What is SDLT MDR?
It is a relief available to buyers of residential or mixed use property in England and Northern Ireland when two or more dwellings are acquired in a single transaction or over a series of linked transactions.
The basic mechanics of the relief is that: (i) residential SDLT rates will automatically apply to the price paid for the dwellings in the purchase (even if it's mixed property, in which case the residential rates apply to the price apportioned to the dwellings); and (ii) the tax on the dwellings is calculated based on the average property value rather than the combined property value, subject to a minimum rate of tax of 1%.
Claiming MDR will often generate substantial savings since the buyer effectively gets to recycle the lower rates and bands of SDLT which is normally not possible.
Why is MDR being abolished?
One of the main rationales for having the relief in the first place was to drive investment in residential property and to boost the private rental sector housing supply. The UK Government sought to test that initiative and in 2021 launched a consultation around possible changes to both the SDLT mixed property rules and to MDR. 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 outcome was not too surprising owing to the way in which most 'built to rent' or similar developments are structured.
Instead, what the consultation revealed is that a majority of MDR claims had in fact come from individuals purchasing dwellings for private use. Indeed, MDR claims are commonplace for purchasers of high value rural properties which often comprise a main dwelling as well as multiple additional ancillary dwellings. Although not necessarily the intended beneficiaries of MDR when it was first introduced, claims by individuals in relation to such properties were entirely valid and often produced very favourable tax savings.
HMRC also revealed that a large number of false or erroneous MDR claims had been made by individuals where the availability of relief was less clear (for example, where a purchased dwelling included an annexe or similar additional living space and the purchaser had claimed MDR on the basis that the annexe was 'suitable for use' as a dwelling in its own right, separate from the main dwelling).
What are the impacts of abolishing SDLT MDR?
Transactions completing on or after 1 June 2024 will no longer benefit from SDLT MDR (unless a contract was concluded before 6 March 2024 and has not been varied since).
Example
Finn is purchasing a large rural property and the purchase will complete on 1 July 2024. Contracts were exchanged on 1 May 2024. The property includes a large main dwelling, and two separate cottages situated within the grounds of the property. The purchase price is £6 million. The higher rates of SDLT apply as Finn will own more than one dwelling.
Without MDR
Since Finn will not be able to claim MDR, he will pay full SDLT at the higher residential rates of charge which will be £811,250.
With MDR
If MDR had been available to Finn, the average dwelling price of £2 million would have been taxed at the higher residential SDLT rates, and the result multiplied by the number of dwellings being acquired. This would have produced a reduced tax charge of £633,750 (a saving of £177,500).
What does it mean for Scotland and LBTT MDR?
Firstly, SDLT doesn't apply in Scotland, having been replaced by LBTT on 1 April 2015.
The LBTT legislation contains its own version of MDR which works in a similar way as for SDLT (although there are some significant differences in the way the relief is calculated and, in fact, the LBTT version of the relief is more generous in certain circumstances).
Nonetheless, the abolition of SDLT will have a knock-on effect for Scotland's finances due to the way the block grant adjustments are calculated. Essentially, because the abolition of MDR will cause the UK Government's SDLT yield to increase, the block grant available to the Scottish Government will be reduced on the basis that they have an equivalent devolved tax.
The impact of block grant adjustments is one of the reasons why we have, for example, the additional dwelling supplement (ADS) which was introduced to counteract the impact of the introduction of SDLT higher rates for additional dwellings.
So, there may be an immediate financial incentive for the Scottish Government to take similar action in relation to MDR. We have already seen the Welsh Government launch a consultation on MDR in relation to their equivalent tax, the Land Transaction Tax (LTT).
For LBTT MDR to be withdrawn or amended, legislation would need to be passed by the Scottish Parliament.
So far there is no indication as to what the Scottish Government will do in relation to LBTT MDR although there now seem to be two realistic possibilities:
- LBTT MDR could be 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.
- The Scottish Government do nothing, or amend the legislation to restrict the scope 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. This may follow a consultation.
It remains to be seen what the outcome will be but we would expect there to be some form of public discussion on the matter in the relatively near future.
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