Multiple Dwellings Relief (MDR) from SDLT – how and when will it apply?

Multiple Dwellings Relief (MDR) is a form of Stamp Duty Land Tax relief that applies to “qualifying” land transactions that completed after 19 July 2011.

MDR applies to transactions that have, as their main subject matter, an interest in:

1. at least two dwellings;
2. a single dwelling if it is part of a “linked” transaction i.e. if a transaction forms part of a single scheme, arrangement or series of transactions between the same buyer and seller);
3. “off-plan” purchases (where the contract to construct the dwelling or dwellings has substantially been performed prior to completion or construction of the “dwellings” begins); and
4. Six or more dwellings (which, whilst such a transaction would ordinarily be treated as a non-residential transaction for SDLT purposes, it is at the purchasers option to apply MDR if it is tax efficient to do so).

The effect of MDR is to fix the SDLT chargeable by reference to the “average” chargeable consideration for multiple purchases of dwellings, rather than the “aggregate” chargeable consideration.  If MDR is available, the SDLT calculation undertaken is:

1. Divide the aggregate chargeable consideration given for all the dwellings by the number of dwellings.  This is the average consideration.
2. Calculate SDLT on the average consideration using the SDLT rates in s55 of the Finance Act 2003; and
3. Multiply the SDLT due on the average consideration by the number of dwellings.  If the resulting figure is less than 1% of the total consideration paid for the dwellings, the SDLT deemed to be payable is the 1% total consideration.

Fiander and Brower v HMRC [2020] UKFTT 00190 (TC)

This case concerned scenario (i) above – a property acquisition consisting of a detached property with an annex (for £575,000 in 2016), over which the purchaser (the SDLT “taxpayer” for the purpose of this article) claimed MDR.  The taxpayer argued that they had bought two dwellings; the “annex” being suitable to be considered a “separate dwelling” under the suitability test to be found at Schedule 6B, Paragraph 7(2)(a) of the Finance Act 2003.

HMRC took a different view and issued a closure notice to the taxpayer on 24 August 2018 amending the SDLT return to show that (i) the property acquisition did not qualify for MDR, and (ii) the taxpayer owed a further £10,000 in SDLT.

The taxpayer challenged HMRC’s decision in September 2018 and a statutory review of the decision was requested. The statutory review concluded in November 2018 upholding HMRC’s original decision that the acquisition did not attract MDR.

The taxpayer referred the case to the First Tier Tribunal (“FTT”).  The question for the FTT to consider seemed a simple one; was the “annex” suitable for use as a “single dwelling” for the purposes of Schedule 6B paragraph 7(2) of the Finance Act 2003.  As ever, the decision was not, in fact, as simple as it appeared.

The annex

The annex had its own living room, kitchen/utility, bedroom and shower room.  It was accessible by French doors that separated the living room from an outside decking area.  It was also connected to the main house by a corridor (there were doorjambs in place but no lockable door) and did not have its own post box, council tax or utility supply.

Was the annex suitable to use as a separate dwelling? The arguments “for” and “against”

For: The taxpayer argued that the physical configuration of the annex should be the focus of the FTT’s decision making as to “suitability”.  To that end, the annex provided an occupier with privacy and the ability to live separately from the residential accommodation in the main house. The fact that the annex was not used as a separate dwelling at the date of completion should not be a reason to deny a claim for MDR relief. In the alternative, if the FTT did not agree that the annex provided separate and independent means of habitation in its present condition, an internal locking door could be hung from the doorjamb without any structural alterations being required.

Against:  HMRC argued that the annex was simply part of a single dwelling. The Rightmove particulars for the sale of the property supported this.  HMRC stressed that the Tribunal should have regard to the facts at the date of completion, not hypothetical scenarios moving forward, and placed emphasis on the fact that the annex had not been used as a separate dwelling at completion.  Whilst the HMRC conceded that the annex had some features of a self-contained living accommodation, they were not sufficient to categorise the annex as a separate dwelling to the rest of the house.  HMRC placed heavy weight on the lack of privacy and security between the main house and the annex. It was HMRC’s view that the annex was simply an extension to the main property.

The FTT’s discussion and decision

The Tribunal confirmed that “suitability” is a test to be determined by the “objective observer”, to be determined on the basis of physical attributes of the property at completion and cannot be performed on the assumption that new physical features will be introduced to enable a new and different kind of use to be attributed to the property. The Tribunal also accepted that there was no one determinative factor – the exercise was a balancing act, effectively weighing all factors against the background circumstances.

With the above in mind, the Tribunal conceded that were a number of factors in support of the annex being a “separate dwelling”.   Principally these were that (i) the annex did provide basic needs for habitation, (ii) the annex could be repaired (so that its state of disrepair at the time of completion should not determine its suitability) and (iii) it was clear that the annex had been used for habitation in the past.  However, the corridor separating the main house and the annex caused problems.  The unimpeded access between the main house and the annex prevented the requisite privacy and security needed for a separate dwelling. The Tribunal noted the decision in Ramduhn  (that a lockable door was not the only way to provide security and privacy) but also made clear that the tests being considered in this case and Ramduhn were different (Ramduhn looking at the adaptation of use rather than the suitability of use being determined in this case).

The Tribunal accepted that the annex could potentially be used as a separate dwelling in current circumstances but only if a very particular relationship of trust subsisted between the occupants of the main house and the annex i.e. a family relationship.  Absent that close relationship, the annex was not suitable as a separate dwelling due to the insufficient privacy and security it provided.

As to the taxpayer’s alternative case that the annex could be made suitable as a separate dwelling by non-structural changes being made, the Tribunal did not agree.  The addition of a new feature to enable the property to serve as a stand-alone dwelling was not a matter of restoration or repair.

The appeal therefore failed and the taxpayer was fixed with an additional SDLT liability of £10,000.

Conclusion – key points to note

SDLT is never a straightforward issue and it follows that the application of potential reliefs from the same will be similarly complex. It is, however, useful to note the Tribunal’s approach to disputes such as these; being one where there are no hard and fast determinative factors, rather an exercise of weighing all factors against the background circumstances.  It is also key to remember that the Tribunal will be looking at the condition of the property at the time of completion rather than at the potential to make amendments to the property in the future that could retrospectively bring the property within the “suitability” test.  MDR will not apply in those circumstances.

For further information please contact Joe Bryant or Fiona Murphy.