ON APPEAL FROM UPPER TRIBUNAL (TAX AND CHANCERY)
Judge Thomas Scott and Judge Ashley Greenbank
[2024] UKUT 00307 (TCC)
Strand, London, WC2A 2LL |
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B e f o r e :
LORD JUSTICE LEWIS
and
LORD JUSTICE HOLGATE
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AMARJEET AND TAJINDER MUDAN |
Appellants |
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- and - |
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THE COMMISSIONERS FOR HIS MAJESTY'S REVENUE AND CUSTOMS |
Respondents |
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Michael Ripley (instructed by The General Counsel and Solicitor to
HM Revenue and Customs) for the Respondents
Hearing dates: 19/06/2025
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Crown Copyright ©
Lord Justice Lewison:
"(1) In this Part "residential property" means—
(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, and
(b) land that is or forms part of the garden or grounds of a building within paragraph (a) (including any building or structure on such land), or
(c) an interest in or right over land that subsists for the benefit of a building within paragraph (a) or of land within paragraph (b);
and "non-residential property" means any property that is not residential property."
The facts
"Mr Mudan agreed that the Property was still residential in nature. It had been someone's house for many years and it was not falling down. Nevertheless, he did not consider that it was safe to live in with a young family. This was so even though there was no structural damage to the Property and no structural work was required except to replace the missing roof over the boiler room. Mr Mudan was sure that there was a danger to life because of the state of the electrics."
"I find as facts that, as at the effective date, the Property:
(a) had been used relatively recently as a dwelling; and
(b) was structurally sound; but
(c) was not in a state such that a reasonable buyer might be expected to move in straight away. I find that, before a reasonable buyer would consider the Property was "ready to move into", the following works would be needed:
(i) the Property would need complete rewiring;
(ii) a new boiler, pumps and gas and water pipes would be required in the boiler house, so that the water system operated safely and the boiler house roof would need fixing;
(iii) the leaking pipes in the cellar would need to be repaired or replaced;
(iv) the kitchen units and appliances would need to be stripped back to the bare walls and replaced;
(v) broken windows and doors (including locks) would need repairing and the Property made secure;
(vi) a lot of rubbish (inside and outside the house) would need clearing away."
Mr and Mrs Mudan's case
i) It is the ordinary meaning of the words;
ii) If a building which cannot actually be used as a dwelling was nevertheless "suitable for use as a dwelling" that would confuse two separate concepts namely "suitable" and "capable of being made suitable";
iii) If Parliament had wished to include within the definition of "residential property" buildings "capable of being made suitable" it would have said so;
iv) Parliament has in fact addressed that question but only in relation to buildings that are "in the process of being constructed or adapted for such use".
v) Treating something as suitable for use on the basis that it is capable of being made suitable ignores the fact that it might never be made suitable for that use.
vi) This conclusion is supported by observations in case law concerned with other areas of the law.
Statutory interpretation
"the modern approach to statutory construction is to have regard to the purpose of a particular provision and interpret its language, so far as possible, in a way which best gives effect to that purpose."
"First, as with any question of statutory interpretation, the task of the court is to determine the meaning and legal effect of the words used by Parliament. The modern case law … has emphasised the central importance of identifying the purpose of the legislation and interpreting the relevant language in the light of that purpose."
"In an appropriate case "the potency of the term defined" may provide some guidance as to the meaning for that term as set out in a statutory definition. As it is put in Bennion, Bailey and Norbury, op cit, section 18.6: "In the case of a statutory definition the defined term may itself colour the meaning of the definition". Lord Hoffmann explained in MacDonald v Dextra Accessories Ltd [2005] 4 All ER 107, para 18, "a definition may give the words a meaning different from their ordinary meaning. But that does not mean that the choice of words adopted by Parliament must be wholly ignored. If the terms of the definition are ambiguous, the choice of the term to be defined may throw some light on what they mean". I agree with Henderson LJ, paras 92–93 (citing Birmingham City Council v Walker [2007] 2 AC 262, para 11, per Lord Hoffmann, and Oxfordshire County Council v Oxford City Council [2006] 2 AC 674, para 38, per Lord Hoffmann, and para 82, per Lord Scott of Foscote), that this principle is not confined to cases where there is an ambiguity in the terms of the definition, but means that when the definition is read as a whole the ordinary meaning of the word or phrase being defined forms part of the material which might potentially be used to throw light on the meaning of the definition. Whether and to what extent it does so depends on the circumstances and in particular on the terms of the legislation and the nature of the concept referred to by the word or phrase being defined."
