When a property is treated as ‘uninhabitable’ for SDLT purposes: And why it matters

Sarah Bradford examines when HMRC will accept that a property is uninhabitable and the findings of the tribunal in the Mudan case. 

There are different rates of stamp duty land tax (SDLT) for residential properties and for non-residential and mixed properties. In addition, a supplement of 5% applies to the purchase of second and subsequent residential properties. The addition of the supplement can make buying residential properties for investment (for example, as a buy-to-let) expensive. By contrast, there is no supplement on the non-residential rates.  

Consequently, there may be significant cost savings to be had if the non-residential or mixed rates apply rather than the residential rates. 

Residential rates and non-residential SDLT rates 

The residential rates applying now and from 1 April 2025 are shown in the tables below. 

31 October 2024 to 31 March 2025 

The SDLT threshold reverts to £125,000 with effect from 1 April 2025. The residential rates applying from that date are as follows: 

A higher threshold applies to first-time buyers. Prior to 1 April 2025, first-time buyers buying a property costing no more than £625,000 pay nothing on the first £425,000 and 5% on the remainder. From 1 April 2025, first-time buyers buying a property costing no more than £500,000 pay nothing on the first £300,000 and 5% on the remainder. 

For non-residential properties, no SDLT is payable on the first £150,000. Thereafter, it is payable at 2% on the next £100,000 and at 5% on the balance. There is no supplement where the individual has multiple non-residential properties. The non-residential rates also apply to mixed property (e.g., a shop with a flat above).  

The legislation defines a residential property as: 

1. 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; 

2. land that is or forms part of the garden or grounds of 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; or 

3. an interest or right over land that subsists for the benefit of a building within (a) above or land within (b) above. 

Non-residential property is property that is not residential property. 

Derelict properties 

The residential rates only apply where a property is being used at or is suitable for use as a dwelling or is in the process of being constructed or adapted for such use. The test is applied at the completion date.  

Where a property is not suitable or used as a dwelling, the residential rates do not apply. This would be the case where the state of the property is such that it is regarded as uninhabitable. The SDLT ‘hit’ on a second or subsequent residential property can be significant.  

For example, on a property costing £500,000 the SDLT hit is £37,500 where completion is before 1 April 2025, rising to £40,000 where completion is on or after that date. By contrast, the SDLT payable at the non-residential rates is only £14,500, a saving of at least £23,000 depending on the completion date.  

The potential savings make the idea of buying a derelict property and doing it up seem attractive. However, this really is a case of ‘buyer beware’ as what an investor may consider to be an uninhabitable property and what HMRC may accept as one may be very different. HMRC receives a high number of repayment claims on the basis that a refund is due where SDLT was paid at the residential rate but the property is not suitable for use as a dwelling. However, a high proportion of these claims – around 95% – are rejected.  

HMRC takes the view that a property will only have deteriorated or been damaged to the extent that it no longer comprises a dwelling in a small minority of cases. A property will be considered ‘not suitable for use as a dwelling’ (also referred to as ‘uninhabitable’) only when the damage is so significant that normal repair work, replacement or modernisation cannot resolve the issue. A clear distinction is drawn between a property that is derelict and one that is in need of modernisation, renovation or repairs. HMRC takes the view that if a property has been used as a dwelling at some point previously, it is fundamentally capable of being used as a dwelling again where there are no structural defects that would render occupation as such dangerous. While an investor may consider it to be uninhabitable if it is in a poor state of repairs with dated décor and fitting, HMRC would not agree. More specifically, in its guidance, it provides the following non-exhaustive list of renovations and issues that will not make a property unsuitable for use as a dwelling: 

• the temporary removal of the bathroom or kitchen before sale; 

• the need for substantial repairs to windows, floors or a roof; 

• the need for a replacement boiler or pipework; 

• unsafe electrical wiring; 

• the need to reconnect services; 

• an infestation of pests; 

• the need for damp-proofing or plasterboard repair; or 

• flood damage. 

HMRC regards these as common issues which can be rectified quickly, rather than structural changes that mean that the building is no longer suitable for use as a dwelling.  

The Mudan case 

The Upper Tribunal case Mudan (Amarjeet Mudan and Tajinder Mudan [2024] UKUT 00307 (TCC)) concerned whether a building which had previously been used as a dwelling and which was in need of renovation and repair at the time of purchase was ‘suitable for use as a single dwelling’.  

At the time of purchase, SDLT was paid on the basis that it was a residential property. A refund was subsequently claimed on the basis that SDLT should have been applied at the non-residential rates on the basis that the property was not suitable for occupation as a dwelling. The taxpayer contended that work needed to be done to make the property a safe place to live, as opposed to a pleasant place to live. This included rewiring and other electrical work, a new boiler, water pumps and pipes, a new roof, repairs to broken windows, new pipework and tanking of the basement due to flooding, removal of the kitchen to get rid of a bad smell and vermin, and the removal of lots of rubbish. 

The First-tier Tribunal found that despite the fact that the property was not in a state that a reasonable buyer might be expected to move in straight away, it was capable of use as a dwelling. It had been recently used as such and was structurally sound. On appeal, the Upper Tribunal also found for HMRC, concluding that the property was suitable for use as a dwelling and liable to the residential rates of HMRC.  

The following findings are worthy of note. 

1. Being suitable for ‘use as a dwelling’ is not the same thing as a property being ready for immediate occupation. 

2. It is necessary to assess the extent to which the building has the fundamental characteristics of a dwelling and is structurally sound. 

3. If a property has previously been used as a dwelling, this will be relevant in considering whether it is suitable for use as a dwelling.  

4. The question to consider is whether the works or repair and renovation are such that the building no longer has the characteristics of a dwelling. 

Practical tip 

Before being tempted to buy an investment property that needs a lot of work on the basis that the non-residential rates of SDLT will apply, check very carefully that the level of damage or deterioration is sufficient to pass HMRC’s test of an ‘uninhabitable property’.