Multiple Dwellings Relief

*STOP PRESS* On 6 March 2024 the Chancellor of the Exchequer announced that Multiple Dwellings Relief (MDR) would be abolished from 1 June 2024. Transactions that complete, or are substantially performed, prior to 1 June 2024, will still be able to benefit from MDR if the requirements are satisfied. In addition, where contracts were exchanged on or before 6 March 2024, MDR will still be available even if completion takes place on or after 1 June 2024. However, please note that these transactional rules will not apply if the contract is amended after 6 March 2024. Multiple Dwellings Relief provides SDLT relief to buyers involved in purchasing several dwellings in one transaction. MDR was initially enacted to encourage investment in residential developments, rental properties and other housing projects.

MDR allows the purchaser to calculate SDLT based on the average value of the individual properties within the transaction (which is then multiplied by the number of dwellings), rather than treating it as a single, higher-value transaction. However, a minimum SDLT of 1% of the total consideration must be paid.

Dwelling

To claim MDR it must be established that at least two separate dwellings are being acquired in the transaction (or multiple linked transactions). In many cases this is pretty obvious. For example, when acquiring two separate houses or a block of independent flats. As time has passed, the breadth of the relief has widened. For example, it is now accepted (by HMRC and the market) that MDR can be claimed in relation to houses with ‘granny annexes’ provided that the annexe satisfies the definition of dwelling. In many cases this is also clear, however, due to the potential benefit that MDR can bring, taxpayers and advisers have continuously pushed the boundaries of what falls within the definition of a dwelling (particularly in relation to annexes). There are multiple cases that HMRC has successfully brought in the Tax Tribunals relating to this issue. In response to this bullish approach, HMRC has released detailed guidance on what constitutes as a dwelling for this purpose. This includes:

• Privacy: “a single dwelling requires a degree of privacy from other dwellings”, so access and security are important considerations.  
• Facilities: it is fundamental that a property must have “the facilities required for day-to-day private domestic existence and a sufficient degree of permanence” to be classified as a dwelling. 
• Utilities: “[a] single dwelling should be able to control all or most of the utility services supplied to it”.
• Other matters: issues such as Council Tax, restrictions on use, and postal addresses can factor into the overall assessment, but we understand HMRC places less emphasis on these elements.

Example one: block of five flats

An individual investor is interested in acquiring a block of flats containing five individual flats in a single transaction. The total purchase price for the entire block is £1,500,000. We have assumed that all five flats satisfy the individual dwelling test for the purpose of MDR. If the investor was a company, and any of the flats had a value of more than £500,000, we would also need to consider the 15% flat rate rules. This is outside the scope of this article, but further details can be found here. 

Without MDR, SDLT would typically be calculated on the entire purchase price of £1,500,000, which would result in £136,250 SDLT being payable (applying the higher rates of SDLT on the basis more than one dwelling is being acquired in a single transaction).

If the investor successfully claims MDR, the SDLT would be calculated based on the average value of the individual dwellings within the block. The SDLT is calculated as follows:

£1,500,000 (purchase price) / 5 (number of dwellings) = £300,000 (average dwelling cost)

HRAD SDLT rates applied to £300,000 = £11,500 (average SDLT cost)

£11,500 (average SDLT cost per dwelling) x 5 (number of dwellings) = £57,500 SDLT liability

This results in a SDLT saving of £78,750.

Example two: main dwelling and a self-contained annexe

John is interested in acquiring a main dwelling with a self-contained annexe. The total purchase price for the property is £2,000,000. This will be John’s only residential property and he will be living in the main dwelling as his permanent residence. The annexe is within the same building as the main dwelling on the ground floor.

As the annexe is within the same building, it is important to consider whether it satisfies the definition of dwelling for SDLT in its own right. We have assumed that the main dwelling satisfies the individual dwelling test for the purpose of MDR.

Without MDR, SDLT would typically be calculated on the entire purchase price of £2,000,000. The SDLT calculation results in £151,250 payable applying the standard rates. The standard rates can often apply in this situation provided that various requirements are satisfied so that the annexe can properly be classified as ‘subsidiary’ to the main house. This is explored in greater detail here.

If John successfully claims MDR, the SDLT liability would be calculated based on the average value of the dwellings. The SDLT is calculated as follows:

£2,000,000 (purchase price) / 2 (number of dwellings) = £1,000,000 (average dwelling cost)

SDLT rates applied to £1,000,000 = £41,250 (average SDLT cost)

£41,250 (average SDLT cost per dwelling) x 2 (number of dwellings) = £82,500 SDLT liability

This results in a SDLT saving of £68,750.

Clawback

If, after completion, the number of dwellings were reduced (e.g. you knock two flats together into a single property) within three years of claiming MDR, HMRC requires that the SDLT liability is recalculated as if that alteration had happened at completion (i.e. there are fewer properties) and any additional SDLT will need to be accounted for to HMRC.

HMRC consultation

Please note that there is currently a live HMRC consultation that could materially amend the MDR rules. The initial consultation window closed on 22 February 2022, and we are awaiting further information from HMRC on the next steps. All SDLT advice and calculations set out here rely on the SDLT rates, rules and HMRC published guidance prevailing as at the date of this letter. Please note that much of the analysis here is reliant on HMRC’s current published guidance on the issue of MDR. Unfortunately, this published guidance is not legally binding on HMRC and is therefore only indicative of the approach HMRC will take. There is always a risk that HMRC will not follow, or indeed amend, its published guidance.