SP1/2004: Stamp Duty Land Tax: Disadvantaged Area Relief

This Statement of Practice is intended as guidance for those claiming exemption from stamp duty land tax in respect of transfers of property situated in designated areas (‘disadvantaged area relief’).

The relief is one of a number of measures set out in the Government’s Urban White Paper “Our Towns and Cities: The Future: Delivering an Urban Renaissance” published in November 2000. The measure is designed to stimulate the physical, economic and social regeneration of the UK’s most disadvantaged areas by attracting development and by encouraging the purchase of residential and commercial property by individuals and businesses. The areas eligible for relief were designated 'Enterprise Areas' by the Chancellor in his 2002 Pre-Budget Report. In addition to the relief, a range of other Government policies designed to support enterprise and economic regeneration, including the Community Investment Tax Relief, will benefit these areas, helping to support the development of new and existing businesses

Background

1. Disadvantaged area relief (provided for by section 92 of, and Schedule 30 to, the Finance Act 2001) was introduced on 30 November 2001 and was initially available for conveyances or transfers on sale (of both residential and commercial property) for which the consideration did not exceed £150,000. Stamp duty in respect of conveyances or transfers of commercial property in disadvantaged areas was abolished in consequence of the stamp duty (disadvantaged areas) (Application of Exemptions) Regulations 2003 (‘the Regulations’), which have effect in relation to instruments executed on or after 10 April 2003. Thereafter the £150,000 limit applies only in relation to residential property.

2. Finance Act 2002 inserted the following provisions in Finance Act 2001 to distinguish residential from other property and to provide for differing stamp duty land tax exemptions:

  • FA2002 Section 92A which enables stamp duty relief in designated disadvantaged areas in respect of all properties to be varied depending on whether or not the property is ‘residential’;

Disadvantaged Area Relief under Stamp Duty Land Tax

3. Section 57 and Schedule 6 Finance act 2003 provides for disadvantaged area relief under stamp duty land tax.

4. The definition of residential property under stamp duty land tax is provided at section 116 FA2003. Non-residential property is therefore defined in the Act by exclusion. Section 116 also sets out particular building uses that are specifically included within, or specifically excluded from, the definition.

5. In most cases there will be no difficulty in practice in establishing whether or not a property is ‘residential’. This statement sets out in more detail the Stamp Office’s approach to borderline cases and gives guidance on the practical application of the legislation. The annexed flowchart provides a quick guide for simpler cases as to whether property constitutes ‘residential property’.

Claiming the relief

6. The way in which relief is claimed is different under stamp duty land tax.
FA2003 Section 76 requires that most land transactions, including those that qualify for disadvantaged area relief, must be notified to HMRC on a land transaction return form (SDLT 1).

7. Relief is claimed by simply completing a box within this form. Certificates of Value are no longer required and no supporting evidence or documentation is required at this point. Once the return has been submitted and we are satisfied with the information provided, the purchaser is issued with a certificate which they must present with documents when applying for registration of title at Land Registry, Registers of Scotland or Land Registry of Northern Ireland.

8. FA 2003 Schedule 10 Part 3 gives HMRC the power to enquire into a land transaction return. These provisions permit HMRC to open an enquiry into any aspect of a land transaction return, including claims to reliefs.

Appropriate contemporaneous evidence should be retained to support any claim to the relief. There is no need to create records that would otherwise not be available. Estate agents’ specifications, site plans, planning applications or permissions, marketing material, photographs and print outs of an internet post code search may all provide relevant information should there be an enquiry into a land tax return.

9. As with all claims the onus is on the purchaser to check whether or not the relief is due.

The meaning of residential property

10.FA 2003 Section 116(1) defines ‘residential property’ as a building which:

  • is used as a dwelling,
  • or is suitable for use as a dwelling,
  • or is in the process of being constructed or adapted for such use.

If a property meets any one of these separate tests it will be treated as residential property and be subject to the £150,000 limit for relief, as will any garden or grounds belonging to it or any interests or rights attaching to it. Each element of the definition is considered in turn below. The question of whether and to what extent a building and grounds are defined as residential property for stamp duty purposes may also have implications for its treatment for capital gains tax and local authority rates.

Use as a dwelling

11.Where a building is in use at the effective date of the transaction it will be a question of fact whether and to what extent it is used as a dwelling.

