A transaction with a mixture of residential and non-residential interests is treated as a non-residential transaction e.g. a shop with a flat above it. The LBTT due will therefore be calculated using non-residential rates and bands.
Where commercial use of land and/or buildings can be evidenced, the non-residential rates will apply. This may include properties such as bed and breakfasts and guest houses. Examples of evidence that can be provided are as follows:
- a VAT Registration
- non domestic rates status
- membership of commercial bodies
- commercial licence / registration details
- business accounts.
Other land transactions may be either residential or mixed use depending on several factors including but not limited to:
- use at the effective date
- any commercial agreements in place
- formal registrations with e.g. local council, rural land register
- being in receipt of agricultural grants
- being in receipt of a crofting payment
- a VAT registration
- non domestic rate status
- registered use of property in land registry
- legal factors and constraints, that may inhibit or permit certain uses
- activities taken place in pursuit of legitimate business interests
- commercial activities following sound and recognised business principles
- activities that have had a reasonable prospect of generating a business profit and carried out with the intention of generating income
how the land is viewed by other public bodies.
All land transactions will be treated on their own merits.
The use of the property on the effective date of the transaction overrides any past or intended future uses for the purpose of establishing whether or not a property is residential.
It is however accepted that the status of residential / non-residential can change over time between transactions.
A building in use as a bed and breakfast or guest house will be a residential, mixed or non-residential transaction based on the facts of each case. Whether Non-Domestic Rates (NDR) and/or Council Tax is paid will be taken into consideration.
A property used as part of a furnished holiday letting business will be a residential property whether the property is assessed to Council Tax or NDR, as in most cases the building could be used as a single dwelling without permission from the relevant local authority.
Where the land in question forms part of the garden or grounds of a dwelling, the residential rates will apply. This is covered at Section 59(1)(b) where residential property includes ‘land that forms part of a garden or grounds of a building suitable for use as a dwelling, this includes any buildings or structures on such land’.
There is no statutory size limit for garden and grounds to be considered residential for LBTT purposes unlike the ‘permitted area’ for the purposes of Capital Gains Tax. It will instead be a question of fact whether the land (including any building or structure on such land) is considered to be the garden and grounds of the dwelling.
Where there is ambiguity over what constitutes garden or grounds, commercial use of the land will be considered. To evidence commerciality, it would be expected that the land had been actively and substantively exploited on a regular basis. For example, genuine farmland is likely to have been exploited by commercial machinery on a regular basis. Where this is in place at the effective date, this is likely to be non-residential. However, land not commercially used will be considered part of the garden or grounds of the dwelling.
Areas of land that could be considered non-residential are:
- commercial woodland
- commercial farming/horticulture areas
- commercial stables/paddocks
- commercial grazing land
- other commercial areas
- a registered croft.
Evidence must be available to support any commercial use which results in non-residential rates and bands being used in a return. Commercial use will be contrasted with uses which appear to be purely for leisure, including, grazing and equestrian activities that do not amount to commercial operations.
As well as the factors outlined under ‘commercial use’ above, the following further indicators will be taken into account:
- Whether the land is registered for any other use e.g. as a croft or agricultural land
- Whether rural payments are received in relation to the land
- Whether a grazing agreement is in place with consideration passing in relation to the land
Where a lease has been granted to a third party for exclusive occupation of the land, this may be an indicator of non-residential use. However, occasionally allowing third parties to occupy or exploit the land is unlikely to mean that the land ceases to be ‘garden or grounds’. Where a lease or licence is in place, the true nature (including commencement and duration) of the agreement will need to be established and evidenced.
The layout of the land in relation to the type of dwelling will also be considered. The presence of:
- domestic outbuildings e.g. barns, storage areas, garages
- leisure areas, for sports and hobbies
- stables and paddocks for leisure use
all indicate that the land is garden or grounds to a dwelling and are therefore residential.
Proximity of the land to the dwelling will be taken into consideration but is not a determining factor.
The status of the land must be assessed at the effective date of the transaction but that does not mean that only the use on that day will be considered. The aim of the legislation is to capture the real or true relationship of the land to the building at the time the transaction takes place.
The habitual use of the land will therefore be taken into consideration, even if the land is sitting fallow at the effective date. This will take into account customary, continued and regular use. This use must also be for commercial, non-residential purposes.
Future use of the land is not relevant and the purchaser’s intentions for the land will not be taken into account if they are not in place at the effective date.
Where a building is in use for one of the following purposes:
- a home or other institution providing residential accommodation for children,
- a hall of residence for students in further or higher education,
- a home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of old age, disability, past or present dependence on alcohol or drugs or past or present mental disorder,
- a hospital or hospice,
- a prison or similar establishment,
- a hotel or inn or similar establishment
no account will be taken for its suitability for any other residential use and will therefore be a non-residential transaction.