Case law on section 116
"[52] We start by approaching this issue by looking only at the words of paragraph 18(1) Schedule 42A FA 2003 – "used or suitable for use as a single dwelling". The "used as" test at a single time is a clear binary issue – either the building was on completion date used as a dwelling or it was not. For buildings that were not so used on the completion date it would be possible to have a yes/no test: eg had its last use been as a dwelling, or if never used was it designed for use as a dwelling? But the test is not like that – it asks the single question: was it "suitable" to be used as a dwelling? There could have been other descriptions used: eg whether it was capable of being used as a dwelling. It seems to us that the legislation contemplates that there must be and is a class of buildings that might not meet the test and the likely class is those which are capable of being a dwelling but which are unsuitable for that purpose. The question then is where is the suitable/not suitable boundary.
[53] No doubt a passing tramp or group of squatters could have lived in the bungalow as it was on the date of purchase. But taking into account the state of the building as shown in the photographs on Mrs Bewley's phone with radiators and pipework removed and with the presence of asbestos preventing any repairs or alterations that would not pose a risk to those carrying them out, we have no hesitation in saying that in this case the bungalow was not suitable for use as a dwelling."
"[58] In the context of suitable for use I agree with Fish Homes that there is a difference between a building being capable for use as a dwelling and one which is suitable for use as such. But the difference in my view is a slim one and consists mainly in the flavour at which "capable" imports that some adjustment could be made which would render an otherwise unsuitable building fit for use as a dwelling whereas "suitable" indicates in evaluation of its present condition or facilities.
[59] So when do defects in the building mean that it is not a dwelling or not suitable for use as a dwelling? Where a building has all the facilities the dwelling - facilities for rest, sleep, storage, hygiene and the preparation and consumption of food, what can render such a building not suitable for use as a dwelling or cause it not to be a dwelling?
[60] It does not seem to me that the failure of a building to comply with building regulations by itself renders a building incapable of being, or being unsuitable for use as, a dwelling. That is demonstrated by the fact that building regulations change: many people live in houses built under earlier regimes (and at times when there were no relevant regulations at all) which do not comply with current regulations, yet no one would say that a Victorian, a Georgian or a 1930s house was not a dwelling or suitable as such because it did not comply with current regulations."
"But I accept that some defects in what could otherwise be a dwelling or suitable for use as such would mean that it is not so. Defects which make it dangerous to live in fall within that category but such danger must in my view be such that a reasonable person would say "it's too dangerous to live there". Some risks to health and safety may fall into this category: high radioactive pollution, the high probability of walls collapsing, and the kind of hazards which would spur a local authority to issue a prohibition notice restricting the use of the premises."
"(1) The word "suitable" implies that the property must be appropriate or fit for use as a single dwelling. It is not enough if it is capable of being made appropriate or fit for such use by adaptations or alterations. That conclusion follows in our view from the natural meaning of the word "suitable", but also finds contextual support in two respects. First, paragraph 7(2)(b) provides that a dwelling is also a single dwelling if "it is in the process of being constructed or adapted" for use as single dwelling. So, the draftsman has contemplated a situation where a property requires change and has extended the definition (only) to a situation where the process of such construction or adaption has already begun. This strongly implies that a property is not suitable for use within paragraph 7(2)(a) if it merely has the capacity or potential with adaptations to achieve that status. Second, SDLT being a tax on chargeable transactions, the status of a property must be ascertained at the effective date of the transaction, defined in most cases (by section 119 FA 2003) as completion. So, the question of whether the property is suitable for use as a single dwelling falls to be determined by the physical attributes of the property as they exist at the effective date, not as they might or could be. A caveat to the preceding analysis is that a property may be in a state of disrepair and nevertheless be suitable for use as either a dwelling or a single dwelling if it requires some repair or renovation; that is a question of degree for assessment by the FTT.
(2) The word "dwelling" describes a place suitable for residential accommodation which can provide the occupant with facilities for basic domestic living needs. Those basic needs include the need to sleep and to attend to personal and hygiene needs. The question of the extent to which they necessarily include the need to prepare food should be dealt with in an appeal where that issue is material.
(3) The word "single" emphasises that the dwelling must comprise a separate self-contained living unit.
(4) The test is objective. The motives or intentions of particular buyers or occupants of the property are not relevant.
(5) Suitability for use as a single dwelling is to be assessed by reference to suitability for occupants generally. It is not sufficient if the property would satisfy the test only for a particular type of occupant such as a relative or squatter.
