Mixed Use Property

The demand for the investment in mixed use property is increasing. Converting the mixed use property later into residential use only, with the appropriate permission is possible. It saves the stamp duty of 3% applied in the residential property.

However, the scenario can be any i.e. the mixed use property might not be permit to use as residential only. Hence, the investor must think wisely before making decision as the investment could end up being commercial or semi commercial property.

One of the example of mixed use property includes departmental store or restaurants with flat above.

Why mixed use property are more beneficial investment?

Commercial property or mixed property investment has become a subject of focus on the other hand no surcharge needed for mixed property. Tax relief changes to buy-to-let implemented in April 2017 has made mixed use property a prior investment with following tax benefits:

1. Are subject to tax exempt from the 3% stamp duty surcharge which is apply in residential property.
2. Eligible for mortgage interest benefit.

Benefit of exemption of 3% stamp duty surcharge

Tax exempt in the mixed use property has made the investors to keep their eye on mixed use property for making the investments.

SDLT (Stamp Duty Land Tax) rate on any non-residential can be reduce to the maximum 5% rate from 12%-15% rate or even higher. Identifying the non-residential elements has increased the SDLT reclaims. Non-residential elements is beneficial if being identify by the landlords who is paying the residential rates.

A reclaim done by the buyers may appear as success initially due to “process now and check later” approach of HMRC. Buyers may not realize the concerns of HMRC until an enquiry is open.

Popular “Hyman case” where buyer after paying residential rates realized that there is non-residential element which would help to reclaim the fund. The case is well explain below:

Hyman Case in Mixed use Property

In 2015, Mr and Mrs Hyman purchased a large Georgian house set in 3.5 acres of land at a cost of £1,515,000. They paid an SDLT bill of £95,550 calculated using the residential rates. In 2017, they were advised that the property could be considered to be mixed use and they made a claim for a refund of over £30,000.

In the case of Mr and Mrs Hyman, it was argued that the barn, the meadow and the bridleway were not residential property as they were not the part of the garden or grounds of the house. The arguments was rejected giving some valid reasons by the FTT (First Tier Tribunal). The reason were:

• For SDLT purposes, “residential property” means a building that is use as a dwelling and land that is or forms part of the garden or grounds of the dwelling including a building on such land. mixed use property.
• In my view “grounds” has, and is intended to have, a wide meaning. It is an ordinary word and its ordinary meaning is land attached to or surrounding. A house which is occupied with the house and is available to the owners of the house for them to use.
• I use the expression “occupied with the house” to mean that the land is available to the owners to use as they wish. It does not imply a requirement for active use. “Grounds” is clearly a term which is more extensive 6 than “garden” which connotes some degree of cultivation.
• It is not a necessary feature of grounds that they are use for ornamental or recreational purposes. Grounds need not be use for any particular purpose and can, as in this case, be allow to grow wild. I do not consider it relevant that the grounds and gardens are separate from each other by hedges or fences.
• This may simply be ornamental, or may serve the purpose of delineating different areas of land; as being for different uses. Nor is it fatal that other people have rights over the land. The fact that there is a right of way over grounds might impinge on the owners’ enjoyment of the ground.  And even impose burdensome obligations on them.
• However such rights to not make the grounds any the less the grounds of that person’s residence. Land would not constitute grounds to the extent that it is use for a separate, e.g. commercial purpose. It would not then be occupy with the residence, but would be the premises on which a business is conduct. mixed use property.
• Applying this test to the meadow and the bridleway. Case is conclude that these elements of the land are part of the grounds of the Farmhouse within section 116(1)(b). And that the barn is a building or structure on that land. Accordingly, the whole of the property owned by Mr. and Mrs. Hyman is residential property for the purposes of SDLT. Accordingly, the tax was correctly pay on that basis.

The Case and its related information resource from Hyman, Pensfold and Goodfellow – GOV.UK.

Mortgage interest benefit

The mortgage interest benefit of mixed use properties is the main part of concentration. The landlords of such investment will be less affected than the landlords investing in residential property. Since 2020 landlords have become subject to much higher tax rates payers even if the existing rates are (40%-45%) and have mixed use property.

The changes will not be apply to the commercial properties and the non-residential property of mixed use properties. Meaning the landlords will be able to claim tax relief on commercial part of property for loan financing costs. Professional advice is highly recommend in order to get appropriate loan finance costs between residential and non-residential parts.

Related:

Myths about cash flow and profit margins

VAT Flat rate scheme

If you want any further details on mixed use property and how Focus Somar can help you to take wise decision and find out non-residential element, please phone 0203 802 7810 Krishna Dahal, or email krishna@focusaccountants.co.uk.