Mudan and another v Commissioners of HM Revenue and Customs

Taxation – Stamp duty land tax – Paragraph 18(2) of schedule 4ZA to Finance Act 2003 – Appellants purchasing property and paying SDLT – Property previously used as dwelling but in need of renovation and repair at time of completion – Respondents refusing application for partial repayment of SDLT on basis property not residential – Whether building “suitable for use as a single dwelling” – Appeal dismissed The appellants bought a property in London and paid stamp duty land tax (SDLT) on the purchase on the basis that it was residential. They subsequently claimed a partial repayment of the SDLT on the basis that the property was not residential. The respondent commissioners enquired into the position and issued a closure notice which concluded that the property was residential. The appellants appealed against the closure notice. The only issue was whether the property was “suitable for use as a dwelling” within paragraph 18(2) of schedule 4ZA to the Finance Act 2003 when the purchase was completed. The First-tier Tribunal dismissed the appeal. The appellants appealed. The appellants contended that the test adopted by the FTT to determine whether a need for repair would prevent a building from being suitable for use as a dwelling was whether the repair was “fundamental”, and whether the defect was “curable”. That was the wrong test in law, and there was no statutory basis for it, the correct test being whether the building was suitable for occupation as a place to live as at the effective date. That definition was modified by the well-established de minimis principle to allow for minor work at the effective date. Even if the test was whether issues requiring repair were “fundamental”, the FTT reached a conclusion as to the application of that test on the facts that was outside the reasonable range. Held: The appeal was dismissed. (1) Section 116(1)(a) of the 2003 Act defined “residential property” as “a building that is used or suitable for use as a dwelling, or is in the process of being constructed or adapted for such use…”.  The paragraph 18 definition was in the same terms, save that it applied to a “single” dwelling. On the facts of the present case, the relevant test was that set out in section 116. As with any statutory wording, the words “suitable for use as a dwelling” had to be construed by reference to the words used, in the context in which they were used, and taking into account the importance of the purpose of the legislation. That purposive approach involved ascertaining the characteristics of the buildings intended to be covered and considering whether the relevant property fell within that class of buildings: Rossendale Borough Council v Hurstwood Properties (A) Ltd [2021] UKSC 16; [2021] EGLR 28 and HMRC v Ridgway [2024] UKUT 36 (TCC); [2024] PLSCS 35 applied. The purpose of the SDLT provisions was to tax transactions relating to residential property at a higher rate than non-residential property, and for transactions in relation to residential property by developers and second homeowners to be taxed more highly than a dwelling in which people lived as their primary home. It was therefore right to construe the phrase “suitable for use as a … dwelling” by reference to that statutory purpose: Henderson Acquisitions Ltd v HMRC [2023] UKFTT 739 (TC) considered. (2) It was not enough to make a building suitable for use if it was capable of being made appropriate or fit for such use by adaptations or alterations. Suitability for use fell to be determined by the physical attributes of the property, with the caveat that a property might be in a state of disrepair and nevertheless be suitable for use as either a dwelling or a single dwelling if it required some repair or renovation. There was an important distinction between adaptations or alterations and repairs or renovation. Whether a building which required some repair or renovation was suitable for use was a question of degree for assessment by the FTT. There were a number of factors relevant to suitability for use, and the question involved a multi-factorial assessment, taking into account all the facts and circumstances. In considering that distinction, recent use and the history of the property were relevant factors. The test was not whether the building was ready for immediate occupation as at completion: Fiander and Brower v HMRC [2021] UKUT 156 (TCC) applied. (3) A helpful starting point was to establish whether the building had previously been used as a dwelling. Previous use as a single dwelling was relevant in determining whether an alteration needed to a building would be a repair or renovation or, alternatively, an adaptation or alteration, changing the building’s characteristics by making it usable as a single dwelling for the first time. Actual use as a dwelling was a strong indication that the building had possessed the fundamental characteristics of a dwelling, and had previously been suitable for use as a dwelling. An assessment of the repairs and renovations needed could then be made against that backdrop and by reference to the state of the building during its actual use as a dwelling. Previous use was fact-sensitive, and factors such as the length of time between the previous use as a dwelling and the effective date would be relevant.   (4) An assessment had to be made of whether the defects in the building which required works were capable of remedy. That assessment should take into account whether the works would be so dangerous or hazardous as to prejudice their viability. If they would, the building was unlikely to be (or remain) suitable for use as a dwelling. It should also take account of whether the works could be carried out without prejudicing the structural integrity of the building (because, for instance, the walls might collapse). If they could not, the building was unlikely to be suitable for use as a dwelling. The principles drawn by the FTT from the relevant authorities were correct, and the tribunal was fully justified in concluding that the other categories of residential property in section 116 supported its construction of “suitable for use”. The application of those principles to the facts disclosed no error of law. (5) The FTT’s conclusion that the works which were needed did not come anywhere near the threshold of rendering the property unsuitable for use as a dwelling was reasonably open to it on all the facts.   Michael Firth KC (instructed by Cornerstone Tax 2020 Ltd) appeared for the appellants; Michael Ripley (instructed by General Counsel and Solicitor to HM Revenue and Customs) appeared for the respondents. Eileen O’Grady, barrister Click here to read a transcript of Mudan and another v Commissioners of HM Revenue and Customs