Everybody is talking about mixed-use property and multiple dwellings relief again…
HMRC announced on the 30th of November, a consultation on the intended reform of the application of multiple dwellings relief (MDR) and the interpretation and treatment of mixed-use property for SDLT purposes.
It is of no surprise to us that HMRC have taken this step.
An industry has quickly built up surrounding the supposed overpayment of SDLT through missed MDR claims and transactions being taxed at residential rates where mixed-use applied. Whilst there are certainly circumstances where there have been genuine missed opportunities to claim relief or lower rates of SDLT, a significant proportion of reclaims are being made on dubious grounds. Where HMRC have caught them, they have been very successful in overturning these reclaims in the tribunals, but the lack of resources HMRC have to check every single claim has meant that a large number of cases are slipping through the net. So once again we find ourselves in the situation of facing new legislation, restrictions on how reliefs apply and resulting higher taxes which will no doubt impact genuine claims and transactions too.
So, what are they considering?
Mixed-use Property
Being able to classify land as mixed use can be extremely valuable to a purchaser because, for the purposes of applying the appropriate rates of SDLT to a transaction, section 55(1B)(b) Finance Act 2003 states that if the transaction “includes land that is not residential property” ( a “mixed-use transaction”) then the non-residential rates of SDLT apply to the whole transaction.
“Residential Property” is defined in Section 116 Finance Act 2003 as a building “used or suitable for use as a dwelling” and its garden and grounds.
Whilst that may sound like a succinct description, unfortunately it is not the case with the recent line of SDLT Tribunal cases highlighting just how complex and contentious the interpretation of that description can be.
For a detailed consideration of that point see our previous article HMRC Gunning for MDR Claimants.
With maximum SDLT rates for residential property now reaching 17%, claiming that the property is mixed-use is a very attractive lure for people seeking to minimise their SDLT burden when the maximum SDLT rate for such transactions is a much lower 5%. So all that’s needed is to identify non-residential property! Easy right … sadly, no.
Area of Confusion/Contention
Section 116(1) Finance Act 2003 states that non-residential property means “any property which is not residential” sounds uncontentious, not quite. For example:
- A building can be used for commercial purposes but still be suitable for use as a dwelling in which case it will be residential property for the purposes of section 116 Finance Act 2003 but this has caused a fair bit of confusion.
- Another problem which has triggered so many reclaims is the concept of whether land sold with a residential property forms part of its “garden and grounds”. HMRC refers to a number of instances in section 3.11 of their consultation where the tax tribunals have denied mixed-use claims on the basis that the land in question remains part of garden and grounds and is therefore residential.
- Other examples of contentious arrears include cases which involved paddocks let on part-year grazing licence and not actually grazed at completion. Such claims have also failed a “mixed-use” test.*
It appears that it may be time for the concept of a single SDLT rate for mixed-use property transactions (properties with both commercial and residential elements) to end.
Proposed Changes
- Apportionment
Instead of the mixed-use element of a property resulting in the entirety of the property being treated as non-residential for SDLT purposes, such transactions could require apportionments to be made between each element with residential rates and commercial rates applying to the respective parts of the property.
We already have provisions in other parts of the SDLT legislation which require apportionments to be made where mixed-use property is involved.
For example, where a claim for Multiple Dwelling Relief (“MDR”) is made or the property involves the acquisition by a non-natural person of dwellings for £500,000 or more (higher threshold interests (“HTIs”)) – subject to the 15% rate of SDLT there must be an apportionment of the consideration between different elements to correctly calculate the SDLT chargeable. For transactions involving HTIs, two returns need to be filed (one for each part). This concept of apportionment is therefore a “well-trodden” path and one we expect HMRC will follow.
A possible impact of the proposal could be seen in the scenario where (currently) an MDR claim on a mixed-use transaction does not require the inclusion of the 3% surcharge when calculating the SDLT chargeable – this would change under the proposals.
- Threshold Test An alternative option HMRC is considering is to retain mixed-use rates but to introduce a “threshold test” whereby mixed-use rates will only apply if the consideration applying to the non-residential element exceeds a certain level (they are currently suggesting more than 50%).
Problem Overlooked
Neither of these options serve to simplify the concepts of actually defining what is residential or non-residential property or “garden and grounds” for the purposes of making these apportionments and unless HMRC draft some clear legislation, we can see complexities attaching to calculating them – how do you treat common areas for example which serve both elements of the property? How is the increasing reliance on valuation for either apportionment or threshold test to be sensibly managed and paid for?
We consider that property lawyers advising those clients undertaking mixed-use acquisitions will still require some detailed advice to assist with understanding clearly what their clients’ liabilities are.
Multiple Dwellings Relief (“MDR”)
This is the heaviest part of the consultation, and HMRC are putting forward a number of options which will result in the restriction of MDR claims. Under the current rules, contained in Schedule 6B to Finance Act 2003, wherever there is a purchase of more than one dwelling at a property, a claim for MDR can potentially be made, to reduce the SDLT payable (for further details of the operations of MDR click here). There are many instances of properties sold with “granny annexes”, converted outbuildings and cottages within the grounds of or attached to a house.
Reason for HMRC’s Proposed Changes
As a claim for MDR can often reduce the amount of SDLT payable on the purchase of a property, this relief, this has led to a number of (sometimes) far-fetched interpretations being put forward by claims companies as to an area of a building or property amounting to a separate self-contained “subsidiary” dwelling and therefore allowing for a claim that more than one dwelling exists at the property. The most infamous of these being a claim that a walk-in wardrobe with a plug socket was capable of being a kitchen if a microwave was put in there.**
Proposed Changes
Ideas such as
- preventing a claim for MDR wherever the additional dwellings are subsidiary to another dwelling
- restricting claims to dwellings which will be used for “business purposes”
- introducing a subjective ‘intended use’ by the purchaser test similar to that required for relief from the 15% rate for companies
- HMRC is also considering restricting claims to purchases of three or more dwellings only as they perceive that the largest area of abuse relates to large country dwellings with a single annex.
The use of the dwellings, post-completion, is anticipated to be subject to a three year claw-back control period which will be policed with random checks, a new power given to HMRC and introduced in the last Finance Act for all relief claims where certain events can trigger a clawback.
Problem Overlooked
Not one of these ideas seems to address the point of the complexity for MDR claims – namely the challenge in establishing what sort of property or part of a property is suitable for use as “dwelling” for the purposes of MDR. This is the crucial issue that the claims and tribunal cases have all related to, and it is this issue that will still require considered detailed analysis and which property lawyers will still need to seek advice upon for their clients.
Denying claims for MDR for subsidiary dwellings will directly and adversely impact those purchasers genuinely seeking to acquire two or more independent living spaces within the grounds of the same property. If the relief is restricted only to those properties intended for business use, what about the genuine situations of a London house with a basement flat where the buyer intends to let that flat on the open market? Will the proposed changes mean that if you only have one flat or cottage to let you cannot have the relief but if you have two you can? What will satisfying the criteria of business use mean for buyers? Will we now see Granny being charged a market rent for three years?
We will be following the course of the consultation closely and of course scrutinising any proposed draft legislation in due course. All property lawyers advising clients in this space should ensure that tax advice is obtained in order to ensure action is taken now to factor in potential changes to planned future projects
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* Pensfold v HMRC [2020]
** Wilkinson v HMRC 2020]
By Winslows Tax Law,
