Mon 15 Mar 2021

Derelict properties - Land and Buildings Transaction Tax

Having become an avid 'Homes under the Hammer' and 'Location, Location, Location' viewer during lockdown, I have become quite open to the idea of purchasing a property that is a bit of a fixer-upper for the many opportunities that this would present - now, wouldn't that be the ultimate DIY project to undertake during lockdown?  

For many, acquiring a property that is in need of some serious tender loving care and attention is an opportunity not only to make a purchase that would otherwise be outside of their budget, but also a chance to really turn the property into one's dream home. 

There can also be an expectation that a derelict property may attract a reduced tax liability on the basis of it being in a state of disrepair that would make it uninhabitable at the time of the purchase. 

Land and Buildings Transaction Tax

Generally speaking, Land and Buildings Transaction Tax ("LBTT") applies to all Scottish property transactions where an interest is acquired in property that is residential, agricultural, commercial or a mixture of all of these.  In addition to LBTT, Additional Dwellings Supplement ("ADS") will also be payable where the purchasing entity owns more than one residential property. 

The relevant rate of tax for LBTT depends on the main subject matter of the transaction.  What this means is that were a transaction concerns an interest in land that is entirely residential property, then the residential rates will apply.  In contrast, where the transaction consists entirely of or includes an interest in land that is agricultural, commercial or not residential property, the non-residential rates will apply.

The residential rates are higher than the non-residential rates.  It is easy therefore to understand why,  in the context of a transaction involving a derelict property, one may try to argue that the non-residential rates should apply.  Not only would this result in a reduced tax liability in terms of LBTT, but it would also mean that no ADS would be payable if the property could not be regarded as a second dwelling.

Meaning of residential property

It is important therefore to establish what is meant by residential property.  To be able to do so, we can turn to The Land and Building Transactions Tax (Scotland) Act 2013, which defines residential property as:-

(a)      a building that is used or is suitable for use as a dwelling or is in the process of being constructed or adapted for such use;

(b)      land that is or forms part of the garden or grounds of a residential building; or

(c)      an interest in or right over land that subsists for the benefit of a residential building.

Therefore, the key words for consideration are "suitable for use as a dwelling".  Whist a property may not appear to be residential due to its state of disrepair at the point of purchase, if it is suitable or capable of being adapted for use as a dwelling, then it will be regarded to be a residential property.

In order to understand how this operates in practice, the First-Tier Tax Tribunal's decision in P N Bewley v HMRC is a useful insight into what can be regarded as a "dwelling" for stamp duty land tax ("SDLT") in England and Wales, and how this can be interpreted in the context of derelict properties.

Whilst the decision is in respect of HMRC's interpretation, the LBTT guidance and legislation in Scotland largely mirrors that in England and Wales and it is likely that Revenue Scotland would follow a similar approach.

P N Bewley v HMRC

Mr and Mrs Bewley purchased a derelict bungalow in the name of a company.  Their intention was to demolish the bungalow following its purchase and to build a new residential property on the site.  Upon reviewing the SDLT return, HMRC imposed the higher residential rates and a second home surcharge (similar to ADS) to the purchase, and this was appealed by Mr and Mrs Bewley.

Whilst the property had been used for residential purposes previously, it had been vacant for a number of years and in a significant state of disrepair.  Asbestos was discovered throughout the property and the heating system, pipework and flooring had been removed.  Mr and Mrs Bewley argued that the property could not be considered suitable for use as a dwelling.

In response to Mr and Mrs Bewley's claim, HMRC argued that the property was capable of being brought back into use as a dwelling through renovation and therefore could not be classified as non-residential simply because Mr and Mrs Bewley intended to demolish, rather than renovate, the property.  HMRC also noted that the building was in a residential area and was always intended to be a residential property.

The Tribunal's decision reflected Mr and Mrs Bewley's position and emphasised that the test to be employed was whether the building is suitable for use as a dwelling at the point at which SDLT becomes payable.  It was the Tribunal's decision that whether or not the building could be restored at a later date was irrelevant, as were the purchasers' intentions.

Following the decision in Bewley the HMRC updated its SDLT guidance to note that:-

“A residential property that is no longer habitable as a dwelling, due to dereliction for example, would not be residential property, on the basis that it is not suitable for use as a dwelling.”

The HMRC guidance does however continue to give examples where this may not be the case and the factors that should be taken into consideration when assessing the habitability of derelict properties

What does this mean for Scottish properties?

Given the existing LBTT guidance issued by Revenue Scotland in respect of what can be regarded as a residential property closely mirrors that issued by HMRC, it is possible that Revenue Scotland could take a similar approach when determining the LBTT treatment of purchases involving derelict properties.

What is clear is that there is not a one-size-fits all answer to this question and the LBTT treatment will be decided on a case by cases basis, in light of some of the considerations raised in Bewley.

In any event, tax implications are a key consideration in any transaction and careful thought should be given, and advice should always be sought, in connection with this.

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