Multiple Dwellings Misconceptions

(Common SDLT Misconceptions and Misunderstandings)

Multiple Dwellings Relief (MDR) ceased on June 1, 2024; however, if your property was bought before this date, you have until April 30, 2025, to submit a claim, provided it’s within one year of purchase.

Misconception: Automatic Application of Multiple Dwellings Relief (MDR)

(Common SDLT Misconceptions and Misunderstandings>Multiple Dwellings Misconceptions)

➤ MDR must be actively claimed on the SDLT1 form and involves a specific calculation process based on the average cost per dwelling, with a minimum tax rate of 1% of the total payment for the dwellings.

Multiple Dwellings Relief (MDR) ceased on June 1, 2024; however, if your property was bought before this date, you have until April 30, 2025, to submit a claim, provided it’s within one year of purchase.

For taxpayers to benefit from MDR, they must actively indicate their desire to claim this relief. This is accomplished by answering question nine with code 33 on the SDLT1 form, informing HM Revenue and Customs (HMRC) that MDR is being sought for the transaction.

Key Points

MDR is available to individuals and entities purchasing more than one dwelling, whether these properties are acquired in a single transaction or through several linked transactions. This relief applies to both freehold and leasehold interests in multiple dwellings. Claiming MDR involves a specific calculation process designed to determine the SDLT owed, which is distinct from standard SDLT calculations:

1. Calculation Method: To calculate the SDLT with MDR, you first divide the total payment for the properties by the number of dwellings involved in the transaction. This step establishes an average cost per dwelling.
2. Tax Due: The next step involves calculating the SDLT due based on this average cost per dwelling. This calculation follows the normal SDLT rates, except it’s applied to the averaged cost rather than the total transaction value.
3. Final SDLT Payment: Finally, the calculated SDLT for a single dwelling is then multiplied by the total number of dwellings to determine the overall SDLT due. Notably, the minimum tax rate applicable under MDR is 1% of the total payment made for the dwellings.

For example, if you purchase four houses for a total of £1 million, the calculation would be as follows: £1 million divided by four equals £250,000, which is the average cost per dwelling. Given the minimum MDR rate of 1%, the SDLT due would be £10,000 (£1 million x 1%).

Misconception: Multiple Dwellings Relief (MDR) Can Be Applied to Any Quantity of Properties in a Single Transaction

(Common SDLT Misconceptions and Misunderstandings>Multiple Dwellings Misconceptions)

➤ MDR applies to transactions involving between two and five properties, with transactions exceeding five properties taxed at non-residential SDLT rates, potentially increasing the tax liability. MDR was abolished as of June 1 2024.

Multiple Dwellings Relief (MDR) ceased on June 1, 2024; however, if your property was bought before this date, you have until April 30, 2025, to submit a claim, provided it’s within one year of purchase.

The misconception is that MDR can be applied universally across any number of properties involved in a single transaction. This belief has led many investors and purchasers to assume that acquiring a portfolio of multiple properties in one go could benefit from MDR, regardless of the number of dwellings involved. 

The Reality

The relief is specifically designed to apply to transactions involving between two and five properties. Its primary aim is to provide a tax advantage for those purchasing multiple dwellings simultaneously, by allowing them to pay Stamp Duty Land Tax at a reduced rate, calculated on the average value per dwelling rather than the total transaction value. 

When a transaction includes more than five properties, the tax calculation shifts from residential to non-residential rates of SDLT. Non-residential rates are generally less favourable than the rates applied under MDR, potentially increasing the total tax liability for the purchaser. 

Key Points and Examples

• MDR applicability is limited to transactions involving between two and five properties. 
• Transactions exceeding five properties are taxed at non-residential SDLT rates. Example: Consider an investor planning to acquire a portfolio of six residential properties in a single transaction, with the expectation of applying MDR to reduce SDLT. Under the misconception, they would anticipate a lower tax rate across all properties. However, in reality, the entire transaction would be subject to the less favourable non-residential rates, resulting in a higher total SDLT bill than initially calculated.

