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When Less Means More

29 March 2023

Change is afoot for those looking to benefit from Multiple Dwellings Relief (MDR). MDR has long been a help in keeping SDLT manageable for certain complex residential purchases.

Multiple Dwellings Relief (or MDR)

As the name suggests, it can reduce your SDLT bill if your residential purchase is (in fact) two or more ‘dwellings’ packaged as part of a single transaction. The way it works is that rather than treating it as a single transaction, with the highest rates of SDLT payable on the full price, instead it’s treated as two smaller transactions. This brings the average SDLT rate payable down substantially.

For example, if you purchased a large house with a small adjoining ‘granny flat’ for £2m then without MDR you might pay SDLT of £151,250, but with MDR it’s treated as two £1m acquisitions, bringing the SDLT down to £82,500. You are not even required to apportion value – you simply pay SDLT on each notional purchase as if the price was the average price (so in this case £2m divided by two dwellings equals £1m). For simplicity I’m ignoring the various surcharges which can apply depending on personal circumstances (e.g. if the house is not replacing your main residence, or you are buying as a non-UK resident), but the saving is illustrative.

What is a dwelling?

The key of course is identifying whether part of the property actually constitutes a separate ‘dwelling’, and in this area there has been quite a lot of contention with HMRC as advisers explore the boundaries of that concept. Despite the quaint connotations of the word ‘dwelling’, the meaning of it is quite simple – a dwelling is, at heart, a self-contained living unit, affording the owner the ability to use it as a residence. Even an unused annexe can count as a separate dwelling as long as it is capable of being used as a genuinely separate home. Disputes over the meaning have ranged from whether a property has adequate security or privacy to whether it is truly self-sufficient. For example, MDR might be defeated by a lack of a separate lockable entrance, or an entrance which can only be accessed through someone else’s home, or inadequate sleeping, cooking or sanitary facilities.

What changes are afoot?

To try and tackle incorrect claims for MDR and abuse of the MDR rules more generally (as well as to improve administrative efficiency and customer experience), HMRC set out the following ways in which the MDR rules could be amended within their November 2021 consultation paper:

  • only allowing MDR to apply:

(i) where all the dwellings are acquired for; or

(ii) to dwellings acquired for,

a ‘qualifying business use’ (namely, acquired for (a) development or redevelopment and resale; or (b) exploitation as a source of rents) if the buyer satisfies this requirement for 3 years post acquisition (or until the property is sold if earlier);

  • restricting the application of MDR with a new ‘subsidiary dwelling’ rule (similar to that used within the higher rate: additional dwellings rules) i.e. that a part of a building etc will not count as a separate dwelling for MDR purposes if the value of that part is less than one third of the total price for the overall property;
  • only allowing MDR to apply where three or more dwellings are purchased.

There have been no announcements since the consultation closed over a year ago, so there is no clear indicator as yet of how the UK Government will proceed. While the rules are this generous disputes with HMRC will likely continue.

Regardless of potential future reforms, it should always be remembered that whether or not a purchase qualifies for MDR is very fact specific. No two property purchases are the same in this very contentious area of SDLT.

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