Property buyers looking to pay reduced rates of stamp duty when buying multiple residential properties have experienced a tightening of the rules following a consultation by HMRC.
Stamp Duty Land Tax (SDLT) is payable in England on residential property transactions where the market value is more than £125,000, with a tiered scale related to the purchase price, and with different rules if you’re a first time buyer, or buying an additional home or a buy-to-let, through a company or when resident overseas. Non-residential property transactions are subject to different rates, which are presently lower than residential rates.
A consultation by HMRC previously put the spotlight on how tax was calculated in two key areas: transactions using the Multiple Dwelling Relief (MDR) rules and those involving mixed-use purchases of both residential and non-residential property.
Previously, MDR could be claimed when at least two dwellings were purchased in a single transaction, or as part of a series of linked transactions between the same vendor and purchaser. This allowed the rate of SDLT to be calculated based on the average value of each dwelling, calculated individually and added together, rather than on their combined value.
This meant, for example, rather than calculating stamp duty on a single transaction of three properties at a total cost of £1.5 million, the tax could be calculated on three individual properties valued at £500,000 each. This enabled significant savings as stamp duty rates are tiered according to property value.
However, from 1 June 2024, MDR was abolished. An external evaluation of MDR carried out as part of HMRC’s Tax Reliefs Evaluation Programme found no strong evidence that the relief played a role in supporting residential property investment.
As a result of the abolishment of MDR, it has resulted in many purchasers focusing on whether the property is entirely residential. The consolation did identify this as a potential area for a tightening of the rules but this has not occurred yet.
At present, savings can be made when claiming for a mixed residential and non-residential use purchase, which is subject to SDLT at a lower non-residential rate, even where the amount of non-residential land in the purchase is very small. As HMRC highlights, mixed-property purchases can range from a country house with some land let for grazing through fast food shops with flats above, pubs and B&Bs, to large-scale city centre developments comprising ground floor retail outlets with floors of flats above.
Because mixed-property purchases are classed as non-residential, as well as benefiting from the lower non-residential rate of SDLT, purchasers can avoid the surcharges due when an individual already owns residential property, or is currently living overseas.
For the purposes of SDLT, there is a definition of what is meant by a ‘dwelling’ and in deciding if it qualifies HMRC will use a number of indicators, such as whether there is a separate council tax bill and energy supply, or a lockable front door, as well as the facilities needed to live independently, such as a toilet or washing facilities.
When stamp duty was introduced, the tax charges on residential and non-residential property were similar so there was no significant tax advantage, but now there is a big difference once property values are over £1m, or where higher rate additional dwelling rates apply.
However, this is a complicated area and it’s worth getting specialist professional advice on the topic. Mixed-use purchase relief is not automatic and must be claimed through a land transaction return and non-specialist conveyancers may not be aware of the potential to make a claim, or what constitutes a legitimate claim and HMRC will push back on anything that is misrepresented.
Some examples of non-residential usage claims rejected by HMRC are outlined in the consultation document, including a room above a detached garage used as an office by the purchaser, when part of a large, detached, six-bedroom home; leasing the garage of a suburban, semi-detached property to a company for storage; and a paddock area behind the back garden of a substantial residential property in an affluent location being used for informal grazing by a neighbour’s horse.
