Newsand decision, Stamp Duty Land Tax and Multiple Dwellings Relief where a building is adapted

There is an interesting decision of the First-tier Tribunal on 8 March 2024 about stamp duty land tax (SDLT) multiple dwellings relief (MDR) in the Newsand Limited case https://www.patrickcannon.net/wp-content/uploads/2024/03/Decision-TC-2023-09861-Newsand-Ltd-08.3.24-1.pdf.? Newsand were appealing against HMRC’s closure notice which rejected their claim to multiple dwellings relief.? HMRC's applied to strike out Newsand’s appeal on the basis that it had no reasonable prospect of success.? In this decision the Tribunal refused HMRC’s strike out application.? The Tribunal said that the correct answer would depend on the evidence and Newsand’s case was not merely fanciful.?

Newsand had bought for ￡6.7 million a four-storey building in Peterborough, the purchase completing on 18 February 2022. There were shops on the ground floor and offices on the first, second and third floors. There was an existing 2020 notice of prior approval by Peterborough City Council for a change of use under Class O of the General Permitted Development Order, allowing (subject to the prior satisfaction of conditions) the three floors of offices to be converted to 102 residential units.?

Newsand’s case was that on the day of completion, work commenced to adapt part of the existing buildings into residential dwellings, which included the stripping out of internal walls, ceilings and floorboards within the property. They had claimed multiple dwellings relief and self-assessed to SDLT of ￡72,769; just over 1% of the price.? The definition of “dwellings” extends to a case where a property is “in the process of adaptation” so as to be suitable for use as dwellings and Newsand’s position was that part of the building was in the process of adaptation.?

The Tribunal held that to decide that issue would require an examination of the facts, so HMRC’s application to strike out failed.? Although the Upper Tribunal had decided similar issues in the Ladson Preston case ?https://assets.publishing.service.gov.uk/media/637f4861e90e07233d28b882/Ladson_Preston_and_AKA_Developments_v_HMRC_Decision.pdf , the Judge said that decision was on a slightly different point; about whether there was a building in the process of construction (whereas in Newsand the question was whether an existing building was in the process of adaptation for use as dwellings).? Here is what the Judge said to explain the decision:?

25. In order to determine this case, I would need to determine whether or not the property was “in the process of adaptation” for use as a dwelling at the time of completion for the purposes of paragraph 7(2) Schedule 6B FA 2003. The answer to that question requires an examination of the facts.?

26. In an application such as this, it is not appropriate to conduct a mini-trial. A strike out application is designed to weed out cases that do not merit a full hearing. I am not satisfied that I have heard all the evidence that the appellant might wish to bring. So, I am not convinced that this case is such that the Tribunal has before it all the evidence that it may require to decide the case.?

27. On the questions of law, I accept that there are many similarities between the Ladson Preston case and this case. For example, the issue concerning whether it is appropriate to take into account works that are commenced on the day of completion, but after the time of completion strike me as equally applicable to the present circumstances. However, Ladson Preston is not on all fours with this case. There are arguable differences between a “process of construction” and a “process of adaptation” – not least because in a process of adaptation an existing building will always exist and so the requirement for there to be “a physical manifestation” of a building in the case of a process of construction (which is critical to the reasoning in Ladson Preston) do not arise.?

There is an interesting discussion of the SDLT principles to be applied.? For example it is recorded paragraph at 17:?

At the hearing, Mr Cannon, counsel for appellant, confirmed that the appellant no longer relies on the fact that the property was purchased with the benefit of permitted development rights in support of its argument that the property was in “the process of being… adapted” for use as a dwelling.?

Paragraph 24 of the decision sets out what the Tribunal took from the decision in the Ladson Preston case. Here is what is said:?

The points that I take from the decision are as follows:?

(1) When paragraph 7(2)(b) was referred to in its proper context, there was a clear indication that it was referring to some physical manifestation of a dwelling on the relevant land. The most obvious indication came from the word “building”. The building did not have to be completed since it was concerned with those that were “in the process of being constructed”. Without any physical manifestation, there might well be an intention to construct a future building but no building that was in the process of being constructed (Ladson Preston [30]-[32], [38]-[40], [44]).?

