When is an annex a separate dwelling?

Purchasing “an interest in at least two dwellings” lowers the rate of stamp duty land tax (SDLT) that you will pay due to a relief known as multiple dwellings relief (MDR). As a result, purchasers are keen to claim this relief wherever possible and HMRC is keen to scrutinise claims. HMRC was recently successful in four cases, where the following buildings were not considered to be separate “dwellings”.

• Fiander v HMRC: an annex, comprising a sitting room, a kitchen/utility room, a bedroom and a shower room, connected to the main house by a corridor with “French doors”.
• George and George v HMRC: an annex, comprising of a bathroom and a bedroom, with a separate external entrance and a lockable internal door separating it from the main house (but no kitchen).
• Gordon and Margaret Morse v HMRC: a garage/studio with a bathroom, central heating, study and inbuilt storage.
• Lovell v HMRC: an extensive barn/studio with entertaining/office space, swimming pool, wash room (including shower and WC) and three sets of sliding doors.

There are some general principles that can be derived from the decisions, as follows.

1. Guidance provided by HMRC manuals is limited
   In George and George v HMRC both the taxpayer and HMRC referred to HMRC’s SDLT manuals in their arguments, but the judge concluded that the function of the manuals is to guide HMRC officers. The manuals do not inform the proper construction of statute.
2. Limited value of case law other than case law referring to SDLT provisions
   Poon J in George and George v HMRC, and Citron J in Lovell v HMRC and Gordon and Margaret Morse v HMRC, both refused to be guided by either Uratemp Ventures Limited v Collins (a case relating to the meaning of a dwelling in the context of security of tenure) or Carson Contractors Limited v HMRC (the meaning of dwelling for VAT purposes). The meaning of dwelling in the context of SDLT cannot be determined by reference to other pieces of legislation. The Upper Tribunal in Fiander v HMRC read the SDLT code purposively: MDR was introduced to promote the supply of private rented housing by reducing the amount of SDLT payable on a purchase of multiple dwellings.
3. The test is objective
   The question of whether individual occupants are prepared to live in a certain way does not satisfy the objective question of whether occupants generally would do so (Lovell). A dwelling can be suitable as a holiday let but not as a single dwelling (Morse). Two buildings together could be a single dwelling (Lovell).
4. Kitchens are essential?
   The quintessential character of a dwelling is residential (George and George). The presumption is that basic domestic needs include the need to prepare food. Citron J commented in Morse that restaurants and takeaways could alleviate this requirement. But in Morse (set in rural Somerset) and in Lovell (rural Essex) it was unreasonable to expect an individual to “make do”. Perhaps Citron J has had poor experiences trying to get a takeaway outside London. A kitchen is more than electrical appliances and gadgetry – water supply, areas for preparing food and hygienic surfaces are all requisites. The ability to convert an area is insufficient. 

HMRC is aware of companies which offer recent buyers the chance to obtain an SDLT refund where there is an argument that MDR should apply. As HMRC points out, the application may well be processed (leading to the return of SDLT and a success fee to the agent) before it is checked. But if deemed incorrect when checked, the taxpayer would need to repay the refund as well as pay interest and (potentially) penalties. Claim MDR with caution.

"The capacity or potential to have a fitted kitchen is not relevant” (George and George v HMRC)