SDLT – how commercial is ‘commercial’?

The facts

The Fergusons purchased a property worth £4.25 million, consisting of 4.3 acres which included an eight-bedroom house, garden and grounds, outbuildings, swimming pool, tennis court and a paddock.

The paddock was about 0.4 acres, that on three sides was surrounded by other parts of the property, with one short side on the perimeter next to a livery business. Access to the paddock was through a gate within the property. It was let to a livery business, which used the paddock under arrangements with successive owners.

Mixed use or residential?

Mr and Mrs Ferguson submitted their SDLT return on the basis the property was mixed use. HMRC considered it was wholly residential.

The Fergusons appealed and said the paddock was “functionally separate from the house and integral to the livery business”. HMRC said it formed part of the dwelling within the definition in the Finance Act 2003, s 116(1)(b) and was “contiguous with the gardens”. Grazing horses was a normal use of a paddock and consistent with residential character. The licence was a “bargain of convenience” to maintain the land rather than for separate commercial exploitation.

It must be stressed here that 0.4 acres is small compared to the total acreage and as a commercial let. It is generally considered that on ratio of land to horses, it should be one acre to support one horse. Obviously, it varies with how the land is used and whether the livery yard is used just as ‘turnout’ for fresh air or to support the horse with grazing.

Tribunal decision

The FTT took a multi-factorial approach to grounds. It noted the paddock “could only be reached across the residential grounds”, so the “practical reality” connected the paddock to the dwelling and its grounds. The judge said: “The absence of independent access from the livery stables is inconsistent with the paddock having its own separate, self-standing function divorced from the house.”

For those advisers looking at future claims, this is a key factor – how separate is the commercial area and how commercial is ‘commercial’?

It noted that the property was sold with vacant possession and Mr and Mrs Ferguson were not obliged to permit the licensees to continue to use the paddock.

The tribunal concluded that it was clear the paddock was part of the grounds belonging to the property. The paddock was intended to be used for grazing horses – this was the “paradigm use of a paddock”. The existence of a grazing licence and of extended use by a third party for that very purpose did not render it any less a part of the grounds of the property.

Key takeaways

The tribunal echoed the “slightly exasperated tone” of the tribunal in Jessica Harjono v HMRC [2024] (TC9107) in relation to the “succession of cases which seek to argue that renting out a paddock for use as a paddock somehow alters its identity”. It quoted the judge’s description of the word ‘commercial’ as a “weasel word” where it was “increasingly being asserted that any letting of part of a property for a market rent is commercial and, as if by magic, the land leaves the residential pot and turns up in the mixed-use pot”.

The quote from the 2024 Harjono case was that:

“in mixed use situations it is increasingly being ascertained that any letting of any part of a property for market rent is commercial and, as if by magic, the land leaves the residential pot. When looking at the use to which land is put, simply inserting some form of ‘commercial’ agreement between a landowner and a third party does not, of itself, generate a use which is of significant weight in the multifactorial evaluation. One needs to look through that agreement and consider the end use of the land as well.” 

Once again, it clearly shows that ‘trade is king’ and that clearly the commercial land has to be sizable (0.4 acres is bordering on ridiculous) and ‘divorced’ from the grounds of the residential property. Of course, this is all very subjective but follows a trend of seemingly lost causes actually losing.