Budget 2024 – SDLT Multiple Dwellings Relief to be abolished

One of the surprise announcements from today's budget was the abolition of SDLT multiple dwellings relief (MDR) from 1 June 2024.

What is SDLT MDR?

It is a relief for buyers of residential property in England and Northern Ireland that applies when two or more dwellings (houses, flats etc…) are acquired in a single transaction or in several linked transactions.

The actual rules can be complex – especially the interaction with the SDLT higher rates for additional dwellings (HRAD) – but the basic idea is that: (i) the residential rates automatically apply to the dwellings in the purchase (even if it's mixed property); and (ii) tax can be calculated on the average property value rather than the combined property value subject to a minimum rate of tax of 1%. This can generate substantial savings since the buyer effectively gets to recycle the lower rates and bands of SDLT which is normally not possible.

Why is it being abolished?

The UK Government consulted around possible changes to both the SDLT mixed property rules and multiple dwellings relief in November 2021. They also carried out a survey of various institutional property investors to see how much the availability of MDR influenced their decision making. The answer was – apparently – not very much.

That's not too surprising – the majority of new built to rent or similar properties are developed using an approach called "forward funding". The investor buys a bare site from the developer and then pays them to build the flats or housing on it. SDLT MDR doesn't apply to bare sites, so wouldn't factor into the decision-making process.

It's therefore most likely to be in point on second hand assets transferred from one institutional investor to another.

What are the impacts of abolishing SDLT MDR?

Firstly, contracts entered into before today's date, but completing after 1 June, will be grandfathered so will still benefit from SDLT MDR on completion provided that they aren't varied between now and completion.

For everything else, let's consider some examples of how the removal of SDLT MDR would affect some transactions.

Example 1 – buying a block of flats

Alexander Ltd is selling a block of 50 flats to Bucephalus LLP at a price of £10 million. The flats are all let on short tenancies.

With MDR

As there are more than six dwellings being bought, the default treatment of the purchase is that it is a non-residential transaction and will be subject lower non residential rates. At a cost of £10 million, the non-residential SDLT is £489,500.

Applying MDR means that the average price of £200,000 is taxed at the residential rates, and the result multiplied up by the number of dwellings. This gives a revised tax charge of £300,000, and a saving of £189,500.

Without MDR

While MDR is no longer available, the purchase is still non-residential. Therefore the tax would be £489,500.

Example 2 – buying some dwellings to demolish

Canae Ltd is buying a site with three existing houses sitting on it. The plan is to demolish these houses and erect a new development in their place. The price paid is £1.8 million.

With MDR

This is an interesting one. While MDR can be claimed, it will be withdrawn when the houses are demolished. But under the SDLT MDR withdrawal rules, the tax must be recalculated as if the demolition occurred immediately before the purchase completed.

If the demolition has occurred immediately before completion, then the purchase would have been non-residential (and HMRC appear to accept this analysis in their guidance). The tax payable is recalculated on this basis.

While there are some administrative hurdles, the net effect is that – through the alchemy of MDR – a residential purchase is taxed at the non-residential rates.

The total tax charge is therefore £79,500.

Without MDR

If there's no MDR, there's no transmutation either, the purchase of three dwellings is taxed at the residential rates with no relief. The tax due is therefore £181,250.

What does it mean for Scotland and LBTT?

Firstly, SDLT doesn't apply in Scotland, so today's measures won't affect the LBTT position. In order for LBTT MDR to be withdrawn or otherwise affected, legislation would need to be passed by the Scottish Parliament.

Secondly, there is a knock-on effect for Scotland's finances due to the way the block grant adjustments are calculated. Very broadly, after the block grant is set for a year, it's adjusted to account for devolved taxes: a slice of the block grant attributable to a UK tax (like SDLT) is removed on the basis that there is an equivalent devolved tax (LBTT) which will make up that portion of the funding. Counterintuitively this means that:

• When Westminster raises a tax with a devolved equivalent, Scotland's overall finances go down (the block grant adjustment for that tax is larger); and
• When they cut a tax with a devolved equivalent, Scotland's overall finances go up (the block grant adjustment for that tax is smaller).
  

This impact of block grant adjustments is one of the reasons we have – for example – the additional dwelling supplement (to make up the shortfall caused by the introduction of the SDLT higher rates) and why, if it hadn't been completely unwound, the Truss – Kwarteng budget would have seen a potential dividend for Scotland (because the abolition of the additional rate would not have been replicated here).

So, the abolition of MDR means that Scotland's block grant will go down.

Realistically, I think there are three possible responses to this. These are:

1. Emergency legislation is introduced to abolish LBTT MDR from 1 June 2024 to align with the withdrawal of SDLT MDR.
2. LBTT MDR is abolished at the Scottish Budget in the winter. The Scottish Budget is normally announced in December, so there would then be a 6 or 7 month window in which Scotland has a form of MDR but England and NI do not. This may perhaps follow a brief consultation on whether to mirror the roUK position.
3. The Scottish Government do nothing, or make tweaks to reduce the benefit of MDR. This means that Scotland would retain LBTT MDR, potentially making it a more attractive jurisdiction for some real estate investors compared to England. However, the difference is likely to be marginal, so it's hard to see how much behaviour this will drive. AS above, this may follow a consultation.
   

My knee jerk reaction is that 1 or 3 seem slightly more likely, but it's really too soon to tell what the Holyrood mood music is: will the Scottish Government see this as a fiscal gap to backfill, or will they see this as a potential (if minor) differentiator from Westminster?

This latter should not be readily dismissed: in the 2018 Scottish Budget the then Finance Minister John Swinney made much of the fact that Scotland's non-residential rates were lower than roUK. The maximum saving between non-residential SDLT and LBTT was £1,000.