You might think the difference between a residential and a non-residential property would be obvious. By its nature, the farmhouse is different from the field and the cottage different from the cowshed.
However it’s important to be aware that Revenue Scotland, the tax authority in Scotland, has a close interest in your answer to this question. And for good reason: purchasers of non-residential property pay a lower rate of Land and Buildings Transaction Tax (‘LBTT’) than those buying residential property. While the difference may seem small percentage wise, it can equate to thousands of pounds on some transactions.
For many properties their nature will be clear. Usually operational farm land will be non-residential, while cottages will be residential. However Revenue Scotland will focus in particular on what are known as ‘mixed transactions’.
These are transactions that include both residential (farmhouse, cottage, etc.) and non-residential elements (fields, forests, etc.). By law, where truly ‘mixed’, these are taxed at the lower non-residential rates. However, Revenue Scotland is challenging some transactions as being incorrectly classified as having ‘non-residential elements’, leading to lower LBTT being paid.
The main area of contention appears to be with the classification of gardens, grounds, outbuildings and others that serve or benefit residential property. Where any of these elements are ‘non-residential’ in nature, the lower rate of LBTT is applied to the whole property. However this is not as simple as it seems, and establishing this can quickly get technical.
For tax purposes, while a garden may not be residential by nature, if that garden exists for the benefit of the residential property, then it is deemed to be a part of that residential property. The same can apply to any outbuildings or other types of landholding.
Consider an orchard, for example: if the apples are grown for the benefit of those in the adjoining cottage then it will almost certainly be the case that the orchard will be deemed to be part of the residential property. However what if the apples were grown and sold to the local cider maker? What if some of the apples were sold, and some retained? Do these scenarios mean a purchaser should pay the lower rate of LBTT?
As you can imagine, this can result in many grey areas especially as it is the position at the point of completion that is relevant, not what the buyer intends to do with it.
While guidance from Revenue Scotland on all of this is limited (at least compared to down south), we do now have one relevant recent Tax Tribunal ruling to consider.
In that case Mr and Mrs Sloss purchased an estate extending to 28 hectares, around 65% of which was let to a farmer for grazing. The couple paid tax based on the entire estate being residential in nature. A question then arose as to whether their purchase should have, in fact, been treated as ‘non-residential’, given the inclusion of agricultural land.
In its judgement the Tribunal ruled that the fact that the land was agricultural was not inconstant with a property being residential. However, when looking at the other factors involved, such as the fact that the fields being grazed were (for the most part) not visible from the house, and that the fields had very little functional purpose for a house of that nature (the house had separate formal gardens), they found these elements sufficient to make the whole property ‘non-residential’ at the time of Mr and Mrs Sloss’ purchase. Further, even although no rent was being paid for the grazings, it was still commercial to the extent Mr and Mrs Sloss were gaining a benefit for the fields being looked after by their tenant. A reassessment of an overpayment of tax was therefore allowed.
As you can imagine, every property will have its own dynamics and each case its own facts and circumstances. These should be weighed up carefully, with input from your tax advisor. If you’re purchasing mixed property, records should be kept as to why you reached a conclusion one way or another. Tax investigation insurance may also be available to cover professional fees, should Revenue Scotland launch an investigation into the position.
One final point to consider. Mr and Mrs Sloss’s situation came to light some time after their purchase had completed and the tax paid. To flag; it is possible to revisit transactions where you believe too much LBTT has been paid, and challenge the same within certain time limits. One of our property tax experts would be happy to discuss the same, if you believe this to be the case.
You may also be interested in the following articles: