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In November 2021, the Government published a consultation exploring changes to the way in which SDLT is charged on mixed-use properties. The consultation ran until 22 February 2022.

The current rules for taxing mixed-use property can lead to distortions as the commercial property rates apply regardless of the extent of the residential element. Consequently, a property with a very small non-residential element will pay SDLT at the lower commercial rates. The savings as against the residential rates can be significant, particularly where the additional dwellings supplement would apply were the property fully residential.

To address attempts to exploit the mixed-use property SDLT rules, the consultation sought views on the introduction of an apportionment basis for mixed-use property. Under the proposed rules,  purchasers would be required to apportion the tax for a property such that SDLT at the residential rates would be charged on residential land and SDLT at the commercial rates would be charged on the non-residential land. The consultation document contains the following explanation of how this would work.

‘This would be done firstly by working out the proportions of the whole consideration relating to residential and non-residential property elements. Tax would then be calculated on the assumption that the whole consideration was for residential property, and again separately on the assumption that the whole consideration was for non-residential property. The two tax figures produced would then be reduced by the proportions of the whole consideration relating to residential and non -residential property elements. Finally, the reduced tax figures would be added together to get the final tax bill.’

Example

Toby purchases a property for £1 million that includes grazing land which is commercially let to a third party for the grazing of horses. The additional dwellings supplement does not apply.

The grazing land accounts for 5% of the value of the property.

Under the proposed apportionment rule, the SDLT would be calculated as follows:

  1. SDLT on the whole at the residential rates = £43,750
  2. SDLT at commercial rates = £39,500
  3. Apportionment calculations (£43,750 @ 95%) + (£39,500 @ 5%) = £43,537.50.

The SDLT under the proposed rules is £4,037.50 more than under the current rules.