Jonathan Ralph v The Commissioners for HMRC

Mr Cannon for the Appellant argued that the Annexe was “suitable for use as a single dwelling” within the meaning of paragraph 7(2)(a) at the date of completion.

Mr Cannon relied upon the Upper Tribunal decision in Fiander and Brower v HMRC [2021] UKUT 0156 (TCC):

“48.

We must therefore interpret the phrase giving the language used its normal meaning and taking into account its context. Adopting that approach, we make the following observations as to the meaning of “suitable for use as a single dwelling”:

(1)

The word “suitable” implies that the property must be appropriate or fit for use as a single dwelling. It is not enough if it is capable of being made appropriate or fit for such use by adaptations or alterations. That conclusion follows in our view from the natural meaning of the word “suitable”, but also finds contextual support in two respects. First, paragraph 7(2)(b) provides that a dwelling is also a single dwelling if “it is in the process of being constructed or adapted” for use as single dwelling. So, the draftsman has contemplated a situation where a property requires change, and has extended the definition (only) to a situation where the process of such construction or adaption has already begun. This strongly implies that a property is not suitable for use within paragraph 7(2)(a) if it merely has the capacity or potential with adaptations to achieve that status. Second, SDLT being a tax on chargeable transactions, the status of a property must be ascertained at the effective date of the transaction, defined in most cases (by section 119 FA 2003) as completion. So, the question of whether the property is suitable for use as a single dwelling falls to be determined by the physical attributes of the property as they exist at the effective date, not as they might or could be. A caveat to the preceding analysis is that a property may be in a state of disrepair and nevertheless be suitable for use as either a dwelling or a single dwelling if it requires some repair or renovation; that is a question of degree for assessment by the FTT.

(2)

The word “dwelling” describes a place suitable for residential accommodation which can provide the occupant with facilities for basic domestic living needs. Those basic needs include the need to sleep and to attend to personal and hygiene needs. The question of the extent to which they necessarily include the need to prepare food should be dealt with in an appeal where that issue is material.” [Appellant’s emphasis]

Mr Cannon relied upon the highlighted comments by the Upper Tribunal at [48(1)] that improvement works were tantamount to “renovation” and should be seen in the same light. On that basis it was open to the Tribunal should treat the Annexe as having been renovated by the carrying out of the alterations.

Mr Cannon also relied upon the Upper Tribunal’s comments at [48(2)] that having facilities for the preparation of food was not necessarily essential for a finding that the property was suitable for use as a dwelling, but a matter for evaluation by this Tribunal.

When the Appellant visited the Property before buying, the Annexe had been used by the previous owner’s son and the Appellant saw a microwave, kettle, toaster, fridge, dustbin, server table, kitchen table and a bench. According to the Appellant, the only things missing was an oven, hob and high voltage power connection.

The Appellant argued that the definition of cooking facilities should move with the times and there were modern alternatives to traditional cookers that required high voltage electrical connections, particularly as people have different approaches to cooking, driven by societal changes such as cost of living, environmental concerns and so on. Further, traditional oil and woodburning Agas and other woodburning stoves did not require high-voltage electrical supplies. The Appellant produced in support evidence from Pinterest of stove less kitchens.

The Appellant also argued that many people eat out or have food delivered and if they do cook it can be without using a cooker. Indeed, the Appellant and his family did so during the 6 months they lived in the Annexe.

There were therefore sufficient kitchen facilities as at completion to meet a contemporary and objective observer’s requirement for food preparation and eating facilities.

The absence of a sink was not an issue, the owner’s son had used the basin in the bathroom.

The Annexe was eminently sellable, or lettable as a holiday let in the state it was at completion as holiday makers often do not require full kitchen facilities.

