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In this week’s Q&A, Croner-i tax adviser Vivienne Cheung explains the rules around higher rate stamp duty land tax on property purchases for joint use
My client is a company and is in the process of purchasing a large plot of farmland that has a farmhouse from a third party. The whole plot is £1.6m with around £600,000 attributable to the farmhouse and the remaining attributable to the commercial farmland. I understand that since the house is being occupied by a farm worker, the farming exemption applies such that the transaction is exempt from the 15% stamp duty land tax (SDLT) rules.
Given that the rest of the plot is farmland that is being used in a farming business, do we simply apply the non-residential rates of SDLT to the whole transaction or do we apply the residential rates to the farmhouse and the non-residential rates to the farmland?
Generally, for SDLT purposes, the land transaction is looked at to see whether it is chargeable at residential rates or non-residential rates with mixed used transactions such as this being chargeable at non-residential rates. However, special rules apply for the higher rate charge of 15%. All legislation references are to Finance Act 2003.
Higher rate charge
As the attributable value to the farmhouse is more than £500,000, the whole plot is treated as two separate chargeable transactions for certain SDLT purposes under para 2(3) Sch 4A Finance Act 2003 (FA 2003), one transaction being the farmhouse and the second transaction comprising the commercial farmland.
In the absence of an exemption, the flat rate of 15% SDLT would apply to the residential purchase and ignore the farmhouse for any linked transactions purposes (para 3 Sch 4A).
The farmland would be assessed at the non-residential rates of SDLT separately. In this situation, if both transactions are notifiable, but the main subject matter of the transaction includes non-higher threshold interests, two SDLT returns are required to be submitted for each respectively (para 2(7) Sch 4A).
Effect of exemption
It is important to remember that there are various qualifying conditions for the farmhouse exemption of para 5F to apply – it is not enough for the property simply to be a farmhouse.
HMRC’s guidance is at SDLTM09640. Note that the farmhouse exemption will be withdrawn if these conditions do not continue to be met in the three-year period starting from the effective date of the land transaction (para 5G Sch 4A).
If the farmhouse exemption under para 5F Sch 4A applies, the farmhouse transaction is not subject to the 15% rate as the exemption disapplies the rules in para 3 Sch 4A that imposes the higher rate.
The exemption does not disapply para 2 Sch 4A however, so the purchase is still treated as two separate transactions for certain SDLT purposes.
One of these purposes is determining the amount of tax chargeable under section 55 (para 2(6)(b) Sch 4A). Since we are treating the purchase as two transactions, we may also need to consider whether they are linked transactions (s108 FA 2003) for the purposes of s55 FA 2003.
Transactions are linked transactions if they form part of the same arrangement between the same vendor and purchaser and there is a degree of interdependency and are part of the same deal. For example, if the whole plot was advertised as one and the client cannot buy the farmhouse without the land (see HMRC guidance at SDLTM30100).
It is difficult to imagine that the purchase of the farmhouse and land would not be regarded as linked, if they were actually purchased under a single purchase contract, and it is just the ‘fiction’ of para 2(6)(b) above that deems them to be separate transactions.
If the transactions are not linked, we would apply the residential rates to the farmhouse acquisition and the non-residential rates to the commercial farmland and submit two SDLT returns if required.
However, if they are linked transactions, we would calculate the SDLT based on a single transaction and the chargeable consideration is aggregated to determine the liability.
If the transaction is mixed use because it includes farmland that is non-residential, we would apply the non-residential rates of SDLT to the whole £1.6m. If the linked transactions have the same effective date, your client can choose to do a single SDLT return.
HMRC also appear to reach a conclusion in example 4 in their manual page SDLTM09535 to apply the non-residential SDLT rates to the entire transaction, where relief from the 15% SDLT rate applies and there is originally a mixed use purchase. However, it is unclear if they have determined this using the linked transaction rules.
Finally, annual tax on enveloped dwellings (ATED) registration will also be required due to the value of the dwelling. There may be possible relief for farmhouses, and it is worthwhile for you to check whether the required conditions are met for this. See Section 40 of HMRC’s ATED Guidance.
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