Into relief

On 30 November 2021 on what has become known as ‘Tax Administration and Maintenance Day’, the government published a number of tax consultations, including one on stamp duty land tax (SDLT or stamp duty). The consultation proposed changes to the way in which mixed-use transactions and multiple dwelling transactions are taxed. The proposed changes, which are significant, are unlikely to be introduced until autumn 2022 unless perhaps the changes are included in an emergency budget or the date of the usual budget is brought forward. This article covers the proposed changes to multiple dwellings relief only.

Transactions in multiple dwellings

The SDLT code rewards the purchase of multiple dwellings in a single transaction or in linked transactions in one of two ways. 

First, it gives a partial relief – multiple dwellings relief – which works by ensuring that the stamp duty payable on the purchase of the dwellings is closer to the amount that would be payable if the dwellings were bought separately.

Second, where six or more dwellings are purchased in a single transaction, it taxes the purchase price at the non-residential or mixed rates, even where the subject matter of the transaction consists exclusively of dwellings (the ‘six-or-more rule’). It does not matter if the dwellings are situated within the same building or on the same grounds. 

These rules apply equally to the purchase of a single freehold building composed of, say, six studio flats, and to the purchase of a portfolio of six physically disparate freehold houses. They are intended to promote the supply of private rented housing and alleviate the absence of reliefs from the residential higher rates or increased rates for non-resident transactions for businesses investing or trading in residential property.

Multiple dwellings relief was introduced in 2011. The six-or-more rule was present at the outset of the tax in 2003.

Granny annexes

Between 2011 and 2016, multiple dwellings relief worked as intended. In 2016, the 3% higher rates were introduced for purchases of additional dwellings by individuals and purchases of dwellings by companies. A government amendment sponsored by Eric Pickles was made to the Finance Bill to give an exception to the higher rates for purchases of dwellings with ‘granny annexes’. The concern was that without it, the granny annexe would count as an ‘additional’ dwelling and automatically engage the higher rates regardless of the ownership of other dwellings by the buyer. 

However, the exception had the unintended effect of starting a practice of claiming multiple dwellings relief in respect of granny annexes. If a granny annexe does not count as a single dwelling, then the exception to the higher rates would have been otiose. It is responsible for what has become a burgeoning reclaim industry, with claims farms sending unsolicited letters to buyers, offering to reclaim stamp duty by making a retrospective claim for the relief where the buyer is still in time or to bring an action for professional negligence against the conveyancer where they are not.

The claims farms are financially interested in ‘pushing the boundary’ on what qualifies as a single dwelling. (The statutory test merely requires a building or part of a building to be “suitable for use” as a single dwelling.) This led to 13 tribunal appeals between 2020 and 2022, all of which were determined in favour of HMRC. The appeals concern the physical ‘suitability’ of annexes from the perspective of privacy / security and/or the standard of fixed kitchen facilities. Brave attempts were made on behalf of the appellants that an inter-connecting door between two dwellings in a single building was not required, because the occupants of both parts could be in a trusted relationship, or that fixed kitchen facilities were not needed because an occupant could uwse a microwave placed on a chair, or rely on eating out or take-away delivery services. 

Unsurprisingly, the tribunals dismissed these arguments and found that ‘suitability’ must be tested objectively, taking into account the type of property and its location. To date, relatively little mention has been made on legal ‘suitability’ such as what weight to give a planning condition which prevents an annexe from being used except as ancillary accommodation. The decision in a tribunal appeal is expected this year, where this factor may have a prominent role.

The consultation proposals

To “reduce or eliminate the scope for incorrect claims and abuse of the rules”, the 2021 consultation makes four proposals that allow the relief:

• only where all the dwellings are purchased for a qualifying business use (for example, development and resale or exploitation as a source of rents)
• only in respect of the dwellings purchases for a qualifying business use
• in respect of annexes only where they are worth at least a third of the total price, and
• only for purchases of three or more dwellings.

All of the proposals are likely to hurt the typical annexe transaction – where there is a single annexe within the grounds of, or within the same building as, the principal dwelling, worth less than one-third of the total price. Curiously, the last might mean prime country properties continue to qualify to the extent that they consist of multiple annexes (such as one or more staff flats and guest suites). The third is the most elegant and deserves more explanation.

At the moment, an annexe is disregarded as a single dwelling for the purpose of the higher rates if it is situated within the grounds of, or within the same building as, another dwelling and is worth one-third or less of the total purchase price. This means that the 3% lower standard rates apply unless the buyer (or their spouse or civil partner) owns any other dwelling at the end of the day that is the completion date of the transaction subject to the exception for replacing a main residence. But the same annexe is respected for the purpose of multiple dwellings relief. This means that up to £86,250 less stamp duty would be payable

than if the buyer had bought a single dwelling. In other words, a buyer can have their cake and eat it. The third proposal in the consultation addresses this imbalance and means that an annexe which is disregarded as a single dwelling for the purpose of the higher rates would also be disregarded as a single dwelling for the purpose of multiple dwellings relief.

What happens next?

If the SDLT proposals are acted on, which is virtually certain in my view, the consequences are likely to include:

• the demise of claims farms
• fewer professional negligence actions
• more complexity for conveyancers, at least in the short term
• pressure on buyers to obtain valuations to defend apportionments, and
• pressure on conveyancers to consider the timing of completions / exchanges in the run-up to the changes being introduced.

Obviously, some of these consequences are welcome and the proposals will certainly achieve their objective of reducing the scope for abuse of the rules. But they will probably have unintended consequences – changes in tax law of this scale usually do – despite consultation. Conveyancers should be aware of the potential changes, advise buyers that might be affected and put in place controls to ensure that the changes are considered when calculating the tax.

Buyer behaviour

Note that the six-or-more rule is not expected to be affected by the changes. The extent to which the stamp duty rates for residential transactions and non-residential or mixed transactions varies means that the difference in stamp duty cost might drive buyer behaviour. For example, rather than invest in a single buy-to-let personally, some overseas investors are joining ‘club deals’ where they take a share of a collective purchase of six or more properties on their disposal by a developer. Such purchases are taxed as if they were non-residential property, meaning that far less stamp duty is payable, and this is before receiving a bulk-purchase discount from the developer. The total amount of stamp duty payable by six non-resident individuals purchasing one £2m property each independently would be close to £1.5m. In contrast, the total amount of stamp duty payable by six non-resident individuals participating in a club deal would be under £600,000 – a 60% tax saving.