It is not uncommon for overage agreements to be placed on land, particularly where it is felt there could be development opportunities in future and the…
On 30 November 2021, HMRC published a consultation paper on changes to two areas of the stamp duty land tax (SDLT) regime. The consultation seeks views on the current mixed-property transaction and multiple dwellings relief (MDR) policy and suitable alternatives. Click here for our mixed-property article.
How does MDR currently work?
Where at least two dwellings are acquired in a single transaction, or as part of a series of linked transactions between the same vendor and purchaser, purchasers may claim MDR. A claim for MDR will mean that the rate of SDLT is determined by the average value of the dwellings purchased, rather than their combined value.
The relief ensures that the SDLT payable is similar to that which would have been payable had the properties been purchased individually from different vendors in separate transactions. Purchasers can benefit from multiple nil-rate and lower percentage bandings, significantly reducing the SDLT liability.
The issue with MDR
MDR was originally introduced to encourage investment in residential property and improve the supply of private rented housing. The current rules apply to both business and non-business purchases. This means that MDR may be available where, for example, a private individual purchases a house with an annexe.
However, the noteworthy saving in tax stemming from MDR has led to the rise of an industry of ‘SDLT reclaim agents’ who often contact purchasers after they have filed their SDLT return suggesting, sometimes incorrectly, that part of the property purchased gives them sufficient grounds to claim MDR.
HMRC proposes four options to tackle the perceived abuse of MDR claims.
Option 1 – Allow MDR only where all the dwellings are purchased for a ‘qualifying business use’
HMRC claims that almost all incorrect MDR claims are made by private individuals purchasing residential homes. HMRC are therefore considering whether MDR should be available only where the purchaser intends to use all the dwellings for a ‘qualifying business use’, i.e., for development, redevelopment and resale or for exploitation as source of rents.
MDR would be withdrawn if the purchaser is unable to satisfy the ‘qualifying business use’ condition either throughout the three years following the transaction, or until the property is sold, if earlier.
Impact of Option 1
This option would remove the ability for private individuals purchasing residential property to use it as their home if they have claimed MDR.
This option would also completely remove relief for individuals who are, for example, buying a block of flats and not all are going to be put to a qualifying business use.
HMRC accept that the intention test and the need for claimants to monitor the use of each of the dwellings over a three-year post-transaction period (and to deliver a further return if necessary) would add to the administrative burden on claimants. Nevertheless, given that there is already a requirement to check the continuing availability of MDR throughout a three-year post-transaction period, any additional burden should be minimal.
Option 2 – Allow MDR only in respect of dwellings purchased for a ‘qualifying business use’
This is similar to option 1, but instead of requiring all the purchased dwellings to be purchased for a ‘qualifying business use’, under this second proposal a claim for MDR would still be available for those dwellings acquired for a qualifying business use.
For example, three flats are purchased, two of them will be used in a property rental business and the third will be occupied by the purchaser as his home. MDR will still be available in respect of the two flats that have a ‘qualifying business use’.
There would be a similar withdrawal rule as set out at option 1 in relation to the properties for which there was an initial intention to use the dwelling(s) for a ‘qualifying business use’.
Impact of Option 2
As with Option 1, this would require the introduction of an intention test with the same administrative consequences, but with the addition of the need to identify the values to be attributed to the different properties, adding to the administrative burdens and compliance risks associated with such SDLT calculations.
Option 3 – Restricting MDR by introducing a ‘subsidiary dwelling’ rule
This proposal would align MDR rules with the ‘subsidiary dwelling’ rule which currently applies to higher rates on additional dwellings (HRAD).
Under option 3, there would be no change to the existing MDR calculations but part of a building, or a building within the grounds of another dwelling, would not count as a separate dwelling for the purposes of MDR unless its value is a third or more of the total price attributable to the property as a whole. This test would apply to both non-business and business purchases.
Impact of Option 3
The additional of ‘a one third of the value’ test is expected to be sufficiently high to stop most incorrect claims for MDR.
The government predicts that this would also resolve an inconsistency between the MDR and HRAD rules and that MDR would continue to be available to individuals.
There will be no additional administrative burden on individuals given the existing subsidiary dwelling rule in HRAD which requires them to make a valuation. However, for businesses claiming MDR in cases where it is not clear-cut whether the value of subsidiary dwelling is worth a third or more of the total price paid, professional valuations may be needed.
Option 4 – Allow MDR only for purchases of three or more dwellings
Under this final proposal, MDR would be available only where three or more dwellings are purchased in a single transaction, or as part of a series of linked transactions.
Impact of Option 4
As many incorrect claims for MDR seen by HMRC are individuals claiming that a single dwelling is in fact two dwellings, HMRC feels that this simple change to the legislation would reduce the number of incorrect claims being submitted to HMRC. However, it is acknowledged that this option would deny MDR for property developers and property rental businesses buying two dwellings, putting them at a disadvantage.
What does that mean for you?
We are here to help. The area of MDR is complex and advice should be sought from our specialist SDLT team. If you are considering buying a property, and you believe that MDR might apply, do get in touch. We will be happy to assist you with professional, practical advice tailored to your case.