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Do lower rates of Land and Building Transaction Tax apply when purchasing a derelict building?

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Category: News
16 August 2019
To understand whether Land and Building Transaction Tax is payable on a purchase of a derelict building, one first needs to understand the definition of “residential property”.  This is described in the Land and Building Transaction Tax (Scotland) Act 2013 as:-

a.    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.
b.    Land that is, or forms part of, the garden grounds of a residential building and
c.    An interest in, or right over, land that subsists for the benefit of a residential building.

Residential property transactions, generally speaking, attract a higher rate of tax than non-residential transactions and are subject to an additional charge for individuals who own more than one residential property, (or for purchasers who are companies).  So, bearing this in mind, what are the tax consequences of purchasing a derelict property?  

Helpfully, guidance can be taken from a recent case of PN Bewely Ltd-v-HM Revenue & Customs 2019.  In this case a company purchased a derelict bungalow which had lain empty for 3 years prior to purchase.  It was in a significant state of dilapidation, having had its floorboards and heating system removed and suffered a substantial asbestos problem.  Safe restoration was not possible and as such the purchasers intended to demolish the same and replace it with a brand new dwelling.  After the purchase had concluded there was a debate as to how much tax should have been paid and the dispute resolved around the question of whether the property could be classed as a residential property or not. 

Whilst HM Revenue and Customs argued that a property is still a residential dwelling notwithstanding the fact that it has become dilapidated (as it could be brought back to use as a dwellinghouse), the purchasers argued that the property did not meet the criteria of being “suitable for use as a dwelling”, as it was in an uninhabitable condition. 

Interestingly, the purchaser’s argument was upheld and it was decided that the property should not be classed as a residential property and as such a lower rate of tax should have been applied to the purchase. 

The important factor appears to be whether a building is suitable for use as a dwelling at the point in which Land and Building Transaction Tax is payable – i.e. at the date of the purchase.  This appears to suggest that a purchaser’s intention and the question of whether a property could be renovated to bring the property back to a habitable condition is irrelevant. 

It is important to bear in mind that each transaction is reviewed on its own merits and detailed evidence of the condition of the property must be obtained to support a claim for lower tax in such circumstances.

If you would like further advice on this area of law, one of our experienced residential conveyancing team would be happy to assist you further.    

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