(2) The availability of MDR is determined by reference to the nature of the chargeable interest that is acquired at completion. Works that commence on the same day but after completion are not relevant. (Ladson Preston [61]-[64]).?

(3) Each case will turn on its facts (Ladson Preston [48]).?

It seems to me that the Tribunal is clear that the nature of the property for SDLT, and the availability of the MDR, are each dependent on the nature of the property at the moment of completion, so changes after the point of completion are not relevant.??

(There is a gloss which is worth mentioning.? In a case where a contract is “substantially performed” before completion, such as by the purchaser taking possession of the whole or substantially the whole of the property, then it is clear from Finance Act 2003 section 44(4) that the “effective date” of the transaction is the point at which the contract is substantially performed.)?

The facts and arguments which will be relevant?

The burden of proof will be on Newsand to demonstrate that multiple dwellings relief is available.? The following points could be relevant:?

1.? They are likely to want to show not only that activities amounting to adaptation had started on the day of completion, but that they had started before the moment of completion (or substantial performance if that is earlier).? Perhaps Newsand had set up arrangements up that way, given that before this transaction there had been indications from earlier cases that one has to judge the property as it was at the moment of completion (or, if earlier, at substantial performance):?

• the Brandbros decision was on 17 May 2021 and
• the Ladson Preston first instance decision was on 7 July 2021.?

2. ?Whether possession was obtained by Newsand before completion of the whole or substantially the whole of the property in order to do the work (that is important for the question of an earlier “substantial performance”).? For this it will be relevant whether the property was fully or partly let.?

3.? The nature of the activities.? A challenge could be the issues raised in Sergeant & Sims about the meaning of the words “in the process of” in the context of both construction and adaptation.??

• The author of Sergeant & Sims is clear in his view that the description “in the process of” is a physical test and requires construction or conversion works to be taking place.
• It is said that the "works must add something to the land rather than remove something from it. So stripping out, demolition, land remediation and excavating foundations by themselves are unlikely to count".?

4.? Whether the works were part of the process of converting the building to residential use, rather than an isolated operation to be followed up by works of adaptation later.?

5.? The timing of the application to the planning authority for approval of details reserved by a condition (such as conditions relating to noise mitigation and mechanical ventilation).?

6.? The date stated on the “Application for Approval of Details Reserved by Condition” as the date on which the development was started.?

7.? If buildings regulation consent was required for the works, the paper trail for that.?

8.? The treatment of the property for business rates purposes.?

SDLT calculation?

As an aside, it is interesting to try to reverse engineer the SDLT calculation that would give the SDLT of ￡72,769 originally self-assessed for a purchase price of ￡6.7 million. I can see that it could work on the basis of apportioning:?

• to the part of the property not to be converted to residential use only ￡150,000
• leaving the remaining ￡6,550,000 for the parts to be converted to dwellings.?

The SDLT calculation with MDR is as follows:?

First, work out SDLT at mixed property rates on the total price of ￡6.7 million. That comes to ￡324,500. SDLT on the part not in the process of adaptation to dwellings is a fraction of that. The fraction is ￡150,000 / ￡6,700,000. The SDLT on that element is therefore ￡7,265.?

For the remaining ￡6,550,000, we need the average price over the number of residential units, say 102 if the property is in the process of adaptation to 102 dwellings.? That average comes to well under ￡250,000. We try applying standard residential rates (without the 3% surcharge, see the NOTE below) to this average, but that would be zero, so the 1% minimum applies, to give SDLT on that element of ￡65,500.?

That gives total SDLT of ￡72,765 which is within a whisker of ￡72,769 which the decision says was paid.?

NOTE: I wrote a piece https://www.blakemorgan.co.uk/stamp-duty-land-tax-mixed-use-property-claiming-multiple-dwellings-relief-interaction-with-the-3-surcharge/ explaining how under the present rules, standard rates of SDLT apply to the residential element where, in a single transaction mixed property is acquired and MDR is claimed.?

Budget changes

Under the Budget of 6 March 2024, broadly speaking MDR will not be available for transactions completing on and after 1 June 2024, unless pursuant to a contract made on or before 6 March 2024.