LBTT4010 - Residential transactions

A transaction is a residential property transaction if:

• the main subject-matter of the transaction consists entirely of an interest in land that is residential property, or
• where the transaction is one of a number of linked transactions, the main subject-matter of each transaction consists entirely of such an interest.

Residential property is:

• a building that is used or suitable for use as a dwelling, or is in the process of being constructed or adapted for use as a dwelling
• land that forms part of a garden or grounds of a building suitable for use as a dwelling, this includes any buildings or structures on such land or
• an interest in or right over land that subsists for the benefit of any of the above.

An interest in or right over land may be, for example, a ‘servitude right of access for maintenance purposes. A servitude is a burden on land in favour of other land. The land over which the servitude is exercised is known as the burdened property or servient tenement; the land that benefits from the exercise of the servitude is known as the benefited property or dominant tenement.

As well as the above, buildings (or part of a building) used for the following purposes are residential property:

• residential accommodation for school pupils
• residential accommodation for students – but not halls of residence for students in further or higher education which is treated as non-residential
• residential accommodation for members of the armed forces
• an institution that is the sole or main residence of at least 90% of its residents and is not one of the following:
  • a home or other institution providing residential accommodation for children
  • a hall of residence for students in further or higher education
  • a home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of old age, disability, past or present dependence on alcohol or drugs or past or present mental health condition
  • a hospital or hospice
  • a prison or similar establishment
  • a hotel or inn or similar establishment

Situation at the effective date

The use, or suitability for use, of the property as a dwelling is to be assessed at the effective date of the transaction. Assessing the use, and the suitability for use as a dwelling, of a property are separate tests. Any historic use or intended future use of the property is therefore not relevant to determining the actual use of the property at the effective date. However, previous use (even historic use) as a dwelling is a highly relevant factor in assessing suitability for use as a dwelling. In addition, a building that has not previously been used as a dwelling could still be suitable for use at the effective date, depending on the factors described below.

Meaning of ‘Dwelling’

• ‘Dwelling’ does not have a defined meaning for LBTT. Revenue Scotland use the everyday meaning of ‘dwelling’ which is: ‘a building, or a part of a building, that gives those who use it the facilities required for day-to-day private domestic living and a sufficient degree of permanence.’
• A dwelling also includes buildings in the process of construction or adaption for such use.

No single factor will determine the suitability for use as a dwelling although factors to be considered include:

• Physical configuration of the building including independent access
• Bathroom facilities
• Kitchen facilities
• Accommodation for living and sleeping
• Security
• Degree of permanence

Caravans, mobile homes or houseboats will not normally be considered as dwellings unless they become sufficiently fixed to the land that they become part of the land. In such cases, these may be a dwelling if they meet the normal definition.

In addition, holiday homes/lets, including those which cannot be used all year round, will be residential property. A property used as part of a furnished holiday letting business will be a residential property whether the property is assessed to Council Tax or Non-Domestic Rates, as in most cases the building could be used as a single dwelling house without permission from the relevant local authority.

For transactions involving six or more residential properties, for the purposes of LBTT, these are treated as non-residential transactions.

Not suitable for use as a dwelling

Purchasing a dwelling which is in need of repair before it would be considered ‘ready to move into’ does not determine that the property is not suitable for use as a dwelling.

In the tax case of Amarjeet and Tajinder Mudan v HMRC the appellant claimed that the property purchased was in need of repair and renovation at the effective date and therefore the transaction should be taxed using the non-residential rates. 

The Upper Tribunal considered that “suitable for use as a dwelling” is focused on the fundamental characteristics and nature of a building, rather than on a snapshot of habitability at the effective date. This assessment may be informed by previous or historic uses of the building.

The need for repairs is only one factor in the multi-factorial assessment of suitability for use as a dwelling. You should consider all of the following:

1. Previous Use 

   Consider the history of the building; was it previously used as a dwelling, how recently was it lived in? Previous use as a dwelling is a strong indication that the building has possessed the fundamental characteristics of a dwelling and is therefore suitable for use as a dwelling.

2. Fundamental Characteristics

   Will the repairs or renovation make the dwelling habitable again? Do you hold any professional advice that the whole building could collapse, or it may not be possible to repair? A desirable house which has become dilapidated and requires updating is likely to be suitable for use as a dwelling. An empty shell with no main roof is unlikely to be suitable for use as a dwelling. 

3. Nature and extent of works

   Consider the necessary work collectively. Is the work needed to render the building habitable or to make the dwelling ready for occupation. Works carried out to make the property "a pleasant place to live" is not a relevant factor and does not affect suitability for use as a dwelling.  

