Stamp duty land tax annexe decision focuses on privacy and security

New ruling on when a property with an annexe qualifies for multiple dwellings relief for stamp duty land tax

The First-tier Tax Tribunal has decided that a property with an annexe did not qualify for multiple dwellings relief for stamp duty land tax (SDLT) because there was no lockable door on a corridor joining the two parts.

In Fiander and Brower, the Tribunal looked in detail at the physical attributes of the property which comprised a main house and an annexe joined by a corridor. The Tribunal found that the accommodation in both the main house and the annexe was ample for the basic domestic living needs of occupants of both parts. Each had the facilities needed for sleeping, eating, cooking, washing and sanitary needs, and a place to sit and relax.

Each dwelling should have sufficient privacy and security for strangers to live in each part

However the Tribunal said a sufficient degree of privacy and security is required for a building (or part) to be suitable for use as a single dwelling. The open corridor connecting the main house and annexe meant that they were too closely physically connected for either to be suitable for use as a “single” dwelling. The Tribunal concentrated on the physical attributes of the property, taking very little interest in “legal” limits such as a restrictive covenant or the lawful planning use of the property.

The Tribunal found that the formulation of multiple dwellings relief by reference to a single dwelling required more than that the annexe could be occupied as separate living accommodation by a family member or by a lodger where there would be “ties of trust”. Instead the test was held to be a higher one: that the annexe could “generally” be used as a stand-alone dwelling, so that if a stranger were to occupy the annexe there would be enough privacy and security for the occupants of both parts.

The Tribunal decided it was not relevant that a door could easily be fitted in the corridor, saying that this would be an alteration, rather than the restoration of a feature evidently in place in the recent past.

The case: Fiander and Brower

The taxpayers bought a property near Petersfield, the purchase completing on 27 April 2016. They claimed multiple dwellings relief; HMRC amended the return to disallow the claim for relief and the Tribunal considered an appeal by the taxpayers.

The property included a main house and an annexe connected by a corridor. There were door jambs in place at the point where the main house joined the corridor, but no door.

The annexe comprised a sitting room, a kitchen/utility room, a bedroom and a shower room. It could be accessed from the outside via glass French doors.

The property was unoccupied at the time of purchase and was in some degree of disrepair:

• the heating was not working (the boiler needed replacing)
• there were problems with damp such that some of the flooring needed replacing.

The annexe did not have its own separate post box, council tax bill or utility supplies.

The property had been marketed as a house, with no mention of the annexe.

Tax at stake

The price paid for the property was £575,000. SDLT at standard residential rates would be £18,750.

With a valid claim to multiple dwellings relief SDLT would be worked out based on half of the price (£287,500) to give SDLT of £4,375 which is then doubled to give SDLT of £8,750.

The amount of tax at stake was the difference between the two sums; that is £10,000.

Legal tests to apply

As the property was unoccupied at the time of acquisition, the Tribunal confirmed the issue was to be addressed by asking whether the main house and annexe were, at that time, each “suitable for use as a single dwelling”.

The Tribunal approached “suitability for use” as “an objective determination to be made on the basis of the physical attributes of the property at the relevant time. Suitability for a given use is to be adjudged from the perspective of a reasonable person observing the physical attributes of the property at the time of the transaction.”

The Tribunal said: “A dwelling is the place where a person (or a group of persons) lives. A building or part can be suitable for use as a dwelling only if it accommodates all of a person’s basic domestic living needs: to sleep, to eat, to attend to one’s personal and hygiene needs; and to do so with a reasonable degree of privacy and security. By requiring that the building or part be suitable for use as a “single” dwelling, the statutory language emphasises suitability for self-sufficient and stand-alone use as a dwelling. Use as a “single” dwelling excludes, in our view, use as a dwelling joined to another dwelling.”

The Tribunal found that the formulation of multiple dwellings relief by reference to a single dwelling required more than that the annexe could be occupied as separate living accommodation in specific circumstances (such as by a family member or by a lodger where there would be “ties of trust”). Instead the Tribunal decided that the test is a higher one; that the annexe could “generally” be used as separate living accommodation, so that if a member of the public were to occupy the annexe on a stand-alone basis, there would be enough privacy and security for the occupants of both parts.

Counsel for the taxpayer had argued that (in the same way as a property not ready for immediate use because it is out of repair is treated as “suitable for use” as a dwelling) an annexe which, with a minor bit of work could be made sufficiently private and secure, should count as “suitable for use”.

However the Tribunal did not accept this, saying: “it would be wrong to determine “suitability for use” at the time of completion on the assumption that a door, or doors, or some other physical barrier, would be introduced to the corridor. This is because the suitability test in paragraph 7 is an objective one based on the physical features of the property as at completion – it cannot be performed on the assumption that new physical features will be introduced to enable a new and different kind of use. This is the case even if the new physical features are relatively easy or quick to install.”

Physical factors

The Tribunal found that the physical attributes of both the main house and the annexe were ample to accommodate the basic domestic living needs of occupants of either: “the annexe was smaller than the main house, but it adequately accommodated sleeping, eating, cooking, and washing and sanitary needs, not to mention a place to sit and relax; and the main house provided these on a larger scale”.

It found: “The main house and annexe were also physically distinct parts of the property – an occupant of either could carry on daily living activities without the inconvenience (and lack of privacy) entailed in crossing through “common areas” that were not part of his or her own dwelling. Both could be entered from the outside via a lockable door – in the case of the annexe, via the French doors into the sitting room.”

“In our view it is significant that nothing in the physical state of the property at completion would have indicated to an objective observer that there had ever been a physical barrier between the annexe and the main house sufficient to enable occupation of the annexe by a member of the general public and establish it as a stand-alone dwelling: there was a door jamb in the entrance to the corridor from the main house, but this in our view falls short of evidence of a meaningful barrier between the two parts of the property in the recent past”

“Putting a lockable door, or some other kind of secure barrier between the two parts of the property, was not a matter of restoration or repair of physical features of the building to enable it to resume a use that would have been obvious to an objective observer of the property as at completion; rather, it was the addition of a new physical feature to enable it to serve a as a stand-alone (rather than a joined) dwelling.”

Also: “in the eyes of an objective observer at completion, the main house and annexe were eminently suitable for use as one joined dwelling. In such circumstances it seems to us that such an observer would not reasonably conclude that they were suitable for a different sort of use on the basis of a new physical feature being added.”

The Tribunal said it did not put a great deal of weight on the evidence that the annexe had no separate utility meters. There was no analysis of whether the two parts of the property had services capable of independent operation and isolation such as:

• central heating systems
• hot water
• cold water
• electricity

The Tribunal quoted from a letter to HMRC from the taxpayers’ representatives of 19 October 2018: “Adaptations such as privacy, security, utility supply, letterboxes, parking and garage segregation, legal tenure, fire regulations, external locks and keys, alarm systems heating controls etc etc are facets of the occupation of the dwelling and not an assessment of suitability. They are relevant only to the choices and preferences of those who occupy the property from time to time.” The Tribunal did not comment on how much of this it agreed with, perhaps because it was able to decide the case on the basis of the connecting corridor without a door.

Legal factors

The Tribunal said it placed no weight on the evidence regarding the “restrictive covenant” recorded on the Land Registry title.

The lawful planning use of the property was not even mentioned in the decision.

Other factors

The Tribunal said it did not put a great deal of weight on:

• the council tax status of the two parts
• whether there was a separate postal address for the annexe or if post had been addressed to the annexe

These were not dismissed entirely, but were not seen as very significant factors.

HMRC had argued that it was relevant that the whole property was occupied as a single dwelling both before and after the acquisition. The Tribunal did not appear to place any weight on this when considering whether the two parts were each suitable for use as a single dwelling.

Disrepair and Bewley

The main issues in the case were about whether multiple dwellings relief applied. The Tribunal did briefly consider whether the state of disrepair of the property meant that it did not count as “residential property” at all. They said:

“We note that the property was in some degree of disrepair at the time of purchase (the heating was not working as the boiler needed replacing; there were damp problems such that some of the flooring needed replacing). We have considered if this meant it was not suitable for use as a dwelling as at completion. We are clear that “suitable for use” does not mean “ready for immediate occupation”. It would have been obvious to a reasonable person observing the property on the completion date both that the property had been used for dwelling purposes in the relatively recent past and that the things that needed fixing – the boiler, replacement flooring – were not so fundamental as to render the property unsuitable as a place to live. Hence, in our view, the state of disrepair did not render the property unsuitable for use as a dwelling.”

I consider the issues of whether a building is derelict enough not to count as a dwelling in another blog.

Comment

The outcome of the case appears to have hung on the issue of whether installing a door in the corridor would have been:

(a) restoring a door evidently there before in the recent past

or

(b) a new adaptation which would therefore not be taken into account on the basis that one has to look at the nature of the property as it is on the day of completion, allowing for minor repairs.

Perhaps the biggest take away points are that:

• It is not enough that an annexe could be lived in with a sufficient degree of privacy and security by certain people (such as relatives and trusted lodgers). The physical attributes need to be such that strangers could live in the two parts with enough privacy and security.
• There was great emphasis on the physical attributes of the property such as the accommodation in each part, the access arrangements and the connecting corridor.
• The configuration of the services and whether they were capable of separate operation and isolation was barely mentioned.
• “Legal suitability” hardly came into play, with the restrictive covenant given no weight and lawful planning use not even mentioned in the decision.

First Tier Tribunal decisions are persuasive, but not binding on other tribunals. The Tribunal decided against the taxpayer based on the interconnecting corridor which did not give a sufficient degree of privacy and security to the two parts such that totally unconnected households could live in them.

My views are that in another case where there is not the same issue with a connecting corridor or door, other issues not given prominence in this case, could come to the fore including:

1. The extent to which the services (such as heating, hot water, cold water and electricity) can be independently operated and isolated
2. “Legal suitability” for stand-alone use, such as the terms of a lease, of restrictive covenants or the lawful planning use.

Both of these factors feature in the HMRC guidance on “how many dwellings” in their stamp duty land tax manual. This makes it clear that no one factor is in itself decisive and all factors need to be weighed up, though the physical configuration is likely to be the most important factor. The Tribunal perhaps could be criticised for homing in on one factor (the connecting corridor) above all others and treating that as determinative.

I have written more about the SDLT issues relating to annexes in my blog about granny flats and there is also a more detailed paper about the issues.

For professional advice on Stamp Duty Land Tax please contact Blake Morgan’s SDLT expert, John Shallcross.

This article is intended for general information purposes only and does not constitute legal or professional advice. Advice should be sought before proceeding with any transaction.