Use at the effective date overrides any past or intended future uses for this purpose. For example, a purchaser is buying a house with the intention to refurbish it to create, in its place, an alternative therapy treatment centre. For the purposes of the relief the house in considered to be a dwelling because it was suitable for that use at the effective date of the transaction. (For another example see paragraph 34)

12.Where the property in question is in use as a dwelling at the effective date of the transaction, it is residential property for the purposes of the relief unless it is part of a multiple transaction qualifying for relief under S116(7) FA 2003 (see paragraphs 40 to 44 below).

13.There is no motive test applicable to the usage of land or buildings, so where a residential property is purchased with the owner intending to use it as a non-residential business the building is considered residential, under the suitability test, for the purposes of the relief.

14.For the treatment of buildings put to both residential and non-residential use, see paragraphs 19 and 20 below.

Suitable for use as a dwelling

15.The suitability test applies to the state of the building at the effective date of the transaction, having regard to the facilities available and any history of use. For example, HMRC will not regard an office block as ‘suitable for use as a dwelling’, but a house which has been used as an office without particular adaptation may well be so.

16.If a building is not in use at the effective date of the transaction but its last use was as a dwelling, it will be taken to be ‘suitable for use as a dwelling’ and treated as residential property for the purposes of the relief, unless evidence is produced to the contrary (see paragraph 17).

17.Whether a building is suitable for use as a dwelling will depend upon the precise facts and circumstances. The simple removal of, for example, a bathroom suite or kitchen facilities will not be regarded as rendering a building unsuitable for use as a dwelling. Where it is claimed that a previously residential property is no longer suitable for use as a dwelling, perhaps because it is derelict or has been substantially altered, the claimant will need to provide evidence that this is the case. See also paragraph 34.

18.Where a building has been used partly for residential purposes and partly for another purpose, its overall suitability for use as a dwelling will be judged from the facilities available at the effective date of the transaction. For example, if two rooms of a house were in use as a dentist’s surgery and waiting room at the effective date of the transaction, HM Revenue & Customs would nevertheless normally consider this property suitable for use as a dwelling unless the claimant provided evidence to the contrary. A building that is used only partly as a dwelling may nevertheless be suitable for use wholly as a dwelling, with the effect that the £150,000 limit applies to the whole of the consideration. Where only a distinct part of the building is used and suitable for use as a dwelling, that part will be residential property for the purposes of the relief and the mixed use provisions will apply (See paragraphs 19 and 20 below).

Mixed use

19.Where only part of a building (and land or interest relating to it) is ‘residential property’ within section 116(1), the consideration ‘shall be apportioned on such basis as is just and reasonable’ between the residential and non-residential elements. The £150,000 limit is then applied only to the residential portion (Schedule 6 FA 2003). For example:

A property situated wholly within a disadvantaged area is bought for
a) £200,000
b) £400,000
50% of the property is ‘residential property’ on the basis of a just and reasonable apportionment.

In these examples:

a) £100,000 is attributed to the residential property element, so relief is due. The part of the land that is not residential property is also exempt. So no duty is payable.

b) the £200,000 attributed to the residential property element is not exempt, because of Schedule 6 paragraph 6, but attracts duty at the rate of 1% (stamp duty land tax payable £2,000). The non-residential property element is exempt as above.

Where a transaction involves six or more mixed use properties, under S116(7) FA 2003, providing certain conditions are met, the residential element is exempt and no stamp duty land tax is payable. See paragraphs 40 to 44.

20.The ‘just and reasonable’ test is necessarily subjective, and each case will be considered on its merits. Apportionment might be on the basis of the percentage areas quoted in planning applications, where appropriate, or alternatively of floor space relating to the respective uses. Other methods of apportionment will be considered as part of a claim.

Specific cases

21.Some types of communal or institutional building are used neither as dwellings nor for commercial purposes. The legislation therefore outlines how these are classified for the purposes of relief, specifically including some such buildings within the definition of ‘dwelling’ (section 116(2)) and specifically excluding others (section 116(3)). If they do not fall within any of the specific categories of section 116(3), most residential institutions will come within section 116(2)(d) and will be treated as dwellings by default.

22.Categories of building use specifically included within the definition of ‘use as a dwelling’ (so that transfers of such buildings only qualify for relief if the consideration does not exceed £150,000) (section 116(2)) are:

a) residential accommodation for school pupils, for example accommodation blocks in boarding schools;
b) residential accommodation for students, other than that within section 116(3)(b). Student accommodation provided by private landlords is ‘a dwelling’, as is accommodation leased to students by universities or colleges in flats or houses rather than in halls of residence (see section 116(3)(b));
c) residential accommodation for members of any of the armed forces, including accommodation for their families (section 116(2)(c));
d) an institution that is the sole or main residence of at least 90% of its residents and does not fall within any of the categories referred to in section 116(3) (see section 116(2)(d) and also paragraph 23 below).
This would include, for example,

  • sheltered accommodation for the elderly where no nursing or personal care is provided. An example of this would be where an elderly person purchases a home on a warden-assisted housing development.
  • accommodation for religious communities (subject to the rules regarding mixed use; see paragraphs19 and 20).

