposes?

At the start of the summer, the Court of Appeal handed down its decision in Amarjeet and Tajinder Mudan v HMRC [2025] EWCA Civ 799 (Mudan). The appeal was an unsuccessful attempt to argue that a building that had been used as a dwelling before being vandalised by tenants in the run-up to completion, and that was not habitable at completion, was not “residential property”. 

The appellants had originally self-assessed that the property was “residential property”. They amended their SDLT return to self-assess that it was “non-residential property”. This was because the property was not “suitable for use” as a dwelling at completion (s116, Finance Act 2003). HMRC disagreed and the appellants brought an appeal against that decision.

The consequence of the building being “residential property” was that the price would be taxed at the (much higher) residential rates rather than the non-residential or mixed rates. The appellants had bought the property for £1,755,000 in August 2019. Applying the residential rates, the SDLT was £177,000, £99,750 higher than the amount calculated using the non-residential rates. 

*Includes additional dwelling supplement of 3%

The condition of the building

The First-tier Tribunal (FTT) ([2023] UKFTT 317 (TC)) found as facts that, at completion, the building in question (the Property):

“(a) had been used relatively recently as a dwelling; and

(b) was structurally sound; but

(c) was not in a state such that a reasonable buyer might be expected to move in straight away. …before a reasonable buyer would consider the Property was “ready to move into”, the following works would be needed:

(i) the Property would need complete rewiring;

(ii) a new boiler, pumps and gas and water pipes would be required in the boiler house, so that the water system operated safely and the boiler house roof would need fixing;

(iii) the leaking pipes in the cellar would need to be repaired or replaced;

(iv) the kitchen units and appliances would need to be stripped back to the bare walls and replaced;

(v) broken windows and doors (including locks) would need repairing and the Property made secure;

(vi) a lot of rubbish (inside and outside the house) would need clearing away.”

In light of this, the FTT considered that no reasonable person would have been prepared to occupy the property in this state. However, this did not mean that the property was not “suitable for use” as a dwelling. The FTT held that although suitability must be tested at completion, it does not mean suitable for immediate occupation. The thing(s) preventing it from being suitable for occupation at completion must require more than repair/renovation.

Characteristics of the building over time

The appellants appealed the decision to the Upper Tribunal ([2024] UKUT 00307 (TCC)), arguing that the FTT had applied an incorrect test in determining suitability. For the appellants, the correct test was whether the building was suitable for occupation at completion, subject to a de minimis principle that minor works which would only take a few days to complete would not prevent suitability. The Upper Tribunal dismissed the appeal. It held that the statutory test focuses on the fundamental characteristics and nature of a building over a period of time, rather than a snapshot of habitability, at the effective date of the transaction. 

The Upper Tribunal’s decision provides some useful pointers on how to determine the impact of works needed to a building on its suitability for use as a dwelling. In the opinion of the Upper Tribunal, it is necessary to assess:

• whether the building has been used previously as a dwelling. This is a highly relevant factor; 
• to what extent the building has the fundamental characteristics of a dwelling and is structurally sound;
• whether any required works of repair and renovation have the result that the building does not have the characteristics of a dwelling;
• whether any defects preventing occupation are capable of remedy and whether they can be undertaken without prejudicing the structural integrity of the building; and
• whether occupation at completion would be unsafe or dangerous. This is a relevant factor, but is not determinative.

The identity of the building

The appellants brought an appeal against the Upper Tribunal’s decision to the Court of Appeal. The Court of Appeal dismissed the appeal. It noted that the definition “suitable for use” is concerned with a building. So, looking at the structure and character of the building is appropriate. If the building has a past history of a dwelling, the question is whether it has retained its identity as a dwelling at completion. Conversely, if a building does not have such a past history, its potential use as a dwelling is irrelevant unless the adaptation of the building has started before completion and is ongoing at completion.

Challenges remain

It is clear from this decision that buildings used as a dwelling that are derelict and have defects preventing immediate occupation at completion, such as a broken hot water boiler, potentially dangerous electrics, water ingress, damp, mould, and a broken roof, do not meet the threshold of being unsuitable such that the non-residential SDLT rates can be applied. On this basis, any firms continuing to sell derelict dwelling SDLT reclaims are advised to take heed of HMRC’s warning, given in a recent press release, that it will “take decisive action on spurious SDLT repayment claims”.

However, Mudan does not set a bright-line test for classifying buildings for SDLT purposes. On the contrary, a multi-factorial or evaluative approach is subjective. The relevance of a factor and the level of weight that should be given to it when weighing up the competing factors in the evaluative exercise will vary from one person to the next.

The approach is also markedly different to the interpretation of the same legislative phrase in the context of SDLT multiple dwellings relief where “suitable for use” was interpreted as a snapshot test at completion. Multiple dwellings relief has been abolished in England and Northern Ireland, but this is not only of historical interest. Determining the number of dwellings at completion is relevant to the application of the rule that treats the acquisition of six or more dwellings in a single transaction as an acquisition of “non-residential property”. And multiple dwellings relief still applies to qualifying transactions in Wales and Scotland.

Perhaps more significantly, there is a range of buildings that have an uncertain SDLT classification, including:

• Buildings that were in the process of being constructed or adapted for use as dwellings but that are no longer in the process at completion (eg, due to the developer’s insolvency).
• Buildings that were historically designed, built and used as dwellings, and remain suitable for use as dwellings but have been used exclusively and continuously for non-residential purposes over many years (eg, a Mayfair townhouse in use as offices).
• Buildings that were originally used as a single dwelling that are in the process of being remodelled into more than five dwellings; and the reverse – buildings that were originally used as more than five dwellings that are in the process of being remodelled into a single dwelling.
• Buildings that were used as “bed and breakfasts”.
• Buildings used as live/work units.
• Buildings used as “assisted living” units.
• Buildings used as “serviced apartments”.
• Buildings designed as purpose-built student accommodation, but that are not occupied exclusively by students.
• Buildings sold in a “shell and core” state.

The problem is the culmination of the following factors:

• The statutory language (“suitable for use”) is capable of multiple interpretations.
• Where a building is suitable for several uses, there is no tie breaker test except where the building is in use for specified purposes (eg, a care home, “hotel or inn or similar establishment”, or hall of residence).
• The extent to which buildings have changed in design and the growth of alternative asset classes (eg, assisted living) since the SDLT legislation was introduced.
• Sometimes the tension between legal factors (eg, planning use) and physical factors (eg, a kitchen and other dwelling characteristics).

Looking forward

As the difference between the amount of SDLT payable depending on whether a building is “residential property” or “non-residential property” is often very large, more attempts to search for the boundary between the two classifications and consequential disputes are inevitable. 

About the author

Sean Randall is an independent stamp taxes expert. He can be contacted on 020 3422 9742 and at sean@seanrandalltax.com.

Further information

“Major win” for HMRC in SDLT case | ICAEW