Writing for Taxation magazine, BKL’s Director of Property Taxes Andrew Levene examines the changes to stamp duty land tax (SDLT) announced in Spring Budget 2024 this month.
Key points
- Multiple dwellings relief (MDR) has been used by institutional buyers, but also by those buying homes with granny flats or cottages in the grounds.
- The abolition of MDR will be felt by smaller investors or developers and traders acquiring two to five dwellings.
- A claim for MDR can now only be made for the pre-commencement transactions, and these cannot be linked with any transactions occurring after the commencement date.
- Changes are proposed to first time buyers’ relief for those granted a lease via a nominee or bare trust.
The Budget included a number of measures on stamp duty land tax (SDLT). The most significant of these was the abolition of multiple dwellings relief.
The chancellor announced the abolition of the SDLT multiple dwellings relief (MDR) from 1 June 2024 subject to further transitional rules explained below.
In November 2021 the government published a consultation document with suggested reforms to MDR to prevent perceived abuse of the relief. So change was expected, but total abolition came as something of a surprise. MDR was introduced in 2011 to help large institutional investors buying residential property. These were finding it difficult to compete with small investors buying a single residential property and paying 1% SDLT while an institution buying a large portfolio was paying up to 7%. (Those were the days!)
The 2021 consultation document also considered the application of the non-residential rates to mixed transactions, an area which if anything has been even more abused than MDR. However there are no proposed changes to the rules for mixed purchases.
Background to MDR
MDR allowed a buyer of two or more dwellings to base the SDLT on the average price of the dwellings acquired rather than the total paid for all the dwellings. While this has helped institutional buyers, the relief has also been extensively used by those buying homes with granny flats or cottages in the grounds.
Where the granny flat or annex was separately let out by the owner, this was arguably within the purpose of the relief. But in many cases the two dwellings were acquired for use as a single home. Although if within three years the dwellings were merged into one, the relief was clawed back, this wasn’t the case if the owner simply used the two dwellings as their home.
The case for MDR was also no doubt not helped by taxpayers who have stretched the relief beyond credulity by claiming for annexes of somewhat dubious quality – often just a separate area of the house with a sink and WC. HMRC has been active in challenging these cases, which have generally been lost by the taxpayer. The government not surprisingly sees this application of MDR to granny flats and annexes outside the intended scope of the relief.
At its start the relief allowed large buyers to achieve an SDLT rate as low as 1%. However with the introduction of the 3% surcharge in 2016, the minimum rate is now normally 3%. With property prices increasing the typical rate will now often be considerably more than 3%.
Buyers of six or more dwellings can benefit from an alternative rule that allows the non-residential rates to be used. This typically gives a rate of slightly under 5%. As the rate with MDR will be at least 3% and often more, particularly in high value areas such as London, the loss of MDR may not significantly affect large buyers.
Who are the losers?
The abolition of the relief will be felt by smaller investors or developers and traders acquiring two to five dwellings. These will now pay SDLT at the residential rates on the total price paid without relief as they can’t use the non-residential rates. A buyer of five flats for £300,000 each would previously have paid SDLT based on £300,000 multiplied by five – SDLT of £57,500 – a rate of about 3.8%. Now the SDLT would be on the full £1.5m – SDLT of £136,250 – a rate of about 9.1%.
The abolition will also affect buyers of student and other communal accommodation. The 3% residential surcharge does not apply to this sort of accommodation. As student dwellings tend to be smaller than normal flats, they often have relatively low average values. Using MDR, these could often achieve rates as low as 1%. However without MDR, SDLT will be paid on the full purchase price. Buyers of blocks of student accommodation with at least six dwellings will be able to use the non-residential rates which will typically give 5% but this will still be considerably higher than the rates previously achieved.
Student accommodation providers have been successful in the past in getting exclusions from adverse tax changes – for example residential property developer tax and the application of inheritance tax to residential property owned by non-domiciles. It remains to be seen whether there could be representations made by these and other losers under the new rules.