23.Categories of building use specifically excluded from the definition of ‘use as a dwelling’ (so that transfers of such buildings in a disadvantaged area will qualify for unlimited relief) (section 116(3)) are:

a) a home or other institution providing residential accommodation for children;
b) a hall of residence for students in further or higher education. This is not defined in the legislation but in practice property provided by a university or similar establishment will be judged on the facts (number of inhabitants, type of facilities, availability of communal areas);
c) a home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of old age, disablement, past or present dependence on alcohol or drugs or past or present mental disorder (for example, an institution that provides accommodation as part of a wider care service such as residential care homes or residential drug treatment centres);
d) a hospital or hospice;
e) a prison or similar establishment, or
f) a hotel or inn or similar establishment.

Bed and Breakfasts/Guest Houses
24.Each case will be taken on its merits, however, paragraph 25 below provides general examples of the treatment of B&Bs/guest houses.

25.A property providing a Bed and Breakfast (B&B) service, which has amenities installed in each room such as bathing facilities, telephone lines etc and is available all year round as the rooms do not need any further adaptation, would be considered non residential for the purposes of the relief.
Example;

Mr and Mrs Boyd run a bed and breakfast in a disadvantaged area of Blackpool. They live on the premises and it is open all year round but trade declines during the winter months.
Under section 116(3) FA 2003, the Boyd’s B&B is a ‘hotel or inn or similar establishment’ and is therefore not used as a dwelling.

Mrs Leaver lives in Southwest London and lets out two spare rooms on a B&B basis during the fortnight of the Wimbledon tennis tournament. She doesn’t make any adaptations to the rooms other than the removal of some of her personal items.
For the purposes of the relief Mrs Leaver’s property is, at all times, considered to be in use as and suitable for use as a dwelling.

26.Buy-to-let properties suitable for use as a dwelling are residential unless they are a development of six or more dwellings whereby they would be non-residential under S116(7).

27.The specific inclusions and exclusions set out in paragraphs 22 and 23 above apply not only to a building’s actual use at the effective date of the transaction, but to the uses for which it is suitable at that date. Where, however, a building is being put to one of the non-residential uses specified in section 116(3), this overrides any suitability for another use (section 116(4)). For example, a building used as a children’s home may also be suitable for use as a school boarding house, but this will not preclude a claim to unlimited relief.

28.Where a vacant building is suitable for at least one of the uses specified in section 116(2) and at least one specified in section 116(3), section 116(5) determines, for the purposes of the relief, the use for which it is ‘most suitable’. Whether or not a vacant building has one or more uses for which it is most suitable is a question of fact. Evidence supporting such uses should be retained.

29.Where there is a single use for which a building is most suitable, the fact that it is also suitable for another use will be discounted.

30.If there are a number of uses for which a building is most suitable and they all come within either of the two subsections, any other use for which the building is suitable will be discounted.

31.Where no most suitable use can be shown, the default will be to classify the building as residential property and apply the £150,000 limit.

32.Land and buildings that are not suitable for any use at the effective date of the transaction will be treated as residential property if they are ‘in the process of being constructed or adapted for such use’- see paragraphs 33 and 34 below.

Process of being constructed or adapted for use as a dwelling

33.Undeveloped land is in essence non-residential, but land may be ‘residential property’ for the purposes of disadvantaged area relief if a residential building is being built on it at the effective date of the transaction. A development of six or more dwellings is deemed to be non-residential under S116(7), even if the process of construction or marketing has begun at the effective date of the transaction (see paragraph 40).

34.Where (at the effective date of the transaction) an existing building is being adapted for, marketed for, or restored to, domestic use, it is residential for the purposes of the relief. The process is taken as commencing when the developer begins marketing the properties for sale or starts physical work on the site which ever is earlier.
This may apply, for example, where a derelict building is being made fit for habitation, or where a previously non-residential building is being converted to a dwelling. For example:

a) Kristian is buying an apartment, in what will be a converted church, off-plan. The sale is completed on 15th March 2004, the properties were marketed for sale on 3 January 2004 and work on converting the church commenced on 2nd February 2004. For the purposes of this transaction the church is considered to be a dwelling, even though it has yet to be fully converted, from 3rd January. If the consideration is greater than £150,000 Kristian will have to pay the appropriate rate of stamp duty land tax.

