In HMRC v Tretyakov (2024), the First Tier Tribunal considered whether a three-storey building with two residential dwellings on the upper floors and a commercial ground floor was “mixed-use” or “residential”. This ultimately makes a difference for the purposes of paying SDLT on the purchase of the building, as commercial “mixed use” SDLT rates are lower than residential SDLT rates.
The Facts
The building was originally a commercial bacon smoking factory. The upper two floors were converted into residential dwellings in 1985, but the ground floor remained commercial. The ground floor had a light industrial planning permission which prevented use as a residential dwelling.
The ground floor was brought by Mr Stephen in 2016. He also used it commercially and renovations were completed in 2019. The ground floor was split into two sections separated by a glass partition. The front consisted of a garage for underground parking and storage as well as a fire-proof glass enclosure. The back contained a wine cellar, sauna, and more storage, to be used commercially as a games room and bar.
In 2024, the property was sold to Mr Tretyakov. The selling agent’s website advertised the property as a residential dwelling, but Mr Tretyakov was informed of the planning restriction prohibiting residential use on the ground floor. Mr Tretyakov believed that the property was mixed-use and would attract the lower commercial mixed use SDLT rates.
The Law
Section 116(1) of the Finance Act 2003 defines a residential property as a building that is suitable for use as a dwelling […]. A non-residential property is anything that falls outside of this definition.
HMRC acknowledged the ground floor was used commercially, but stated the question at hand was whether the building was residential property on the basis that, in conjunction with the two upper floors, the ground floor was “suitable” for use as a dwelling.
HMRC’s Internal Manual (SDLTM00390 & SDLM00295) suggests mixed-use applies when a building containing residential dwelling has separate areas, one or more of which is adapted for commercial or business use.
The Tribunal held the two staircases connecting the ground floor to the first floor and the main entrance through which all floors could be accessed meant a lack of separation for mixed-use purposes.
Additionally, the fact that the garage was being used commercially did not make it unsuitable for residential use. A large part of its commercial use was storage for products. The Tribunal highlighted there was no reason why the space could not be used to store personal items for residential use.
The historic commercial use of the building was also of little importance as the renovations in 2019 drastically changed the character of the building. Furthermore, the floor plans Showed the garage being labelled as a “gym” and for storing gym equipment. This allowed the Tribunal to infer it was used as a personal home gym. Whether or not Mr Stephen used it as such was irrelevant.
Arguments for mixed commercial use
Mr Tretyakov argued that the following facts meant the property was not suitable for residential use:-
- ·The ground floor had a separate energy performance certificate (EPC) for commercial use;
- The ground floor was subject to a planning condition preventing residential use; and
- The property had been sold by contract using the standard commercial conditions which meant it was not residential.
Decision on SDLT rates
The Tribunal gave little weight to the separate EPC and commercial nature of the sale. Whilst these are characteristics of a commercial property, they do not prevent residential suitability. The planning restriction for the ground floor preventing residential use was also given little weight. The Tribunal acknowledged that residential use would amount to a breach, but nonetheless held it to be “suitable” for such use.
Rather more weight was given to Mr Stephen’s recent personal use. From January to October 2019 Mr Stephen made personal use of the ground floor, parking his car in the garage, and using the games room and wine cellar for hospitality. After October 2019, the garage was used for his wife’s business, but the personal use of the games room continued.
The Tribunal gave this more weight than the planning restriction as it showed the ground floor could easily be accessed and used as a part of the overall residential dwelling on the upper floors.
This case emphasised that suitability does not equal practical nor actual use. The ground floor cannot be used as a residential dwelling due to its planning restriction but was deemed “suitable” for such.
Comment
This decision slightly departs from current HMRC guidance as it gives little weight to a planning restriction. Going forward, prudent buyers may require more detail on how previous owners have used the building. On its face a building may be deemed commercial, but if the occupiers have made personal use of the building or its facilities, it may mean SDLT is payable at the higher residential rates.