(6) The test is not "one size fits all": a development of flats in a city centre may raise different issues to an annex of a country property. What matters is that the occupant's basic living needs must be capable of being satisfied with a degree of privacy, self-sufficiency and security consistent with the concept of a single dwelling. How that is achieved in terms of bricks and mortar may vary.
(7) The question of whether or not a property satisfies the above criteria is a multi-factorial assessment, which should take into account all the facts and circumstances. Relevant facts and circumstances will obviously include the physical attributes of and access to the property, but there is no exhaustive list which can be reliably laid out of relevant factors. Ultimately, the assessment must be made by the FTT as the fact-finding tribunal, applying the principles set out above." (Emphasis added)
"It is therefore plain that the question to be determined is suitability for use and not a question of readiness for occupation/immediately habitable."
"[24] … The question of determining suitability for use of a building as a dwelling (or as relevant a single dwelling) is a question of fact in which all the circumstances will need to be considered. As noted in Bewley a dwelling can be expected to have facilities for washing, cooking and sleeping. A property which entirely lacks such facilities is unlikely to suitable for use as a dwelling; such a property would not be ratable as a dwelling and, for instances, for the purposes of the VAT rules concerning a dwelling would not represent a dwelling. However, where a property has such facilities which are unserviceable but can be repaired or replaced, the property will continue to be suitable for use as a dwelling.
[25] A building which has the facilities to be a dwelling, but which is so structurally unsound or has some other feature (such as asbestos) which precludes repair/renovation then the building will cease to be suitable for use as a dwelling. In essence, in such cases, the land acquisition is of a plot suitable for development and not the building on it. These situations will, in our view, be relatively unusual (Bewley was however, one such example). In our view the majority of renovations will involve making a house which is suitable for use as a dwelling a habitable residence meeting modern building regulations and becoming a comfortable home ready for immediate occupation."
"It is common ground that the test for whether a building is suitable for use as a dwelling is an objective test. Any intention the purchaser might have to put the building to a particular use is irrelevant. It is also common ground that in construing section 116(1)(a), we must interpret the statutory provision in the light of its purpose. In the present context, that involves ascertaining the characteristics of the buildings intended to be covered by the phrase "suitable for use as a dwelling", and considering whether the Old Summer House falls within that class of buildings."
"Parliament has used simple, straightforward language to distinguish residential property and non-residential property. The focus in section 116(1)(a) is on whether the building in question is actually used as a dwelling at the time of the transaction and if not whether it is suitable for such use. In our view, suitability for use might involve consideration of a wide range of factors, including the physical attributes of the building but also any restrictions on use of the building, including legal restrictions. As Mr Birkbeck himself pointed out, there may be a range of legal restrictions on the use of a building. Private law restrictions, environmental law restrictions and planning restrictions. There is nothing in the words of section 116(1)(a) or in the context of FA 2003 as a whole which suggests that Parliament was concerned only with the physical suitability of the building for use as a dwelling. If that was Parliament's intent, it could easily have said so."
Other case-law
"The word "suitable" is an empty vessel which is filled with meaning by context and background."
"'house' includes any building designed or adapted for living in and reasonably so called…"
"The two parts of the definition are in a sense "belt and braces": complementary and overlapping, but both needing to be satisfied. The first looks to the identity or function of the building based on its physical characteristics. The second ties the definition to the primary meaning of "house" as a single residence, as opposed to say a hostel or a block of flats; but that in turn is qualified by the specific provision relating to houses divided horizontally. Both parts need to be read in the context of a statute which is about houses as places to live in, not about houses as pieces of architecture, or features in a street scene, or names in an address book."
"The buildings were very similar in appearance; both had been designed as shops with rear living rooms and living quarters above, but neither was in current use for living purposes. No 17, which had undergone no structural alterations, was held by the Minister to have "retained its identity as a dwelling". No 19, by contrast, was held to have "lost its identity as a dwelling", following structural alterations involving the extension of the shop into the rear living area… Lord Denning MR's formula can be seen as his way of expressing the present "identity" (in the inspector's words), or perhaps function, of a building not currently in use, defined by reference to the purpose of its construction or subsequent adaptation."
"The fact that the property had become internally dilapidated and incapable of beneficial occupation (without the installation of floor boards, plastering, rewiring, replumbing and the like) does not detract from the fact that the property was "designed … for living in", when it was first built, and nothing that has happened subsequently has changed that."
