Spring Budget: The end of Multiple Dwelling Relief

In this article, Steven Baker, partner and Harry Stewart Dilley, who joins us for work experience in Lodders’ Real Estate team, explain the implications of the recent abolishment of Multiple Dwelling Relief and the implications for Stamp Duty Land Tax. 

What is MDR, or Multiple Dwelling Relief?    

MDR, or Multiple Dwellings Relief, was a policy introduced in 2011 to reduce barriers to investment in residential property and to augment the housing supply in the private rented sector.  Under the policy, when purchasing two or more properties in a transaction (or linked transactions), Stamp Duty Land Tax (SDLT) was reduced by a relief which allowed it to be calculated in an unusual way. With MDR, rather than calculating SDLT on the total value of the transaction, it was calculated using the average price of the properties multiplied by their number. This represented a considerable saving in SDLT.

For example:

A purchaser looking to buy five flats for £1.5m, resulting in an average price of £300,000 per flat. Originally, SDLT would be calculated by reference to the total value of the transaction. Using the applicable rates (see below), this would mean SDLT of £136,250.  However, with MDR, this would become 8% of £300,000 multiplied by the 5 flats, meaning total SDLT of £57,500. In this case, MDR represents a saving of £78,750.

Equally, what has become common in recent years is the use of MDR in houses with an accessory dwelling unit (ADU).  If, for example, a purchaser was looking to buy a £1 million house with an ADU, there was an opportunity – for MDR purposes – to claim that this was two properties worth £500,000 each. Without MDR, the SDLT due would be £71,250. With MDR, total SDLT would be £55,000, with a saving of £16,250.

What happened in the Spring Budget?

In the Spring Budget, MDR was removed. This comes on the back of a number of consultations and evaluations by HMRC into whether their policy was indeed increasing supply in the private rented sector (PDS). An external evaluation – completed in 2023 – concluded that there was ‘no strong evidence’ that MDR was fulfilling its purpose. Having calculated that the policy was costing it some £700 million per year (2022-23), HMRC have decided to abolish MDR altogether.

This represents something of a surprise: none of the four options to reform MDR in the consultations had included one to abolish the regime completely. Most likely, it comes as a result of cases like the second example, in which HMRC perceive MDR as being ‘abused’ in the purchase of single properties.

Furthermore, HMRC have cited a rise in the number of tax reclaim agencies making unsolicited approaches to buyers, suggesting they have been ‘overpaid’ tax and offering to make a claim for a refund to HMRC in exchange for a commission. HMRC has been defeating these cases, most of which are spurious, at the tribunal; however, it has stated that this is not a ‘cost-effective use of HMRC resources.’

Whilst the Budget has abolished MDR, there is no change to the existing rule for transactions involving the purchase of six or more properties. These can be assessed for SDLT on the lower non-residential rates (see below). This still represents a loss of value in comparison to the old MDR regime; but mitigates the worst of its effect on the housing market.

For example:

On a purchase of 100 flats for a total price of £20 million, SDLT of £600,000 would be due with MDR. But, taxed as 100 linked transactions, the tax at residential rates would now be £2,911,250. However, electing to use the non-residential rates would bring the SDLT down to £989,500.

Mixed-use property transactions

The Budget has not changed mixed-use property transactions (that is, purchases of property having both residential and non-residential characteristics), after further consultation. These are taxed at the non-residential rates. This can be helpful to buyers of agricultural property or mixed-use investment property, for example.

Consequences for residential property sector

For those in the residential property sector, the removal of MDR is a significant consequence of the Budget. It will mean higher costs associated with portfolio purchases which will almost certainly have a negative impact on availability of housing in the PRS. To be sure, for purchases of six or more properties, the damage is not as significant as it could have been: non-residential SDLT has a maximum rate of 5% rather than the 15% on residential. Nevertheless, it has been received poorly, especially by those campaigning against the chronic shortages in the housing market.

Important dates

For purchasers, there are several important dates.

• The measure was announced on 6 March 2024 with the legislation becoming operative on 1 June 2024.
• For contracts exchanged on or before 6 March 2024, MDR will continue to apply, even where completion takes place after 1 June 2024, though this is ‘subject to there being no variation on the contract’ after 6 March 2024.
• MDR will also continue to apply to contracts exchanged after 6 March 2024 that ‘substantially performed’ before 1 June 2024.
• Given the detail of these transitional arrangements and their relation to real-world transactions, careful consideration of purchase transactions will be needed in the run up to the 1 June 2024 ‘cut of date’.

Stamp Duty Land Tax Rates

Surcharges

* 3% Surcharge is added if the dwelling(s) being purchased are not a replacement for the dwelling in which you currently live i.e. if the dwellings purchased are a second, third, fourth (etc.) house. For the vast majority of portfolio purchases this will be the case; therefore, values in the above examples have been calculated with this surcharge included.

**A further 2% surcharge is added for non-residents of the UK.

[1] ‘Stamp Duty Land Tax, Residential property rates’ (Gov.uk) <https://www.gov.uk/stamp-duty-land-tax/residential-property-rates> Accessed 14 March 2024.

[2] ‘Stamp Duty Land Tax, Rates for non-residential and mixed land and property’ (Gov.uk) <https://www.gov.uk/stamp-duty-land-tax/nonresidential-and-mixed-rates> Accessed 14 March 2024.

Need more advice?

Lodders provide uncomplicated advice and guidance. To find out more about how these Multiple Dwelling Relief changes may impact you, please get in touch and we’ll be happy to assist.