The Appellant also argued that the lack of separate utility meters, postal address, council tax registration and separate land registry title were of little or no weight in the context of a building in the nature of the Annexe (Judge Citron at [69] in Fiander in this Tribunal [2020] UKFTT 190 (TC))

Mr Jones for HMRC also relied on paragraph [48] in the Upper Tribunal’s decision in Fiander when considering the meaning of the term “suitable for use as a single dwelling” and extracted the following principles–

Consideration must be given as to how many dwellings an objective observer would consider there to be and ‘objective observer’ is defined at [51] of this Tribunal’s decision in Fiander:

“51.

We approach “suitability for use” as an objective determination to be made on the basis of the physical attributes of the property at the relevant time. Suitability for a given use is to be adjudged from the perspective of a reasonable person observing the physical attributes of the property at the time of the transaction”.

This summary of the test was endorsed by the Upper Tribunal in Fiander:

“62.

We agree with the FTT’s statement at [51] of its decision that suitability for use as single dwelling is an objective determination to be made on the basis of the physical attributes of the property at the relevant time, namely completion. It therefore follows that the property’s past history - which is the subject-matter of the additional evidence - is of limited relevance to suitability for use as at completion”

HMRC argued that in the current appeal the Annexe was not suitable for use as a dwelling at the point of completion, for two principal reasons:

Mr Jones accepted that, as set out in HMRC’s internal manual at SDLTM00210, there need not be a cooker, oven, hob or other white goods in the property at completion as these are often removed but there should be the necessary infrastructure:

“Kitchen – A dwelling would be expected to have an area where a meal can be prepared and somewhere suitable to eat it (not necessarily in the same place). It is not necessary for a kitchen to have a cooker or white goods such as a fridge or dishwater present at the effective date of the transaction, because these are sometimes removed on a house sale. However, there should be space and infrastructure in place e.g. plumbing for sink, power source for cooker etc.”

HMRC also referenced the comment in the marketing brochure that the Annexe could be converted to a self-contained flat, indicating that the agents did not believe it was at the time.

HMRC referenced decisions of this Tribunal where the absence of kitchen facilities was significant (Lovell v Revenue & Customs [2021] UKFTT 291 (TC) at [48], Mobey v Revenue and Customs [2021] UKFTT 122 (TC) at [106]). The test was not a “one size fits all”, but presence or absence of kitchen facilities was an important factor in deciding whether a property was a suitable for use as a dwelling.

Use as a holiday home, AirBnB lettings or other temporary use is not the appropriate test (Dower & Anor [2022] UKFTT 170 (TC) at [53(6)], [54] and [55]).

Further, the lack of a separate utility meter, postal address, title number at the Land Registry or Council Tax billing was a “reliable indicator” that the Annexe was not suitable for use as a dwelling (Dower at [56]).

In considering the test in paragraph 7(2)(a) as to whether a building is “suitable for use as a single dwelling” we take as a starting point the principles set out by the Upper Tribunal in Fiander. Thus,the test must be determined from the perspective of a reasonable objective observer and is to be applied as at the effective date. Each case is to be determined on its facts, applying the multi-factorial test of weighing all the facts and circumstances.

In applying paragraph 7(2)(a) we do not accept Mr Cannon’s attempt to extend the Upper Tribunal’s observations in Fiander at [48(1)] about properties in disrepair to include improvement works. A dwelling in disrepair is a different situation to a property that, absent alteration works, is not a dwelling. To hold otherwise and permit potential improvement works to be taken into account would be to elide the tests in paragraphs 7(2)(a) and (b) and undermine the construction applied by the Upper Tribunal that it is not enough for the building to be “capable of being made appropriate or fit for such use by adaptations or alterations”.

Further, we do not, as suggested by Mr Cannon, read anything significant into the Upper Tribunal’s observations in Fiander at [48(2)] that the extent to which the test in paragraph 7(2)(a) required basic domestic living needs included the need to prepare food should be dealt with in an appeal where that issue is material. Specifically, we do not take these comments as a steer or endorsement by the Upper Tribunal of an argument that a property should be considered suitable for use as a dwelling even if it did not have the facilities for preparing food.