"Context and common sense argue strongly against a definition turning principally on historic design, if that has long since been superseded by adaptation to some other use." (Emphasis added)
"The basis of the decision, as I understand it, was that the upper floors, which had been designed or last adapted for residential purposes, and had not been put to any other use, had not lost their identity as such, merely because at the material time they were disused and dilapidated. It was enough that the building was partially "adapted for living in", and it was unnecessary to look beyond that: see para 25. That reasoning cannot be extended to a building in which the residential use has not merely ceased, but has been wholly replaced by a new, non-residential use." (Emphasis added)
"Once it is accepted that a "literalist" approach to the definition is inappropriate, I find myself drawn back to a reading which accords more closely to what I have suggested was in Lord Denning MR's mind in Ashbridge [1965] 1 WLR 1320, that is a simple way of defining the present identity or function of a building as a house, by reference to its current physical character, whether derived from its original design or from subsequent adaptation. Furthermore, I would not give any special weight in that context to the word "adapted". In ordinary language it means no more than "made suitable". It is true that the word is applied to the building, rather than its contents, so that a mere change of furniture is not enough. However, the word does not imply any particular degree of structural change. Where a building is in active and settled use for a particular purpose, the likelihood is that it has undergone at least some physical adaptation to make it suitable for that purpose. That in most cases can be taken as the use for which it is currently "adapted", and in most cases it will be unnecessary to look further."
"flat' means a separate set of premises (whether or not on the same floor)— (a) which forms part of a building, and (b) which is constructed or adapted for use for the purposes of a dwelling, and (c) either the whole or a material part of which lies above or below some other part of the building"
"Accordingly, on the relevant date, the structural works on the sixth and seventh floor premises had long since been completed and they contained new raised floorboarding and suspended ceilings but no internal walls (other than the dividing wall), pipes, cables or other items of fit out. The two sets of premises on each floor (as identified in the new underleases) were separated from each other by the dividing wall and the locked pairs of access doors, which were designed to be opened to facilitate work to fit out the flats for occupation. Separate access to each of the intended new flats could be gained via the lifts and staircase in the northern or southern core of the Building."
"Each of the four separate sets of premises in existence on the sixth and seventh floors have been constructed for use for residential purposes, even though their current condition precludes actual use for those purposes."
"The two areas had never achieved a state of construction sufficient to enable anyone to use them as their home. Put another way, the two areas had not been "constructed" (past tense) for use for the purposes of a dwelling: they were in the course of construction for that purpose."
"Thus, Boss Holdings was a case in which a building once had an identity as a house; and had not lost that identity because of subsequent events. By contrast in Hosebay, the two buildings, although originally designed for living in, had lost their identity. The identity of each building at the relevant date was to be ascertained by reference to "its current physical character" however that had been produced. I do not consider that the judge was justified in finding support for his conclusion in Boss Holdings, in the light of his finding that what had been the flats on the sixth and seventh floors had lost their identity as a consequence of the extensive structural works."
"If a putative flat is in the course of construction, it has not yet been "constructed" for any purpose. Second, whereas a house must be designed "for living in", a flat must be constructed "for use for the purposes of a dwelling". This is more than simply requiring that a flat must be constructed for the purposes of a dwelling. It must be constructed for use for that purpose. A purpose may be a future purpose. But if a separate set of premises is to be constructed "for use" as a dwelling, it must, in my judgment, be in a state in which it is suitable for use as a dwelling. An interpretation of "for" as meaning "suitable for" is a commonplace in the law of patents. It also coincides with the interpretation that Lord Carnwath JSC put on "adapted" in Hosebay ("made suitable"); and would therefore achieve consistency in the definition. Mr Jourdan accepted that in a case of adaptation rather than construction, there had to be some physical work which changed the previous identity of the premises from something that was not suitable for use as a dwelling to something that was. I cannot see any warrant for different tests being applied to the constituent parts of the definition. Accordingly, in my judgment the same meaning should be ascribed to that word in that part of the definition of "flat" which refers to "construction … for use for the purposes of a dwelling".
"So we are concerned with premises in the course of construction, which were intended to be used for residential purposes but which, at the relevant date had not in fact been used for that purpose and were incapable of use for that purpose. It is important to stress the narrowness of the issue. Some of the examples given by Mr Jourdan (a flat gutted by fire or stripped out for refurbishment) would still qualify as flats because they had at some stage in the past been constructed for use as a dwelling and had not subsequently lost their identity."
