Judgment summary
This appeal concerned the SDLT treatment of a property at 59 Fitzjohns Avenue, Hampstead, purchased by Inngrays Limited on 29 May 2024 for £7,750,000 (8).
The property comprised five flats and an electrical substation occupied by London Power Networks plc under a 20 year lease (9, 12, 14). The dispute was whether the land occupied by the substation formed part of the garden or grounds of the dwelling within section 116(1)(b) Finance Act 2003, which would make the property wholly residential, or whether it was non-residential, making the property mixed-use for SDLT purposes (1, 2, 29).
The Tribunal applied the multi-factorial test derived from the authorities, including Hyman, 39 Fitzjohns and Suterwalla, and concluded that the substation performed a self-standing commercial function separate from and unconnected with the dwelling (57). The Tribunal therefore found that the substation land was not part of the garden or grounds and allowed the appeal (58, 59).
Background
Inngrays Limited purchased the Property, a substantial semi-detached period building arranged as five flats, on 29 May 2024, with contract, completion and the effective date of the transaction all falling on that date (8). Four flats were subject to assured shorthold tenancies and the fifth was vacant; it was not disputed that each flat was used or suitable for use as a dwelling (9, 10).
The Property included land to the rear occupied by an electrical substation, a key facility within the electricity distribution network, held under a separate registered leasehold title (NGL970777) and concealed at the side and rear by a large tree and bushes (12). The land had previously been demised to the London Electricity Board under a 1963 lease for 40 years, and the Tribunal found it more likely than not that the land had been separately occupied for electricity distribution purposes since at least 1963 (13).
The current lease, granted to London Power Networks plc, gave LPN exclusive possession for a 20 year term from 24 June 2010, at an initial annual rent of £1,000 plus VAT rising to £1,250 plus VAT from 24 June 2015, and permitted use only as an electrical transformer substation (14, 15). The landlord's right of re-entry was limited to material breach of covenant following notice and an opportunity to remedy (17). The freehold title expressly recorded that it was subject to the Substation Lease, and the Appellant purchased the Property subject to the existing tenancies and the Substation Lease (18, 19).
On 11 June 2024 the Appellant submitted an SDLT return treating the acquisition as mixed-use, claiming Multiple Dwellings Relief and paying SDLT of £377,000; Multiple Dwellings Relief was not in dispute in this appeal (20). Following an enquiry, HMRC concluded that the Property was wholly residential property and issued a closure notice assessing additional SDLT of £341,750 (21).
Core dispute
The issue for determination was whether, at the effective date of the transaction, the land demised by the Substation Lease formed part of the garden or grounds of the dwelling within section 116(1)(b) Finance Act 2003 (29). If it did, the Property was entirely residential property; if it did not, the Property included non-residential property and the transaction was mixed-use (29).
The difference between the higher rate SDLT payable if the Property was wholly residential and the lower rate payable if it was mixed-use was £341,750, which was the amount in dispute (3). The burden of proof lay on the Appellant, to the civil standard of balance of probabilities, to establish that the Substation did not form part of the garden or grounds of the dwelling (30).
The Appellant submitted that the Substation was used for a purpose separate from and unconnected with the flats, that the owner was excluded from access except in the event of an unremedied material breach, and that the Substation served a commercial purpose distinguishable from cases such as Faiers, Bloom and 39 Fitzjohns (36-39). HMRC submitted that neither third-party rights nor commercial use were, without more, determinative, that the Substation was contiguous with the surrounding land and formed part of a coherent residential curtilage, and relied in particular on Faiers (40-44).
Court findings
The Tribunal accepted that the existence of third-party rights does not necessarily prevent land from constituting grounds, and that commercial use by a third party is not of itself conclusive (46). However, it found that the present case went materially further than the examples in the authorities relied upon by HMRC (47).
The Tribunal found that the land occupied by the Substation had been separately occupied for electricity distribution purposes since at least 1963, that the landlord was excluded from possession and use save for very limited re-entry rights, and that the occupiers of the flats had no rights over it at all, describing this as "a case of complete exclusion" rather than limited intrusion (48).
The Tribunal distinguished Faiers and Bloom on the basis that in those cases the utility infrastructure was overhead or underground and the affected land remained available for the same use as the surrounding grounds, whereas the Substation was a separate building occupying a defined area and preventing any residential use of that area (49). It also distinguished 39 Fitzjohns, noting that in that case the ventilation shaft itself was excluded from the land acquired, whereas here the Substation itself formed part of the Property acquired by the Appellant (50, 51).
Applying the principle from Myles-Till v HMRC that land must function as an appendage to the dwelling rather than have a self-standing function to constitute grounds, the Tribunal found that the Substation did not support the use of the flats as dwellings and performed a distinct and self-standing function as part of a wider electricity distribution undertaking incompatible with residence (52). The Tribunal considered the facts closer to the quarrying example in Harjono & Santosa than to the grazing, cable or septic-tank examples relied upon by HMRC (55).
Taking all relevant factors into account, the Tribunal concluded that the Substation had a self-standing commercial function separate from, and unconnected with, the use of the flats as dwellings, and did not form part of the grounds of the Property for the purposes of section 116(1)(b) (57).
Outcome
The Tribunal concluded that the transaction included land that was not residential property, so the acquisition was a mixed-use transaction for SDLT purposes (58). The appeal was allowed (59).
Major issues / areas of contention
- Whether land occupied by an electrical substation under a 20 year lease formed part of the garden or grounds of a dwelling within section 116(1)(b) Finance Act 2003.
- Whether the Property was wholly residential property or mixed-use property for SDLT purposes.
- Application of the multi-factorial test derived from Hyman, 39 Fitzjohns and Suterwalla to determine the character of land subject to third-party commercial occupation.
- Whether the Substation's long-standing separate occupation since at least 1963 and exclusive lease to LPN meant it performed a self-standing commercial function unconnected with the dwelling.
- Distinguishing the facts from Faiers, Bloom and 39 Fitzjohns, where utility infrastructure did not change the character of the surrounding land.
- Whether the £341,750 difference in SDLT between residential and mixed-use rates was properly assessed by HMRC's closure notice.