In this appeal the effective date is completion on 4 December 2020. We note that the property had been used by the previous owner’s son before completion but we do not find that to be particularly significant, particularly as the occupier had been a close family member occupying in unusual circumstances and on a temporary basis.

Further, in determining whether the test in paragraph 7(2)(a) is satisfied, we do not find it relevant that the Appellant had ordered household goods, kitchen units and appliances prior to completion or that the household goods had been delivered to the Annexe prior to completion. Further, we do not find it relevant that the Appellant had contracted with a kitchen fitter to install the kitchen. The test is the state of the property as at completion and those goods did not change the nature of the Annexe until after completion.

The principal debate in this appeal has been whether and to what extent there needs to be facilities for the preparation of food. However, that question must be answered in the context of all the other relevant factors.

In our view a reasonable objective observer would consider the following features present at completion to points towards the Annexe being suitable for use as a dwelling:

However, the reasonable observer would consider the following features to indicate the Annexe was not suitable for use as a dwelling:

In our view a reasonable observer would consider the presence of kitchen facilities - being those features listed at paragraph 82(1)-(4) above - as an important factor in determining whether the Annexe suitable for use as a dwelling.

The Appellant argued that the test as to what is suitable for use as a dwelling should adapt as modern habits change and, for a number of reasons, people now did not use conventional cookers as much. The Appellant made much of how his family and visitors had not used the oven and hob because they used the convection microwave, ate out or ordered takeaways. Further they did not use the washing machine in the Annexe as they sent their washing out to a laundry. Any washing of dishes was done in the sink in the bathroom.

We accept that the Appellant’s family lifestyle and that of visitors using the Annexe on a temporary basis did not require the use of a conventional cooker or a washing machine but the test is that of occupants in general and whether viewed objectively they would find the property suitable for use as a dwelling. We do not accept that the Appellant’s family lifestyle is representative of occupants in general who would, on an ongoing basis require more than a convection microwave for cooking and washing up in a hand basin in the bathroom.

We do accept as does HMRC, that it is not necessary for the property to have installed at the property on the effective date the conventional white goods of cooker (or hob and oven), fridge, washing machine and so on. Nor is it necessary for the property to have fixed worksurfaces and storage of the kind subsequently fitted by the Appellant as they can be freestanding and still serve the same purpose. White goods and loose tables will often be retained by the seller.

Nevertheless, the main room in the Annexe was essentially empty at completion. Aside from lights in the ceiling, normal power points and central heating radiators there were no other electrical or plumbing connections. Without carrying out works, an occupier could not connect and use a conventional cooker, oven, hob, washing machine or dishwasher. Further without carrying out plumbing works, an occupier could not install a sink for washing food and dishes.

In our view an objective observer would conclude that this lack of minimum infrastructure weighs heavily against the Annexe being suitable for use as a dwelling. The lack of plumbing and electrical connections for dishwashers and washing machines would also point towards an objective observer considering the property was not suitable for use as a dwelling.

We find that the lack of a separate utility meter, postal address, title number at the Land Registry or Council Tax billing, whilst of less significance pointed towards the Annexe not being suitable for use as a dwelling.

For the above reasons we do not accept that the Annexe as at completion satisfied the test in paragraph 7(2)(a) of being a building that is “suitable for use as a single dwelling”.

The Appellant argued in the alternative that the Annexe at the effective date was “in the process of being…adapted for [use as a single dwelling]” within paragraph 7(2)(b).

The Appellant gave evidence as to the alterations made by the Appellant to the first floor of the Annexe which we have set out above.

Addressing the point that the works were only physically commenced after completion, the Appellant relied on comments in the Upper Tribunal in Ladson Preston and Anor v HMRC [2022] UKUT 310 (TCC) at [62] to [64] and specifically:

“62.