In the above example the developer that initially purchased the church will have bought it as a non-residential property regardless of the intention to turn the building into residential units.

The garden or grounds of a building used etc. as a dwelling

35.Section 116(1)(b) includes within the definition of residential property ‘land that is or forms part of the garden or grounds of a building within paragraph (a) (including any building or structure on such land)’. The test HMRC will apply is similar to that applied for the purposes of the capital gains tax relief for main residences (section 222(3) of the Taxation of Chargeable Gains Act 1992). The land will include that which is needed for the reasonable enjoyment of the dwelling having regard to the size and nature of the dwelling.

36.A caravan or houseboat is not a ‘building’ for this purpose.

37.Commercial farmland is not within the definition of residential property. A farmhouse situated on agricultural land would be dealt with under the mixed use provisions (paragraphs 19 and 20 above).
It may often be the case that farmhouses will occupy only a small fraction of the total land and will therefore, when apportioned, fall below the £150,000 consideration limit thus attracting the residential relief.

38.Outhouses on land within the section 116(1)(b) definition will also be ‘residential property’ unless it can be demonstrated that they have a specific non-residential purpose. Where a distinct non-residential use can be demonstrated, the mixed use provisions will apply.

Interest in or rights over residential property

39.The treatment of interests in, or rights over, land or buildings for the purposes of disadvantaged area relief will follow that of the land or buildings to which they relate.

Six or more separate dwellings transferred by a single transaction

40.Section 116(7) FA 2003 provides that ‘where six or more separate dwellings are the subject of a single transaction involving the transfer of a major interest in, or the grant of a lease over, them, then… those dwellings are treated as not being residential property’. This recognises that commercial developers and institutional landlords, for example, frequently deal in numerous properties at one time. The fact that those properties may individually be ‘residential property’ does not detract from the inherently commercial nature of the transaction itself.

41.To qualify as ‘separate’, the dwellings must be self-contained. So for example, flats within a block, sharing some common areas but each with their own amenities will qualify as separate dwellings. Rooms let within a house will not constitute separate dwellings if tenants share amenities such as a kitchen and bathroom.

42.A transaction in respect of six or more such dwellings must be carried out by means of a single transaction in order to qualify for relief.

43.Qualifying multiple transactions will be treated as non-residential property for the purposes of relief, even where the proportionate consideration for individual dwellings exceeds the £150,000 limit for residential property. It is not a condition of relief that multiple transactions comprise only dwellings. One example of this would be where a purchaser is buying eight houses and four shops. Mixed use properties, such as pubs with self-contained residential accommodation, are also treated as non-residential.

44.The fact that some of the six or more dwellings within the single transaction are outside a designated disadvantaged area will not prevent them from constituting a non-residential transaction. However relief will only be available for the portion of the land situated within the disadvantaged area.

Property only partly within a disadvantaged area

45.Schedule 6, Part 3, FA 2003 determines how property situated partly within and partly outside a designated disadvantaged area is to be treated for the purposes of the relief. Such cases are relatively rare in practice. Queries may be referred to HM Revenue & Customs (Stamp Taxes) for guidance.

Grants of new leases

46.FA2003 Schedule 6 Part 2 deals with the charge to stamp duty land tax on the grant of a new lease.

Land all non-residential
47.If all of the land is non-residential it is exempt from any charge to stamp duty land tax.

Land all residential
48. The general rule is that:

(a) if the premium (and any other consideration than rent) does not exceed £150,000 then this is exempt from stamp duty land tax, and
(b) if the ‘net present value’ of the rental payments does not exceed £150,000 then this is exempt from stamp duty land tax

‘Net present value’ is, broadly speaking, the total rental payments due under the lease, discounted to reflect the fact that future rental payments are of less value than current rental payments. There is a tool for calculating net present value on the HM Revenue & Customs website.
There is a special rule where the average annual rent exceeds £600. In such a case there is no relief or exemption for any premium. Any premium, however small, will be charged at 1% (or at higher rates if it exceeds £250,000).
49. Where there is mixed use apportionment is applied. The non-residential portion is exempt from lease duty.

If the consideration includes rent and the relevant rental value does not exceed £150,000, the rent does not count as chargeable consideration.

50.If the consideration includes consideration other than rent then:

a) If the annual rent does not exceed £600 and the relevant consideration does not exceed £150,000, the consideration other than rent does not count as chargeable consideration
b) If the annual rent exceeds £600, the consideration other than rent is counted as chargeable consideration

The “annual rent” is the average annual rent over the term of the lease.

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