Effect of new SDLT regime on Multiple Dwellings ReliefSeptember 24, 2015
The changes announced at the end of last year to the calculation of stamp duty land tax (SDLT) for residential properties also modify the way in which SDLT is calculated when claiming Multiple Dwellings Relief (MDR). This article will explain how MDR works, how it interacts with the new system and why it is not always advisable to claim it.
As the name suggests, MDR is a relief which can be claimed when a transaction results in the acquisition of more than one dwelling. The effect of the relief is to compute the mean price of the dwellings and to apply to the whole transaction the single SDLT band applicable to a dwelling of that value (as long as this figure is not less than 1% of the total transaction in which case this figure is used).
Therefore, under the old rules, the purchase of a residential property for £1.5 million would attract an SDLT liability of £75,000 as a residential property of this value was subject to tax at the rate of 5%. However, if instead of being one property, it was a block of five flats, the mean price per dwelling would be used (£300,000). Under the old rules, a residential property for £300,000 would attract an SDLT liability of 3%. Therefore in claiming MDR for this purchase one would only have to pay £45,000 in SDLT (3% of 300,000 multiplied by 5). This would result in a saving of £15,000 as compared to what would have been payable had the relief not been claimed.
Now we no longer have the “slab rate” of SDLT for residential property and instead it is calculated in bands in a similar way to income tax. The structure of the bands means that while most residential purchasers will now pay less SDLT, purchasers of properties over £937,500 will now pay more under the new rules.
This is also the case when using MDR. Therefore, in the example above the purchase of the property for £1.5 million would now attract an SDLT liability of £93,750. However, if MDR is claimed the tax payable would be £25,000 (a saving of £68,750). This is because again the mean value of £300,000 is used. Now under the new rules, the first £125,000 is free, the next £125,000 charged at 2% and the remaining £50,000 at 5%. This results in a figure of £5,000 which is multiplied by 5 to get the total tax payable of £25,000.
It is also important to note that purchases of 6 or more dwellings in a single transaction can be treated as a commercial rather than a residential purchase. MDR is only used for residential transactions. The rates for commercial purchases were not changed at the end of last year and still incur a maximum “slab” tax of 4% for transactions over £500,000. This is lower than the higher rate residential rates (which for the value of the transaction which is over £1,500,000, is currently at 12%).
This means that in a purchase of 6 or more dwellings one could be in a better position if one did not claim MDR and instead classified the transaction as a commercial purchase. For example a purchase of 6 flats for £6,000,000 classified as a commercial transaction would attract SDLT of £240,000 (4% of 6,000,000). However, if one claimed MDR the SDLT payable would be £262,500 (£43,750 multiplied by 6).
This shows the complexity of SDLT when considering transactions for multiple properties. It is important that the transaction is correctly described on the SDLT Return and that MDR is claimed but only where appropriate. Failure to do this could result in a much higher SDLT bill than is actually due and this could affect the viability of the deal.
DISCLAIMER – This Article is for information purposes only and should not be relied upon. Independent legal advice or other professional advice should be sought in every case so as the particular circumstances can be considered. For further information please contact Patricia Cronin at firstname.lastname@example.org