HMRC proposes to change SDLT rules on mixed property and Multiple Dwellings Relief

Stamp Duty Land Tax (SDLT) is generally chargeable on the acquisition of residential property at the residential rates where the property is exclusively residential. If the property is mixed commercial and residential, the SDLT chargeable on the entire consideration is calculated using the non-residential SDLT rates, however small the residential component.

Given that more SDLT is generally chargeable under the residential than non-residential SDLT rates, especially in relation to more expensive properties (of close to £1m and above), it is clearly advantageous to the taxpayer from an SDLT perspective for some non-residential property, however small, to be included in any acquisition of higher-value residential property.

In a recent consultation document, HMRC noted that this SDLT advantage may be encouraging, in a way that is contrived, the inclusion of non-residential property in residential property acquisitions. HMRC cites, for example, the cases of a purchaser leasing a garage in an ordinary semi-detached property in a regular residential suburb to a company for storage, and a purchaser using a room in a large house as an office claiming, in each case, that the property is mixed use and so not subject to the (higher) SDLT rates for residential property.

Therefore, to facilitate what HMRC would see as creating a level playing field, it is proposing instead either of the following (on which it has sought views):

• an apportionment basis, so that SDLT would be payable on the residential part at the residential rates and on the non-residential part at the non-residential rates;
• treatment of the property as non-residential only where the consideration attributable to the non-residential part exceeds a certain threshold (e.g. half of the total consideration).

The second option seems somewhat arbitrary: why, for example, should a genuine mixed property which is, say, 55% residential be subject in its entirety to the higher SDLT residential rates, and a mixed property, which is only 45% residential, treated as non-residential and so benefit from the lower non-residential ones?

If the regime is to be changed, an apportionment basis would seem fairer – just and reasonable apportionments are, after all, a staple feature of UK tax legislation. Indeed, it is perhaps surprising that residential/non-residential apportionments were not introduced when the residential/non-residential SDLT rates first diverged in a substantive way in 2011. That said, it is by no means certain that an apportionment basis would fully achieve the fairness which HMRC states it is seeking; in the cases cited above, the purchaser could still seek split residential/non-residential SDLT treatment to achieve an SDLT saving, albeit smaller.

Proposed changes to Multiple Dwellings Relief

Coupled with the proposed change in what constitutes non-residential property are proposed changes in relation to Multiple Dwellings Relief (MDR). MDR applies to the acquisition of two or more dwellings in a single transaction. Under MDR, the applicable (residential) SDLT rate is, in broad terms, determined by reference to the average consideration for each of the dwellings (rather than the total consideration for all the dwellings). In general, therefore, the greater the number of dwellings, the lower the likely SDLT.

This has led to the making by purchasers of what HMRC describes as “unreasonable” MDR claims (for example, a purchaser seeking to treat an en-suite bedroom with a built-in wardrobe in a large house as a separate dwelling on the grounds that it had an electric socket and so could house a microwave and kettle and allow the area to double up as a kitchen!).

To tackle incorrect claims for MDR, HMRC is proposing (as one option) that MDR be restricted to cases where dwellings are, in whole or part, purchased for ‘qualifying business use’. Another option proposed by HMRC is to limit MDR to acquisitions of three or more dwellings (to pre-empt “unreasonable” claims of the type described above). A further option (whether in addition or by way of alternative) is to preclude or restrict a claim for MDR in a case where a “subsidiary dwelling” (say, an annexe) within a larger dwelling is less than one-third the value of the property as a whole. This option would, in broad terms, preclude MDR being available in relation to an additional dwelling which, because of its small proportionate size within the larger dwelling, is not subject to the 3% SDLT surcharge applicable to the acquisition of additional dwellings.

HMRC’s consultation on the above runs to 22 February. However, it seems clear that some fundamental changes to the SDLT treatment of mixed residential and commercial property and MDR can be expected later this year.

If you have any questions on HRMC’s consultation and how it could impact your property purchases, please contact tax solicitor Michael Fluss.