Last night Hansard published the long-promised (since April 11) amendments to the Finance Bill indicating the hoops through which purchasers of dwellings that include “granny annexes” must jump to avoid paying SDLT at the new surcharge SDLT rates because they are buying two dwellings
Annexes that are not separate dwellings don’t – of themselves – trigger surcharge liability. So buying a dwelling containing an annex that isn’t a self contained separate residence capable of independent occupation doesn’t trigger the liability. Thus far, no change.
Even if the annex is capable of separate independent occupation, it won’t – under the amendment tabled in the House of Commons yesterday – qualify as a separate dwelling if it is “subsidiary to another … purchased dwelling”. “Subsidiary” is strictly defined. The annex must be:
- a dwelling “…within the grounds of or within the same building…” as the main dwelling, and
- the part of the price justly and reasonably attributable to the main dwelling must be at least two thirds of the total price for all dwellings within the building or grounds.
Looking at condition A first, annexes that are physically with the envelope of the building containing the main dwelling qualify as “subsidiary”. A gardener’s cottage in the garden or grounds of the main dwelling also qualifies. The new amendment does not define “grounds” in this context; nor is it defined elsewhere in SDLT legislation. Although no formal guidance has yet been published, on past showing, HMRC is likely to apply the interpretation set out in its Capital Gains Manual, which reads:
“The word ‘grounds’ infers a larger area than ‘garden’. A useful dictionary definition of the word grounds is ‘Enclosed land surrounding or attached to a dwelling house or other building serving chiefly for ornament or recreation.’ ”
Some purchases will test this definition. For example, can a gatehouse or lodge at the end of a long drive be treated as “subsidiary”?
Turning to condition B, the price threshold; some purchasers may not find such apportionments easy to make. A purchaser filing an SDLT return claiming that an additional dwelling is “subsidiary” to a main dwelling must have reasonable grounds for believing that the two thirds threshold is not breached. While it is not necessary to commission a formal and expensive valuation, a wild and ill-informed guess formed with out any serious justification is not going to be accepted by HMRC, particularly if it’s obviously been done to save SDLT. Purchasers who have their own valuations or surveys can ask their valuer or surveyor to opine on whether the two thirds threshold is breached.
The price threshold is calculated by reference to the total price of the dwellings bought. For example, someone who buys, for example, a main house with two cottages in its grounds must do the apportionment twice, once for each cottage. If the proportion of the price attributable to either cottage causes the threshold to be breached, the entire purchase is subject to SDLT at the surcharge rate, even though the other cottage qualifies as “subsidiary”.
The good news for purchasers of very big houses with large gardens is that there’s no limit to the number of dwellings that can qualify as annexes. For example, a large house with a flat in the basement and two gardeners’ cottages in the grounds are all bought for £3m by an individual who does not have an interest in any other dwelling. Provided the proportion of the £3m attributed to the main house is £2m or more, the flat and the two cottages all qualify as “subsidiary” and the surcharge is not payable. In addition multiple dwelling relief may well be available to such a purchase.
There’s more good news. If:
- such purchasers sold their previous main residence that day or during the previous three years, and
- the new main dwelling is to be their main residence,
they can claim replacement of main residence exemption, despite the fact that they are acquiring a number of dwellings. In this way the surcharge is avoided, even if they also own other dwellings such holiday homes or buy-to-let investments. As originally drafted, the 2016 Finance Bill denied replacement of main residence exemption to purchasers of dwellings with annexes.
The amendment is silent about buyers of dwellings with annexes who have, since 1st April, paid SDLT at surcharge rates on their purchases; but who would not have done, had the amendment been in the Finance Bill as published on Budget Day. HMRC’s short announcement says that the amendment will take effect from 1st April. It appears that such purchasers will be able to make a claim for a rebate of the “overpaid” SDLT under section 2 of the Provisional Collection of Taxes Act 1968. HMRC will probably make a longer announcement about this Finance Bill amendment in due course, including guidance on how to claim a rebate and the time limit for doing so.