Misconception: Minimum rate MDR 1% is added to 3% surcharge

(Common SDLT Misconceptions and Misunderstandings>Multiple Dwellings Misconceptions)

➤ Claiming MDR usually results in a minimum SDLT payment of 3% due to the surcharge for additional properties, but certain exceptions might allow for a 1% minimum rate without the surcharge. MDR was abolished as of June 1 2024.

Multiple Dwellings Relief (MDR) ceased on June 1, 2024; however, if your property was bought before this date, you have until April 30, 2025, to submit a claim, provided it’s within one year of purchase.

Incorrect assumption. When claiming MDR, you’ll always pay a minimum SDLT rate of 1% plus the 3% surcharge for additional properties.

The Reality

While the default minimum rate for MDR is 1%, the 3% surcharge for additional dwellings generally pushes that minimum to 3%. However, certain scenarios may allow you to claim MDR without incurring the 3% surcharge.

Key Points:

• Understanding the Rule: The 3% surcharge for additional properties (second homes, buy-to-let properties, etc.) usually overrides the 1% MDR minimum rate, resulting in a total minimum SDLT payment of 3%.
• Granny Annex/Subsidiary Dwelling Exception: When purchasing a main dwelling along with a granny annex or subsidiary dwelling, you might be eligible for MDR without the additional 3% surcharge, maintaining the minimum at 1%.
• Linked Transactions: Buying one dwelling in one transaction and another in a linked transaction might also potentially remove the 3% surcharge, but the rules around linked transactions are complex.

Example:

You purchase three residential properties with an average price of £150,000 per dwelling. Here’s a potential SDLT breakdown:

• MDR at 1% minimum: Total tax would be significantly lower, but this scenario is usually unlikely due to the surcharge.
• MDR at 3% minimum (most common): The 3% surcharge typically applies, but it still often results in less tax than without MDR.
• Special Exception: If one property qualifies as a subsidiary dwelling, and all other MDR criteria are met, you might potentially pay SDLT with only the 1% minimum.

Misconception: After Obtaining MDR Relief, Property Owner Can Immediately Merge Units Without Reassessing SDLT

(Common SDLT Misconceptions and Misunderstandings>Multiple Dwellings Misconceptions)

➤ Modifying properties to merge units after claiming MDR could trigger SDLT reassessment, potentially withdrawing benefits, unless specific criteria for exceptions are met.

Multiple Dwellings Relief (MDR) ceased on June 1, 2024; however, if your property was bought before this date, you have until April 30, 2025, to submit a claim, provided it’s within one year of purchase.

Property buyers may erroneously believe that obtaining Multiple Dwellings Relief (MDR) allows for subsequent alterations, such as the merging of units, without triggering a reassessment of Stamp Duty Land Tax (SDLT) liability.

The Reality:
Modifying properties to reduce the number of separate dwellings after claiming MDR could result in HMRC (His Majesty’s Revenue and Customs) issuing a further SDLT charge. In some cases, it may lead to the partial or complete withdrawal of MDR benefits.

Key Points:

• Triggers for Reassessment: Combining dwellings is a primary trigger for SDLT reassessment. Other actions such as removing kitchens, substantially altering internal layouts to eliminate independent living, or demolishing whole dwellings could also impact an original MDR claim.
• Limited Exception: Specific circumstances may allow for the conversion of dwellings into a main residence with a subsidiary annex while retaining MDR benefits. However, strict criteria apply, such as limitations on the annex’s size and self-sufficiency.
• Refund Opportunities: If modifications occur within a prescribed time frame after the initial purchase, buyers may be eligible for an SDLT refund. In certain instances, HMRC may permit an extension of the eligibility period for reclaiming SDLT under the MDR scheme.

Example:
Imagine purchasing three, adjacent terraced houses using MDR. Later, you remove internal walls to merge two of the houses into a single, more spacious dwelling. Unless this was part of the original plan within strict guidelines, it’s likely HMRC would require you to pay back a portion of the SDLT relief you received, plus possible interest.