4. Are the defects in the building fixable

   Can the defects be fixed safely, or are there serious hazards preventing the repairs being undertaken? If the works are so dangerous or hazardous that they cannot realistically be carried out, or if the works would prejudice the structural integrity of the building, then the building is unlikely to be suitable for use as a dwelling. 

5. Safety Considerations

   A building being unsafe or dangerous to live in at the effective date may be a relevant factor but would not of itself render the building unsuitable for use as a dwelling.

6. Structured Analysis

   Distinguishing between minor and fundamental repairs is not particularly informative as a free-standing test. An important consideration is whether the building retains essential facilities and overall structural integrity – specifically, whether it is capable of being repaired rather than requiring complete reconstruction.

7. Determination

   The question for determination is whether the works of repair and renovation needed to the building have the result that the building does not have the characteristics of a dwelling at the effective date, so that it is no longer residential property.

Examples of repairs, renovations and issues that will not make a property unsuitable for use as a dwelling include, but are not limited to:

• fitting of kitchen or bathroom facilities
• substantial repairs or replacement is required to windows, floors, doors, or a roof
• reconnection to utilities such as the fitting of a boiler for heating and replacement of piping to access water
• unsafe electrical wiring
• an infestation of pests
• damp proofing required or plasterboard damage
• repair work because of water or fire damage
• the presence of asbestos
• structural defects that can be repaired/rectified

These are all common issues which can be fixed and do not prevent the building from being suitable for use as a dwelling, even where multiple issues are present.

How the property is viewed by other authorities

Just because a property is exempt from council tax does not mean it is not suitable for use as a dwelling. It is also important to note that the inability to obtain a mortgage does not influence whether a property is suitable for use as a dwelling or not for LBTT purposes.

Tribunal decisions

• Professor Richard Ball and Dr Sigrid Torokoff v Revenue Scotland
• Professor John Lambert and Dr Hirohito Nago v Revenue Scotland
• LMT Property Investors Ltd v Revenue Scotland

Although decisions of the First-tier Tribunal are not binding on other tribunals, it is appropriate to have regard to them. 

You can see all of decisions of the First-tier tribunal (Tax Chamber) at First-tier Tribunal for Scotland Tax Chamber

Garden and grounds

Where the land in question forms part of the garden or grounds of a dwelling and is for the benefit of the dwelling, the residential rates will apply.

There is no statutory size limit for garden and grounds to be considered residential for LBTT purposes, unlike the ‘permitted area’ for the purposes of Capital Gains Tax. It will instead be a question of fact whether the land (including any building or structure on such land) is considered to be the garden and grounds of the dwelling.

Garden and grounds can include but are not limited to:

• Grounds for hobbies / leisure activities e.g. tennis courts, paddocks, bee hives
• Storage areas e.g. garages, barns, stables
• Water features / waterways e.g. ponds, streams, swimming pools, lakes
• Flower / vegetable gardens / walled gardens
• Outbuildings e.g. conservatories, orangeries, greenhouses
• Fields / woodland e.g. non-commercial paddocks, orchards, grazing

Constructed or adapted for use

It is an objective test as to whether a building is in the process of adaption or construction for use as a dwelling at the effective date. Intention alone is not sufficient.

Planning permission is not enough to consider a dwelling being under construction. However, once construction has begun - which is considered to be once building works start on top of a foundation - with the intended use on completion as a dwelling, this will be considered residential.

Preparatory works, including demolition of previous buildings and site preparation are not considered sufficient to determine that construction of a dwelling has started. These may be considered ‘construction works’ but they do not yet involve the construction of the building for use as a dwelling.

Change of use

From residential to non-residential

A change of use from residential to non-residential property takes effect from the time that the associated planning permission and any building warrant for conversion works have been fully implemented.

This is when:

1. a completion certificate has been given for any work requiring building warrants and
2. a submission has been made under section 27B of the Town and Country Planning (Scotland) Act 1997, notifying the local authority of completion of the development.

Where there are no works involved in a change of use planning application any change would be from the point the change actually occurs. Full documentation should be kept.

If the effective date of the land transaction takes place earlier than the change of use takes place, residential rates will apply.

From non-residential to residential

Where the proposed change is from non-residential to residential, for LBTT purposes the property becomes residential as soon as any construction / adaptation for such use begins.

The Additional Dwelling Supplement (ADS)

For an additional dwelling with a purchase price of £40,000 or more, the Additional Dwelling Supplement (ADS) is applicable. The ADS is a flat rate of 8% on the consideration for the relevant dwelling which is paid in addition to the LBTT calculated.

Example calculations

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