Where a building is not in use but could be suitable for use for both residential and non-residential purposes as listed at Section 59(3) and Section 59(4), if there is one use which is more suitable to the property that is the deciding factor and the suitability to other uses is not considered. Otherwise, the building is to be treated as residential and suitable for use as a dwelling.
Where transactions include both residential and non-residential property the ADS applicable is attributable to the residential part of the transaction only. You must calculate the relevant chargeable consideration for this on the basis of a just and reasonable apportionment. Where the relevant chargeable consideration for an additional dwelling is £40,000 or more the ADS is applicable, this is calculated at a flat rate of 6% and added to the LBTT calculated on the mixed transaction at non-residential rates and bands.
For buildings containing areas used as a dwelling and areas used for business purposes, a distinction can be drawn between the scenario where certain rooms of a building that would otherwise be a dwelling are used for work purposes (an office at home) and the scenario where the building containing residential accommodation is divided into separate areas, one (or more) of which are adapted for use as commercial or business premises (e.g. a house which has been part converted into a surgery).
For a home office, the rooms used for office work will normally remain suitable for use as part of the dwelling and the building overall remains in use as a dwelling. Therefore, this is not mixed residential/non-residential property and would be subject to residential rates.
For further guidance see:
Green and Blue purchase a large country house which includes, stables, a tea room and a garden maze for £1,639,500. The stables, tea room and maze are ongoing commercial businesses which will continue under the ownership of Green and Blue. On the effective day of the transaction there are non-residential elements to the purchase therefore the whole transaction is treated as non-residential. There is no ADS as Green and Blue will be using the house as their main residence and selling their previous main residence on the same day (the effective date).
LBTT will be calculated at non-residential rates and bands:
Non-Residential Rates and bands
|Up to £150,000
|Nil rate band
|Above £150,000 to £250,000
Yellow buys a pub with a flat above. ADS will be due on the flat as this is an additional dwelling for Yellow. The total cost is £591,000. The chargeable considerations are calculated on a just and reasonable basis. Based on market value calculations, the chargeable consideration attributed to the pub is £392,000 and the flat is £199,000.
As this single purchase includes both residential and non-residential property it is a mixed use transaction, the LBTT due will be calculated at non-residential rates and bands:
Non-residential Rates and bands
|Up to £150,000
|Nil Rate band
|Above £150,000 to £250,000
|£100,000 x 1% = £1000
|£341,000 X 5% = £17,050
|ADS on £199,000
|Total LBTT due
Green Ltd acquires 8 flats with 2 ground floor shop units for £1,250,000. The chargeable consideration attributable to the shops is apportioned on a just and reasonable basis to be £250,000.
As this transaction involves the acquisition of six or more dwellings, relief for purchases of six or more dwellings will be available therefore Additional Dwelling Supplement (ADS) will not be included in any part of this calculation if the relief is claimed.
The amount of tax due in relation to the transaction is:
(DT x ND) + RT
DT is the tax due in relation to a dwelling
ND is the number of dwellings
RT is the tax due in relation to remaining property
Dwellings consideration is £1,000,000.
DT £1,000,000 / ND 8 = £125,000
Up to £145,000 Nil Rate Band £0.00
(DT x ND) in this case is zero.
Calculate the amount of tax that would be due in respect of the transaction in the absence of the relief.
The 8 flats and 2 shops £1,250,000 at non-residential rates.
Up to £150,000 Nil Rate Band £0.00
Above £150, 000 to £250,000 1% £100,000 x 1% = £1000
Above £250,000 5% £1,000,000 x 5% = £50,000
The total tax chargeable for the transaction, based on a chargeable consideration of £1,250,000 calculated at non-residential rates, is therefore £51,000.
Divide the consideration attributable to remaining property by the chargeable consideration for the transaction.
250,000 / 1,250,000 = 0.20
Multiply the amount calculated in step 1 by the figure reached in step 2.
£51,000 x 0.20 = £10,200 the tax due in relation to remaining property (RT).
Applying the minimum prescribed amount of tax to the part of the transaction relating to dwellings
Where DT x ND is less than the minimum prescribed amount, the amount of tax chargeable in relation to the relevant transaction is:
MPA + RT
MPA is the minimum prescribed amount
RT is the tax due in relation to remaining property
Calculating the minimum prescribed amount
The minimum prescribed amount (MPA) is 25% of:
TT – RT
TT is the amount of tax that would be due in respect of the transaction but for the relief; and RT is the tax due in relation to remaining property
Step 1 of ‘Calculation of RT’, the amount of tax that would be due in respect of the transaction but for the relief is £51,000. TT is therefore £51,000.
Step 3 of ‘Calculation of RT’, the amount of tax due in relation to remaining property, RT, is £10,200.
The minimum prescribed amount (MPA) is 25% of (£51,000 - £10,200) = £10,200
Because DT x ND (£0) is less than MPA, the amount of tax that is chargeable in relation to the transaction (after the application of multiple dwellings relief) is:
MPA (£10,200) + RT (£10,200) = £20,400