…The chargeable interest that AKA acquired was the chargeable interest as it stood at the very time of completion. That conclusion depends, not on any definition of “effective date” but on an analysis of the nature of the chargeable interest acquired which is required by paragraph 2(2) of Schedule 6B.

63.

…In the circumstances of this appeal, where the effective date is the date of completion, the FTT made no error of law in concluding that it should apply the requirements of paragraph 2(2) of Schedule 6B by reference to the chargeable interest as it stood at the time of completion, that being the chargeable interest that AKA acquired.

64.

In those circumstances, we see no reason to express any conclusion on whether the works undertaken after completion were, as a matter of evaluation, capable of satisfying the requirements of paragraph 7(2)(b) of Schedule 6B. The FTT, rightly in our judgment, saw no need to express any such conclusion and we do not consider that it would be right for the first evaluative conclusion on those works to come from an appellate tribunal such as us in the absence of an error of law by the FTT.”

It was therefore a matter of evaluation for each Tribunal as to whether works undertaken after completion were capable of satisfying the requirements of paragraph 7(2)(b).

In the current circumstances, the Appellant’s strenuous efforts before completion are sufficient to satisfy the test in paragraph 7(2)(b). It was only Covid that prevented the alterations from being carried out before completion. Unlike the facts in Fiander, there was already a building and the Appellant was in the course of adapting it at completion.

Mr Jones argued that it was a condition of the test in paragraph 7(2)(b) that the adaptation had commenced had to be satisfied as at the effective date, being completion (Fiander at [48]).

HMRC relied upon the Upper Tribunal in Ladson Preston at [38], which concerned the construction of a building but the same principle applied to adaptation of an existing building:

“38.

When paragraph 7(2)(b) is considered in its proper context, there is a clear indication that it is referring to some physical manifestation of a dwelling on the relevant land...in our judgement, a “building” can only be said to be “in the process of being constructed” if there is some physical manifestation of what is ultimately to become that “building”. Without such a physical manifestation, there might well be an intention to construct a future building, perhaps even a firm intention, but no building that is in the process of being constructed”

Mr Jones also made some observations about the practicalities of self-assessment. If the SDLT liability depended on future works yet to be started it made self-assessment, and HMRC’s oversight of compliance, impossible.

In the current appeal as the installation works did not commence until 7 December 2020 and the purchase of goods and other preparatory work before completion did not amount to commencing the adaptation, it cannot be said that at the effective date the Annexe was “in the process of being…adapted for [use as a dwelling]” within paragraph 7(2)(b).

The test in paragraph 7(2)(b) is to be applied as at the effective date, here completion on 4 December 2020 (Fiander at [48], Ladson Preston at [63]).

Even if, following completion of the alterations in December 2020, the Annexe was a dwelling within the meaning of paragraph 7, we do not accept that “in the process of being…adapted” encompasses the steps taken by the Appellant as at completion. The Appellant had bought the kitchen units and appliances and he had contracted with a kitchen fitter to install the kitchen. However, the alterations had not started and we agree with HMRC and the Upper Tribunal in Ladson Preston at [38] that “in the process of being…adapted” requires physical works to have started. We accept that the question would be more difficult had the Appellant’s fitter had made a nominal start on works but that is not the case in this appeal.

We do not accept that the delays caused by Covid, most importantly the inability to access the Annexe between exchange and completion changes the matter. Covid may be a very good reason for the delay but we have to determine the matter on the facts as they are not how the Appellant intended them to be.

For the reasons set out above we find that the Annexe is not suitable for use as a single dwelling within the meaning of paragraph 7(2)(a) nor is it in the process of being adapted for such use within paragraph 7(2)(b) Schedule 6B. We therefore find that the purchase of the Property is not within Schedule 6B Finance Act 2003 as the main subject-matter does not consist of an interest in at least two dwellings.

Accordingly, we dismiss the Appellant’s appeal.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.