Mixed purchases
The November 2021 consultation also proposed reforms to use of the non-residential rates for purchases of mixed (ie commercial and residential) property in the same transaction. The response to the consultation confirms that no changes to the mixed-property rules are planned. The non-residential rates can still be used by buyers of a shop with a flat above or a country estate including a working farm or commercial buildings. Many buyers have attempted to argue that their properties include a non-residential element. Where this has been quite small – for example electricity cables or public footpaths on the land, HMRC has been active in taking cases to the tribunal and has generally won.
Although mixed purchasers can continue to use the non-residential rates, they can still be losers from the abolition of MDR. For a mixed transaction involving buying two or more dwellings (along with a commercial property) the taxpayer had a choice of applying the non-residential rates or apportioning the total consideration between the residential and non-residential and applying MDR to the former. In late 2020 HMRC issued a statement saying that it did not consider that the 3% residential surcharge applied where there was a mixed purchase and a claim for MDR was made. Again this meant that rates as low as 1% could be achieved on the residential element. The basis for this practice was not entirely clear and even less clear is why, assuming it was correct, HMRC didn’t seek to amend it through legislation. So while 5% will still be achievable for mixed transactions, the very low rates previously achieved will no longer be possible.
While there have undoubtedly been abuses of MDR, the chancellor seems to have used a sledgehammer to crack a nut. With carefully targeted changes the relief could have been better focused on its intended beneficiaries. Further nothing has been done about mixed purchase rates which have been abused as much, if not more than MDR.
Transitional rules
The abolition of MDR applies to contracts whose effective date is on or after 1 June 2024. However MDR can still be claimed if:
- the transaction has already been substantially performed before 1 June 2024; or
- if the transaction is effected under a contract entered into on or before 6 March 2024 provided that:
- no variation of the contract or assignment of rights is made after 6 March 2024;
- the transaction is not exercised after 6 March 2024 in pursuance of an option or pre-emption right (in other words the buyer could have chosen not to exercise); or
- after 6 March 2024 there is a sub-sale or other transaction whereby someone other than the person who made the contract becomes entitled to call for a conveyance.
There are rules to deal with linked transactions some of which fall before the change and others after. Where a later transaction is linked with an earlier one, the SDLT is recomputed at the time of the later transaction. A claim for MDR can now only be made for the pre-commencement transactions, and these cannot be linked with any transactions occurring after the commencement date. The non-linking applies not just for MDR but for all SDLT purposes. So for the post commencement transactions, this appears to mean that the lower SDLT rate bands (residential or non-residential) can be applied even if those bands have already been used on the earlier transactions.
First time buyers’ relief
Changes are proposed to first time buyers’ relief for those granted a lease via a nominee or bare trust. This may occur because a buyer wants to retain anonymity and is often used by victims of domestic abuse.
Up till now under a special rule for leases, the nominee rather than the beneficiary was treated as the buyer for SDLT purposes. This could mean that relief was not available even though the beneficiary had never previously acquired a dwelling. Under the proposed change the beneficiary rather than the nominee will be treated as the buyer.
The definition of first time buyer will also be amended so that the nominee is disregarded. This should mean that an individual who has previously acquired a property through a nominee will not be treated as a first time buyer.
Both changes apply to transactions on or after 6 March 2024, subject to transitional rules similar to those for MDR.
The changes seem sensible although the more elegant approach would of course be to amend the special rule for leases so that the nominee is no longer treated as the buyer.
Registered social landlords and public bodies
Changes will be made to the legislation exempting purchases of social housing from SDLT where the purchase has been funded at least partly by public subsidy. It appears that as the legislation is currently drafted, such purchases can sometimes be subject to SDLT against the policy objective. The changes will apply to transactions on or after 6 March 2024. The legislation will also be amended to exclude public bodies from the flat 15% SDLT rate (under FA 2003, Sch 4A).
The full article is also available on the Taxation website.
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Our Spring Budget 2024 coverage also includes:
