The Government is proposing to change the way Stamp Duty Land Tax (SDLT) is calculated on mixed-property purchases (where residential and non-residential elements are acquired) and on the availability and use of multiple dwellings relief (MDR).
They have suggested a range of proposals to stop what they perceive as abuse under the current rules. The government will subsequently consult on a specific reform proposal and change is not expected in the Finance Act 2022, but the new rules could still have effect as early as 2023.
The difference between commercial SDLT rates (maximum 5%) and those for residential purchases (up to 17%) is very significant (and has widened considerably with residential SDLT rule changes over the past decade), and this is no doubt why there has been an increased focus on ways to mitigate this tax burden.
The changes will likely have a wider effect than just targeting abusive transactions and will affect transactions where there is no abuse (perceived or otherwise).
In relation to mixed-use acquisitions of commercial and residential property, it is currently possible to pay SDLT at the commercial rates even where only a small proportion of a property is commercial.
Given the material difference in tax charges, this has prompted some taxpayers to seek commercial rates on buying their own homes by including token amounts of non-residential property.
The Government is looking at two alternatives to make the rules fairer:
- Apportionment - the residential portion of a mixed-property purchase would be taxed at the residential rates and the remaining, commercial portion of a purchase would be taxed at the commercial rates. Apportionment would be done on a just and reasonable basis, and may involve a valuation. The existing surcharges that apply to certain residential acquisitions would then apply to the residential element where relevant, i.e. the 3% surcharge for additional dwellings and the 2% surcharge for non-resident purchasers. Significantly, the relief that allows six or more dwellings to attract commercial rates would still apply.
- Including a minimum threshold of commercial land/property before mixed use treatment applies – under this approach, a mixed-property purchase would attract the commercial rates only where the commercial element is more than a certain threshold proportion of the consideration, for example more than 50%.
In relation to Multiple Dwellings Relief (MDR), it is clear in particular that the Government wants to stop individuals making unreasonable claims for this relief on buying their homes. The relief allows the purchaser to pay SDLT on the average consideration where there are multiple dwellings being acquired (at the moment the bar is set low at 2 or more dwellings).
The Government is looking at three alternatives to change the rules:
- Allow MDR only where dwellings are acquired for a “qualifying business use” – this would potentially include buying the property for development or redevelopment and resale, or buying it to rent out.
- Introduce a “subsidiary dwelling” rule – part of a building, or a building within the grounds of another dwelling, would not count as a separate dwelling for the purposes of MDR unless its value is at least a third of the total price of the property. This should prevent MDR being used for house purchases with typical “granny annexes”, an area HMRC feels has been exploited over recent years.
- Allow MDR where at least three dwellings are acquired – this would increase the number of dwellings that need to be acquired for the relief to apply from two to three, and similarly to the second alternative above should theoretically close off the availability of MDR to house purchases with a typical annexe that can be argued to be a dwelling in its own right but is effectively part of the same property and would never be sold separately.
It is likely that the rules for both mixed-property acquisitions and MDR will be changed given the perceived abuse of both of these “reliefs”. HMRC have been raising concerns for quite some time and these rules have created an industry of SDLT reclaim advisers who, in the Government’s view, are in some cases encouraging “unreasonable interpretations” of the rules.
On the other hand it is obviously important that the Government does not deter development of much needed new residential homes. House builders acquiring sites from farmers or other landowners will typically want to limit their SDLT liability to a maximum of 5% and the mixed use rules are particularly helpful when it comes to sites that include perhaps an old cottage with a large amount of surrounding land that has all been granted planning permission.
As soon as we hear more on the likely direction of travel on these proposals, and the potential implementation date, we will provide a further update and commentary.
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