Stamp duty land tax: why it is important in a tricky market

Stamp duty land tax is an increasingly costly aspect of buying property and is much reduced when the property in question is deemed “mixed use” rather than wholly residential.

Mixed use property, which includes most farms, is charged at between 0% and 5% of the purchase price, while residential rates range as high as 17%, depending on the price paid and the buyer’s circumstances. 

Mixed use challenges

The growing number of challenges by HMRC to mixed use claims means those planning to sell smaller farms, and particularly those where there is a large residential element to their value, need to prepare their properties and related activities well in advance in order to have the best chance of buyers benefiting from a mixed use claim.

“This increased likelihood of challenge arises from a plethora of some very marginal submissions by taxpayers and their advisers,” says accountant Julie Butler, of Butler & Co.  

The “residential” farm market and that for country properties in general is quite tricky at present. The huge gap between mixed use and residential rates means that buyers will want to be as certain of their ground as they can be, says Julie.

The current level of restructuring of farming and rural assets needs also to take stamp duty land tax (SDLT) into account, especially where houses or cottages are being split away from the main holding, with the risk that they are taken out of the mixed use net.    

Taxpayer success

A recent successful case for the taxpayer concerns a 150-acre holding in Henfield, West Sussex, bought by Mr and Mrs Goudman- Peachey for £7.9m in 2019.

The property has a 10-bedroom house, two further dwellings, a swimming pool and equestrian facilities. The land is mainly pasture but includes woodland and a lake.

Shortly before completion, the 130 deer which were on the land were also bought by the couple. The previous owner had used the land for deer farming and breeding horses, with some arable use and some of it grazed by sheep on a commercial contract with a local farmer.

SDLT of £384,500 was paid (applying the 5% mixed use rate) on the purchase but HMRC issued what is termed a closure notice for an additional £477,250 of SDLT because it considered the property residential.

A closure notice is a formal letter finalising a compliance check or enquiry into an SDLT return. It completes the inquiry and either confirms the original return is correct or amends it to reflect the tax HMRC considers is due.

In this case the closure notice was issued almost 20 months after the transaction was completed. Taxpayers have just 30 days in which to object to such a notice.  

Taxpayer appeal

By then acting as executor to her husband’s estate, Lesley Goudman-Peachey appealed the notice.

In the appeal it was argued that the sheep grazing agreement for 200 and 300 head was formalised by the purchasers shortly after completion of the transaction, and that while the house and the gardens immediately surrounding it are residential property, the different plots of [other] land had been used for a variety of purposes and that it included extensive public footpaths.

The First Tier Tribunal (FTT) which heard the appeal concluded that while the house and other parts of the property were residential, other parts of the land were used for non-residential purposes.

The long history of deer grazing and its commercial exploitation on the land helped in this respect, as did the employment by the purchasers of the previous deer manager. Some of the ground had also been used for arable cropping.

Wind farm cable

An important part of the taxpayer’s case was the existence of a 99-year agreement made by the vendor for cabling for an offshore wind farm to run through the property, which the tribunal found positive for the mixed use argument.

As well as access rights, the agreement obliges the appellant to maintain the land for the duration of the lease.

“As farms diversify further, such long-term leases may be important and have implications across a range of taxes,” says Julie.

“In a case to support mixed-rate SDLT, business use before and immediately after a sale must be demonstrated. It will be important to set up a trading vehicle – usually as a sole trader or partnership – and to submit documents such as trading accounts and contracts of employment for the land use such as grazing or haymaking agreements, or for employment.

“Also purchases and sales invoices to support the business use. Business plans, grants applied for and licences obtained can also be useful.”

HMRC argument

HMRC had argued that the land was garden or grounds and that there was insufficient evidence to demonstrate that there was separate use of the land, commercial or otherwise, nor was there any activity more than a mere leisure activity in keeping with the area’s rural character. In reaching its decision, the FTT considered 23 previous cases.

Julie describes the case as a boost for both the sale and retention of smaller farms, especially with the increased inheritance tax relief of up to £2.5m per individual and the transferability of this allowance.

“With rollover relief for earlier capital gains tax bills still available, on purchase the tax advantages of the purchase of a small farm can be structured in a very positive way in overall terms with good planning and strongly evidenced arguments.”

Julie points out that the pure agricultural SDLT rates of non-residential property range from 0-5%.

“These attractive rates make the purchase of bare land with a subsequent planning application for a new build at 0% VAT also very attractive. And of course it could then be sold with mixed-rate advantages.”