Reform of the SDLT rules on mixed property and multiple dwellings relief in prospect

Details of, and comments on, the recently launched HMRC consultation on reforms to the SDLT mixed property and multiple dwellings relief rules.

On 30 November 2021 HMRC published a consultation on reforms to the Stamp Duty Land Tax (SDLT) rules applicable to purchases of mixed property and multiple dwellings.

The consultation has been launched as HMRC considers the current rules have a tendency to give rise to “potentially unfair outcomes, incorrect claims, [and] abuse of the rules”, as demonstrated by a number of recent tribunal cases in which taxpayer claims to mixed property treatment or multiple dwellings relief have been successfully challenged by HMRC.  HMRC also hopes to reduce the number of questionable, and sometimes downright spurious, refund claims being submitted as a result of taxpayers having been approached by ‘SDLT reclaim agents’ following submission of their original SDLT return.

HMRC’s Reform Proposals:

Mixed Property

The term ‘mixed property’ is used to describe a purchase (or, where applicable, linked purchases) that includes both land that is categorised as residential for SDLT purposes and land that is categorised as non-residential.  Under the current rules, it is the more favourable non-residential SDLT rates that apply to the whole of a mixed property purchase, even where the majority of the land being purchased is residential.  Furthermore, the rules operate to prevent the SDLT surcharge for purchases of additional residential dwellings from applying to a mixed property purchase that includes more than one dwelling.

HMRC’s view is that some taxpayers have unfairly exploited the current rules by claiming mixed property treatment for their purchase even though the purchase does not include any meaningful non-residential aspects. As well as inviting respondents’ own suggestions for ways in which this issue might be addressed, HMRC has put forward the following proposals for possible solutions:

• an apportionment-based approach in which the non-residential element of a purchase is taxed at non-residential rates, and the residential element taxed at residential rates; or
• a threshold approach in which mixed property treatment would only be available on purchases in which the consideration attributable to the non-residential element exceeds a specified proportion of the total consideration.

Multiple Dwellings Relief

Under the current rules, multiple dwellings relief (MDR) is available where a purchase (or linked purchases where applicable) includes two or more dwellings.  For MDR purposes, ‘dwelling’ is defined as a building or part of a building that is:

a)      used or suitable for use as a single dwelling; or

b)     in the process of being constructed or adapted for such use.

HMRC’s concern in this area is that a number of recent claims have seen taxpayers asserting that the suitability for use as a single dwelling criterion is satisfied in circumstances that attempt to stretch the concept of suitability beyond its reasonable bounds.  Examples of the more egregious claims to separate dwelling status that have been successfully challenged by HMRC at tribunal include:

• an indoor entertainment area, swimming pool and toilet at the end of a garden’; and
• a single en-suite bedroom (forming part of 7 bedroom detached house) with a walk-in wardrobe containing an electric socket.

HMRC has put forward the following proposals for possible solutions to this issue:

• allowing MDR only where all the dwellings being purchased are purchased for a ‘qualifying business use’.  Qualifying business use would mean a) development or redevelopment for resale or b) exploitation as source of rents;
• allowing MDR only in respect of dwellings purchased for a qualifying business use;
• making MDR unavailable for a dwelling (the ‘subsidiary dwelling’) that forms part of the same building, or is located within the grounds, of another dwelling and the value of the subsidiary dwelling amounts to less than a third of the total purchase price for the property being purchased; or
• allowing MDR only for purchases of three or more dwellings.

Consultation details

The consultation document containing full details of the reform proposals and associated issues on which HMRC is seeking stakeholder input can be found here.

Those wishing to contribute to the consultation should submit their responses to HMRC by 11.45pm on 22 February 2022, following which HMRC will consider the responses received with a view to drawing up draft legislation to be issued for further consultation.

Comments

Anyone planning on acquiring a property in 2022 to which the mixed property or MDR rules may apply should keep in mind the possibility that the rules in this area may change before their purchase has completed, and that this is likely to have an impact on their SDLT liability.

While there have undoubtedly been a number of mixed property and MDR claims being argued before the tribunal over the past couple of years that might prompt a raised eyebrow, it is also the case that some of the claims that HMRC regards as ‘incorrect’ will have arisen from ambiguities in the published guidance on how mixed property and dwelling status is to be assessed.  The emphasis on taxpayers weighing up ‘all relevant’ factors arguing in favour and against such status in order to determine where the balance lies is of limited assistance in marginal cases.  It is profoundly to be hoped, therefore, that the legislative proposals that emerge from the consultation will also seek to reduce ambiguity in this area.  If not, there is a danger that any changes will simply add further complexity to rules that are already notoriously difficult to navigate.

The launch of the consultation also provides a reminder of the need for taxpayers to proceed with caution if approached by firms claiming to be able to obtain an SDLT refund on the basis of MDR or the mixed property rules.  Often such claims are made on the basis of very limited knowledge of the details of the relevant purchase.  In addition, the common practice among such firms of charging a fee based on a percentage of any refund payments received can appear deceptively like a ‘no win; no fee’ arrangement.  It is, however, HMRC policy to make refund payments before it goes on to consider whether the refund is actually due.  This can result in taxpayers being required to return refund payments to HMRC.  As SDLT reclaim agents often do not offer proportionate reimbursements of the fee paid to them in these circumstances, taxpayers can find themselves having incurred a significant fee for a win that was illusory, and never realistically achievable.  Therefore, when approached by an SDLT reclaim agent, it is usually a sensible first step for the taxpayer to review the advice provided by their original SDLT advisor, and if necessary, contact that advisor to establish whether the MDR and mixed property rules were duly considered at the time of purchase.