Multiple Dwellings Relief (MDR) Not Claimed

(Overview: Process of Reclaiming SDLT>Reclaims for Stamp Duty in Various Situations)

Multiple Dwellings Relief (MDR) ended on June 1, 2024. However, if you purchased your property before this date, you can still submit a claim for MDR until May 30, 2025, as long as the claim is made within one year of paying the SDLT.

Reason for Reclaiming Multiple Dwellings Relief (MDR)

Understanding Multiple Dwellings Relief: Multiple Dwellings Relief (MDR) is designed to reduce the Stamp Duty Land Tax (SDLT) burden for buyers purchasing more than one dwelling in a single or linked transaction. It essentially allows the SDLT to be calculated in a way that reflects the individual values of each dwelling rather than on the total transaction value, which can significantly lower the overall SDLT payable.

Common Scenarios for MDR Reclaim A reclaim of MDR may be necessary if it was not correctly applied at the time of the original SDLT calculation. This can occur due to several reasons:

1. Misunderstanding of Property Classification: If properties are incorrectly classified (for instance, as commercial when they are residential), it may prevent the rightful application of MDR.
2. Incorrect Transaction Linking: Incorrectly identifying or failing to recognise linked transactions can lead to miscalculations. For instance, properties purchased in sequences that should be treated as linked transactions but are not can affect how SDLT is calculated.
3. Failure to Recognise Qualifying Dwellings: Sometimes, a transaction involving multiple properties may not be recognised as eligible for MDR due to an oversight or misunderstanding about what constitutes a dwelling. For example, properties under significant renovation or not immediately habitable might be overlooked as qualifying dwellings for MDR.
4. Errors in SDLT Returns: Simple human error in completing SDLT returns can result in failing to claim MDR when it is applicable.

Process and Evidence for Reclaim To successfully reclaim MDR, the buyer (or their agent) must demonstrate that the original SDLT assessment did not correctly apply MDR. This involves several steps:

• Review of Original Transaction: Examine the details of the original purchase to determine if more than one dwelling was involved and whether the transactions were linked appropriately.
• Gathering Evidence: This includes contracts, property descriptions, and evidence of payment structures that demonstrate the presence of multiple dwellings.
• Calculation of Correct SDLT: Recalculate the SDLT based on the individual values of the dwellings rather than on the total purchase price. Compare this to the SDLT originally paid to establish the potential overpayment.
• Filing an Amended Return: Submit an amended SDLT return to HMRC with the correct calculations and supporting documentation to claim the MDR. This must be done within the statutory time limits for amending returns.

Case Examples Examples where MDR reclaims could be applicable include:

• Multiple Flats Purchased in a Single Transaction: If a buyer purchases multiple flats within a building and MDR was not claimed on the initial SDLT return, they could file for a reclaim.
• Renovation Properties: Purchasing several properties that require extensive renovation before they are habitable might also qualify for MDR, which may not have been claimed initially due to misconceptions about their eligibility.
• Off-Plan Purchases: In some cases, purchases off-plan where construction had not yet started at the time of contract could qualify for MDR but were overlooked in the initial tax calculations.

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Circumstances Leading to Incorrect Assessment of SDLT

Lack of Awareness and Understanding One common reason for failing to claim Multiple Dwellings Relief (MDR) is a simple lack of awareness or understanding of the relief and its conditions. Both buyers and their advisors may not recognise that certain configurations of property purchases qualify for MDR. Examples include transactions involving a main house with a granny annex, purchases of multiple flats within the same building, or a single transaction involving a house with a separate, self-contained unit on the same plot.

Complexity of Legislation The intricacies of Stamp Duty Land Tax (SDLT) legislation also contribute to mistakes. The rules surrounding MDR are complex, and the calculation method for applying this relief isn’t always straightforward. This complexity can lead to errors where MDR is either not considered or is applied incorrectly, resulting in SDLT overpayments.

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Argument for Reclaim

Basis for Reclaiming Overpaid SDLT The basis for reclaiming SDLT hinges on demonstrating that the property transaction involved multiple dwellings and that these dwellings meet the eligibility criteria for MDR. The core of the argument is that had MDR been properly applied at the time of the transaction, the amount of SDLT paid would have been significantly lower.

To clarify the criteria for a separate dwelling in the context of claiming Multiple Dwellings Relief (MDR) for Stamp Duty Land Tax (SDLT) purposes, several key factors are derived from HMRC’s guidance, case law, and the real-world application as adjudicated in tax tribunals. Here’s a detailed breakdown:

Suitability for Use as a Dwelling

• Physical Suitability: The property must be suitable for use as a dwelling, meaning it should be fit for use in its current state at the time of transaction, not just capable of being made suitable through potential modifications.
• Independence: It should be independent enough to function as a separate unit. This involves having the essential facilities for living, such as sleeping areas, sanitation, and possibly cooking facilities, that do not require access to another dwelling to be usable.

Sleeping Area

The dwelling must have a designated sleeping area that is separate from general living areas. It should include basic amenities such as lighting, power points, and ideally, a window for natural light and ventilation.

Living Area

There needs to be a distinct living area, equipped with essential living facilities such as heating, lighting, and power points. The space should be conducive to day-to-day activities like dining, relaxing, and entertaining guests.

Kitchen Facilities

A kitchen or food preparation area should be present, with basic infrastructure such as plumbing and power sources for appliances. Even if certain appliances are not present at the time of sale, the space should be evidently designed to accommodate them.

Independent Access

Each dwelling should have its own access point, either directly from the outside or via a common area that does not compromise the privacy and security of the dwelling.

Privacy and Security

Adequate privacy and security measures, such as lockable doors between any shared or connecting spaces, are essential. This includes having doors that are secure and possibly soundproof to maintain the independence of each dwelling.

Control of Utilities

The dwelling should have independent control over its utilities, including electricity, water, and heating systems. This may involve separate meters or controls that are accessible within the dwelling.

Legal Constraints and Planning Permissions

The dwelling must comply with all relevant legal and planning requirements to be considered a separate unit. This includes adherence to building regulations and any local planning permissions that dictate its use as a dwelling.

Marketing and Perception

How the property is marketed and perceived can influence its classification as a single or multiple dwelling. However, this is less critical than the physical and functional attributes of the property.

Council Tax and Postal Arrangements

While separate council tax assessments and postal addresses support the argument for separate dwellings, they are not decisive. The physical setup and functionality as independent units carry more weight in the assessment.

Additional Considerations

• Fire Safety and Building Regulations: Compliance with fire safety and building regulations is crucial, especially in configurations like annexes or converted spaces.
• Adaptability for Modern Use: The property’s suitability for modern living standards and habits (such as the usage of microwaves instead of conventional ovens) should also be factored into its classification.

The application of these criteria involves a holistic assessment of the property at the effective date of the transaction. Each case may vary, and specific circumstances can significantly influence the final determination of what constitutes a separate dwelling for SDLT purposes. For accurate application and potential claims, it is advisable to consult with a tax professional experienced in property transactions and SDLT regulations.

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Required Documentation and Calculations To support a claim for reclaiming overpaid SDLT, detailed information must be provided about the transaction. This includes:

• Description of the Dwellings: Clarification on the nature of the dwellings involved in the purchase, particularly how each unit qualifies as a separate dwelling under MDR rules.
• Proof of Transaction Details: Copies of transaction documents that detail the purchase of multiple dwellings.
• MDR Calculation Breakdown: A breakdown showing how the SDLT would have been calculated with MDR applied, compared to the SDLT actually paid. This should clearly demonstrate the potential financial benefits that were overlooked.

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Navigating the Reclaim Process with HMRC Successfully reclaiming overpaid SDLT involves navigating through the reclaim process with HM Revenue and Customs (HMRC). This may require:

• Submitting a Revised SDLT Return: Filing an amended return to reflect the correct SDLT due with the application of MDR.
• Providing Supporting Documentation: Submitting all relevant documents that justify the claim, such as contractual agreements, property descriptions, and detailed calculations.
• Engagement with HMRC: Communication with HMRC to explain and justify the basis for the reclaim. This may include responding to queries from HMRC regarding the nature of the dwellings and the details of the transaction.

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MDR On Mixed Use Transactions Not Correctly Applied

(Overview: Process of Reclaiming SDLT>Reclaims for Stamp Duty in Various Situations)

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

The 2020 update to HMRC guidance clarified that for properties qualifying for Multiple Dwellings Relief (MDR) with mixed-use elements, the correct Stamp Duty rate is 1% instead of the previously applied 3%.  

When claiming Stamp Duty reliefs, it’s important to note that these claims must typically be made within 12 months of the transaction’s effective date. However, if there has been an oversight or error in the application of the relief, there is a provision for a longer reclaim period. 

In such cases, it is arguable that the period for making a reclaim extends to the statutory maximum of four years from the effective date of the transaction. This extended period allows for corrections to be made when mistakes in the initial assessment are discovered, ensuring that taxpayers can rectify their Stamp Duty liabilities appropriately.

Context of the HMRC Guidance Change

Original Misinterpretation: Previously, HMRC guidance indicated that the 3% Higher Rates Additional Dwelling (HRAD) surcharge applied uniformly to the residential components of transactions claiming MDR, regardless of the property’s mixed-use nature. This was in conflict with the practical and intended application of MDR, particularly for properties that combine residential units with commercial premises.

Guidance Update and Error Correction: In a significant update of their guidance on 13 November 2020 HMRC acknowledged that for mixed-use properties where MDR is claimed, the appropriate surcharge on the residential elements should be 1% instead of 3%. This update came after recognition that applying a 3% surcharge was erroneous for such properties, especially when non-residential elements were not just negligible or artificially contrived.

Implications of the Updated Guidance

The updated guidance specifically mentions:

1. Non-Higher Rates Transactions:
   • Transactions involving non-residential or mixed residential and non-residential properties are typically not subject to the higher rates. This categorisation is critical when a transaction includes more than one dwelling, and MDR is claimed on the residential part of the transaction.
2. Exemption Criteria:
   • The HRAD will not apply if the non-residential element of the transaction is substantial and not negligible or artificially contrived. This means genuine mixed-use properties can benefit from the reduced surcharge, aligning with the legal framework and practical realities of property transactions.

Steps for Those Who May Have Overpaid

1. Transaction Review: Individuals and entities should review all relevant transactions in the last four years. The focus should be on transactions where:

• MDR was claimed for mixed-use properties.
• The 3% surcharge was applied to the residential elements instead of the corrected 1%.

2. Calculation of Potential Refunds: The difference in surcharge rates (2% overpaid per transaction) could represent significant financial implications, as noted in the potential reclaim of £20,000 per £1 million of residential value incorrectly assessed.
3. Claiming Refunds: Affected parties should prepare to file for refunds or adjustments based on this updated guidance. This involves gathering transaction records, recalculating the correct SDLT, and potentially engaging tax professionals to ensure accurate submissions and a subsequent reclaim.

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