"… the suitability of offered accommodation is not to be judged exclusively by reference to the condition of the accommodation at the time of the offer, but that the assessment of its suitability can and should also take into account any adaptations or alterations that are, at that time, proposed to be made." (Boreh v Ealing LBC [2008] EWCA Civ 1176, [2009] PTSR 439 at [27] per Rimer LJ)
The UT's decision in the present case
"In our opinion, this suggests that the phrase "suitable for use as a dwelling" is more likely to be focused on the fundamental characteristics and nature of a building which is the subject matter of the transaction than on a snapshot classification by reference to habitability at the effective date. In determining the fundamental characteristics and nature of a building, whether it has in fact been used as a dwelling is clearly relevant."
"In our opinion, the following points should be considered in determining the impact of works needed to a building on its suitability for use as a dwelling:
(1) In assessing the impact of the works needed to a building in the context of determining suitability for use as a dwelling, a helpful starting point is to establish whether the building has previously been used as a dwelling. That is relevant for two reasons. First, as we said in Fiander UT [2021] STC 1482, previous use as a single dwelling is relevant in determining whether an alteration needed to a building would be a repair or renovation (because of prior use as a dwelling) or, alternatively, an adaptation or alteration, changing the building's characteristics by making it usable as a single dwelling for the first time. Second, actual use as a dwelling is a very strong indication that the building has possessed the fundamental characteristics of a dwelling, and has previously been suitable for use as a dwelling. An assessment of the repairs and renovations needed can then be made against that backdrop and by reference to the state of the building during its actual use as a dwelling. Previous use is, of course, fact sensitive, and factors such as the length of time between the previous use as a dwelling and the effective date will be relevant.
The fact of previous use as a dwelling does not mean that a building remains suitable for use as a dwelling regardless of what happens to the building and regardless of the effluxion of time. Equally, to state the obvious, the fact that there has been no previous use as a dwelling does not mean that a building is not suitable for use at the effective date. However, previous use is a highly relevant factor in the evaluation of suitability.
(2) Looking at the building as at the effective date, an assessment must be made of the extent to which it has the fundamental characteristics of a dwelling, including the extent to which it is structurally sound. Is it, for instance, a desirable house which has become dilapidated and requires updating, or is it an empty shell with no main roof? Subject to the points which follow, in principle the former is likely to be suitable for use as a dwelling and the latter is not.
(3) The necessary works should be identified, and their impact on suitability for use should be considered collectively. A distinction must be drawn between works needed to render a building habitable and works to be carried out to make the property "a pleasant place to live", in the words used by the FTT at FTT [30] (such as painting and decorating). The latter do not affect suitability for use as a dwelling.
(4) An assessment should be made of whether the defects in the building which require works are capable of remedy (in colloquial terms, are fixable). That assessment should take into account whether the works would be so dangerous or hazardous as to prejudice their viability (as in Bewley [2019] UKFTT 65 (TC)). If they would, then the building is unlikely to be (or remain) suitable for use as a dwelling. It should also take into account whether the works could be carried out without prejudicing the structural integrity of the building (because, for instance, the walls might collapse). If they could not, the building is unlikely to be suitable for use as a dwelling.
(5) If occupation at the effective date would be unsafe or dangerous to some degree (for instance, because the building requires rewiring), then that would be a relevant factor, but would not of itself render the building unsuitable for use as a dwelling.
(6) The question of whether a repair would be a "minor repair" is not irrelevant, but nor is it particularly informative in assessing suitability. While certain repairs were described as "minor" in Fiander FTT, that classification was not a reason for the decision in Fiander UT. It is too vague and abstract to form a principled basis for the overall determination of the impact of the need for repair on suitability. For the same reason, an approach which seeks to establish whether the necessary works are "fundamental" is acceptable if it is effectively shorthand for the approach we describe above, but as a free-standing test it is not particularly informative.
(7) Applying the principles we have set out, the question for determination is then 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 it is no longer residential property."
Discussion
"… provides the broad definition of residential property which is that a building or part of a building which is in use as a dwelling or suitable for use as a dwelling or is in the process of being constructed to adapted as a dwelling constitutes residential property."
"… a building that is… in the process of being constructed for use as a dwelling or a building that is in the process of being adapted for use as a dwelling"
"I also agree with the recorder that, if the accommodation as it currently stands is unsuitable, it will be a matter of fact and degree as to whether any such proposed adaptations and alterations will be such as to make it suitable. At one extreme, the proposed adaptations may be simple, and easily and quickly effected: for example, the installation of a ramp for access purposes. At the other extreme they may involve the carrying out of such major works as to make the accommodation uninhabitable in the meantime: in such a case the property might well be regarded as unsuitable despite the proposal to carry out the works."
Lord Justice Lewis:
Lord Justice Holgate: