Tax experts could have been forgiven for taking a sharp intake of breath last week when chancellor Jeremy Hunt announced that multiple dwellings relief (MDR), a staple of the residential stamp duty land tax (SDLT) world, was to be abolished.
Some tinkering around the edges was perhaps expected (particularly following the recent consultation in respect of purchases of multiple dwellings together with commercial property, where surprisingly low SDLT rates could legitimately be achieved), but the relief being axed completely was a bold and surprising move.
The question many have pondered since then is: was this a sledgehammer to crack a nut, or a much-needed sensible step?
Many will be aware that an industry had emerged whereby specialist agents scoured historic property listings and contacted those who purchased reasonably high-value residential property with an annexe or ‘granny flat’, offering advice as to whether SDLT could be recovered via an amendment to the SDLT return to claim MDR. Some of these agents were probably thorough in their analysis and recommended entirely legitimate claims, but some did not, and in some cases reliefs were improperly obtained.
Was abolishing MDR a sledgehammer to crack a nut, or a much-needed sensible step?
Whether or not a second dwelling exists is often not clear-cut. But as legislation cannot easily give a clear test – and the work required to properly decide the SDLT treatment can be material, requiring several cases to be considered – it could take hours to consider a single case. The burden on HMRC to check the hundreds of claims received (without much of the supporting evidence) must be immense.
Putting aside incorrect relief claims, in some cases there was also a questionable moral rationale for certain purchases attracting this SDLT relief. While a £3m mansion may include a small, low-value flat above the garage for the mother-in-law or nanny, for example, the SDLT relief it attracted was disproportionately generous.
However, there are many situations where multiple dwellings are legitimately purchased; for example, perhaps an investor buys a block of flats from a developer. Residential SDLT rates have skyrocketed in recent years and the top rate of SDLT is now 15% (or 17% if you don’t spend enough time in the UK). This rate is paid on consideration above £1.5m.
Linked SDLT rules broadly require you to treat the purchase of several properties as a single purchase, and could mean a lot of consideration is subject to (perhaps) 15% SDLT rates, even though each individual dwelling is well below the £1.5m threshold. This could cripple certain legitimate industries, such as professional landlords. But fortunately, there is already an escape from these penal SDLT rates, provided you are buying at least six dwellings. A purchaser can choose to apply the commercial SDLT rates to such purchases, and these rates peak at 5%.
The abolition of MDR therefore creates an anomaly – purchasing between two and five dwellings in a single deal will probably incur a higher-percentage SDLT rate than a purchase of six or more dwellings.
Put bluntly, this is not fair. An investor buying five flats should not pay a significantly higher SDLT rate compared with an investor buying six flats. It does not make commercial sense and hurts the smaller investor (who will already suffer compared with larger investors, due to general economies of scale).
By way of example: investor A buys six flats from a developer for £3m. Investor B buys four flats from the same developer for £2m. The flats are all identical, priced at £500,000 each and let’s assume everyone is on shore and intends to let the properties (escaping the flat 15% ‘enveloping’ rate of SDLT).
Investor A pays £139,500 SDLT, an effective SDLT rate of 4.65%. Investor B pays £211,250 SDLT, an effective SDLT rate of 10.56%. It is clearly unfair that investor B pays more than twice the effective rate of SDLT than investor A, who acquires two more flats and spends £1m more.
The solution proposed in Hunt’s spring Budget is not perfect. It tackles one problem but in fact creates a new wrinkle that will no doubt affect purchaser behaviour. However, on balance, many will no doubt come to a grudging conclusion to agree with the new measure, as it will likely do far more good than harm. And sadly, a better, more practical solution probably doesn’t exist.
Matt Spencer is a tax partner at Kingsley Napley
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