What has been announced in the budget?
The Chancellor has announced the abolition of SDLT multiple dwellings relief (MDR) from 1 June 2024. This will be implemented by introducing legislation in Finance (No 2) Bill 2024 repealing the current MDR legislation in Schedule 6B of the Finance Act 2003.
The measure is expected to raise between £70 million and £385 million a year for the next five financial years.
What is MDR?
MDR was introduced in 2011 “to reduce a potential barrier to investment in residential property and promote private rental sector (PRS) housing supply”.
Where it applies, MDR permits a purchaser buying two or more dwellings under a single transaction (or linked transactions) to pay SDLT by reference to the average chargeable consideration per dwelling, rather than the aggregate chargeable consideration (subject to a 1% minimum rate). In effect, this enables a purchaser to benefit from the lower SDLT rate bands on a per-property basis, rather than just once for the entire transaction.
This can lead to big SDLT savings. For example, assuming that the 3% SDLT surcharge applies, an individual purchaser buying two separate dwellings under a single transaction for a total purchase price of £1 million would pay £55,000 of SDLT (effectively £27,500 per dwelling) if MDR is available. Without MDR, the SDLT due would be £71,250.
The MDR saving is magnified where the subject of the transaction is a large number of relatively low-value dwellings. For example, on a purchase of 100 flats for a total price of £20 million, SDLT of £600,000 (effectively £6,000 per flat) would be due with MDR. Otherwise, the SDLT due would be £989,500 (paying on the non-residential rates, which apply by default where 6 or more dwellings are acquired under a single transaction).
Where the conditions are met, the relief can be claimed by businesses and individual/private purchasers, so there is a wide range of transactions that can potentially benefit.
Why abolish MDR now?
Between November 2021 and February 2022, HMRC consulted on a number of proposals to reform MDR, including limiting the relief to acquisitions of dwellings intended for business use, or to purchases of 3 or more dwellings. One of the drivers for change was the increased volume of what HMRC regard as incorrect MDR claims made by individual purchasers, often pushed by so-called ‘tax reclaim agents’. While HMRC has been largely successful in challenging these claims in the tribunal, they do not regard this “an efficient or effective use of HMRC resources”.
Until the announcement at Spring Budget 2024, there had been no further update from HMRC on the outcome of the consultation. It is now apparent that in the interim, HMRC commissioned an external evaluation of MDR to assess whether the relief is meeting its original objectives of supporting investment in residential property and the private rented sector (the MDR Study). HMRC say that the MDR Study “found no strong evidence that MDR supports these objectives”. On this basis, a policy decision was taken to abolish the relief.
Note that the consultation also considered proposals for reforming the SDLT rules applying to mixed use acquisitions of residential and non-residential property. It was announced at Spring Budget 2024 that these proposals would not be taken forward, so no change is expected to those rules.
How will the announcement affect purchasers?
As noted above, MDR can currently apply to a wide range of transactions.
At one end of the spectrum, individual purchasers of, say, a house together with a separate cottage, will no longer be able to claim MDR. The study commissioned by HMRC suggests that private individuals had “little awareness or understanding of MDR”, which was often regarded as an “unexpected benefit”. It may therefore be that the impact on the transactions of this sort is relatively limited.
At the other end of the spectrum are large-scale property investors in the private-rented sector (PRS) / build-to-rent (BTR) sector, who currently frequently utilise MDR to materially reduce the SDLT cost of bulk acquisitions of residential units, particularly on second-hand assets.
Here, the MDR Study concludes that the availability of MDR is one of the factors considered in making decisions about investments (in that it is seen as a way of reducing transaction costs and thereby increasing profitability / viability of the investment), but that this is only one such factor and that MDR does not “fully mitigate the emerging challenges or increased costs which investors were experiencing”.
However, given the material savings that will now no longer be available in the context of some transactions, it is difficult to see how this decision will not jeopardise the viability of at least some PRS/BTR projects and transactions, and it is hard to square this with the well-publicised supply problems in the housing market and the Government’s commitment to remedying this.
Further, while not-for-profit social landlords will generally be able to claim other relief (or reliefs) from SDLT, for-profit social housing providers buying portfolios of completed residential units without the benefit of a public subsidy will not, and so will also be adversely affected by this change where they could otherwise claim MDR. The same is true of other purchasers of sizeable residential portfolios, such as local authorities. It is not clear whether, or the extent to which, the MDR Study engaged with these types of organisation.
When will the change take effect?
The starting point is that MDR will cease to be available to claim in respect of property transactions with an effective date on or after 1 June 2024.
As regards transitional provisions, the policy paper says that MDR will continue to be available:
- for purchases under contracts that exchanged on or before 6 March 2024 (irrespective of when completion takes place), provided there is no variation of the contract after 6 March 2024; and
- where a contract is “substantially performed” (a technical SDLT concept, which can accelerate the SDLT due date) before 1 June 2024.
However, for linked transactions involving completions on either side of 1 June 2024, the pre and post change transactions will be treated as “unlinked” for the purposes of MDR. This will mean that MDR is either unavailable at all (where there is only one dwelling purchased before 1 June 2024), or will be available only in respect of the pre-1 June 2024 transactions.
Applying transitional provisions of this sort to real-world transactions can be complex, and we are yet to see the detail in the implementing legislation. Purchasers about to exchange or complete on transactions in which MDR was intended to be claimed would be well-advised to seek advice as soon as possible.
Further comment
While a response to the consultation at Spring Budget 2024 was not unexpected, the outright abolition of MDR is likely to be a surprise for many, not least since this was not one of the options explicitly consulted on by HMRC.
Purchasers of 6 or more dwellings will still be able to pay on the non-residential rates (giving an effective SDLT rate of c. 5%), rather than the higher residential rates. However, as shown by the second example above, this will still often give rise to materially higher SDLT costs than currently if MDR can be claimed.
While it is purchasers who are liable to pay SDLT, vendors will be affected too since SDLT is a transaction cost like any other that needs to be factored into pricing. Therefore, those currently negotiating transactions in which the purchaser was intending to rely on MDR post-1 June 2024 may need to revisit the commercial terms of the deal and take advice about the impact of the transitional provisions referred to above.
In the longer-term, it will be interesting to see the extent to which the structure and timing of transactions is affected.
For example, although already relatively common-place, we may see more forward-funding transactions and acquisitions of bare sites in advance of development, on the basis that while the same (non-residential) rates would apply to such transactions, acquiring land at an earlier stage in the development process will generally ensure that the chargeable consideration treated as subject to SDLT is materially lower (as compared with, say, a turn-key project). However, this will clearly not assist in relation to purchases of second-hand units.
Finally, it is also interesting to note that the MDR Study does not seem entirely unequivocal that MDR is not meeting its objectives in relation to business claimants:
“Amongst businesses that claimed MDR on dwellings that formed part of a linked transaction, half (49%) said that it had no influence, 44% said it had a bearing on the size of purchases and 37% said it had an influence on the timing of investments. Combined, 30% said it had an influence on both size and timing.
These findings should not be considered conclusive evidence of MDR failing to reach its objectives of reducing barriers for purchasing residential property with a view to supporting supply in the private rented sector.”
While it seems difficult to envisage the Government making a U-turn on this announcement, we fully expect it to come under sustained pressure to do so from the residential property sector, at least in relation to purchases for business use.
If you would like to discuss any of the above, please contact Jonathan Woodall.