Background to SDLT Multiple Dwellings
A 3% surcharge on standard SDLT rates was introduced in the Chancellor’s Autumn Statement of 2015. The stated aim was to reduce demand for residential properties that were not being bought with the intention of being lived in by the buyer. Where applicable, the surcharge is applied to SDLT for the whole price of the purchase.
A consultation paper issued at the same time discussed cases in which multiple residential properties were bought in the same transaction. Where any of these counted as additional properties, the paper said that the transaction would be eligible for multiple dwellings relief. The higher rates would only be applied to the average price of the properties, but the paper did not indicate any issues pertaining to the purchase of properties with self-contained dwellings such as granny flats.
A Guidance Note was later published on 16 March 2016, which again gave no indication of a problem with relation to self-contained dwellings.
Some points to note:f
- Paragraph 2.10
Here, the Guidance Note points out that it is important to decide whether a property consists of a single dwelling or more than one.
- Chapter 4
This chapter deals with the purchase of multiple dwellings in a single transaction, though it makes no specific mention of self-contained dwellings such as granny flats.
- Paragraph 4.1
It is made clear here that if two or more dwellings are considered in the same transaction, the normal rates or higher rates should be applied to the whole purchase price, rather than using a mixture of rates.
- Paragraph 4.7
This seems to deal with the subject of separate dwellings such as annexes without specifically naming them. It says that where multiple dwellings are purchased in a single transaction, the higher rates should be applied to the entire transaction. The Guidance Note was superseded by amendments issued later, however – therefore, paragraph 4.7 became outdated.
Press coverage in April 2016 suggested that the 3% surcharge could have a negative and unintended effect on people who were buying a home with a granny flat. It was suggested that these buyers could be treated the same as if they had bought two separate properties at the same time, with the 3% surcharge being applied to the whole purchase price. This could be the case even if they owned no other home.
The then Financial Secretary to the Treasury, David Gauke, responded to the negative press coverage with a statement that said it was not the intention of the legislation to treat those people buying a home with a granny flat in this way and added that amendments would be issued.
The Finance Act 2016 came into force on 15 September 2016, but the amendments were retrospective going back to 1 April 2016.
A revised Guidance Note was published on 29 November of that year and covered the subject of granny flat-style separate dwellings across paragraph 2.10A to 2.10F. Examples were also provided in Chapter 9. This official guidance was subsequently moved to the HMRC Manual, while the Guidance Note PDF was removed. The text can still be found in the archived Guidance Note, however.
Does the property count as a single dwelling or Multiple?
The rules say that a building or part of a building can still count as a dwelling if it is suitable to be used as such. This may be the case even if it is not currently being used or intended to be used in the future as a separate dwelling.
In the case of granny flat-style annexes, the house and granny flat will probably be considered as two separate dwellings if:
- Each part has its own front door. In the case of the granny flat, this may come off a commonly used part such as an entry hall, but in either case, you would not have to pass through a private living area of the other part to get to it.
- Each part is self-contained and has all the elements that you would expect for a dwelling, such as sleeping, washing and cooking areas and facilities
Some other factors that may apply include the set-up of essential services such as water, power and heating. If they are on two separate self-enclosed systems, then this would add to the likelihood of the property being counted as two dwellings. If an electricity fuse box or central heating control was located entirely in the main part, however, with no access or control from the granny flat, then this would stand against them being counted as separate dwellings.
The legislation does little to clear up whether the “legal suitability” of the granny flat to be used as a dwelling in regard to planning permission, etc., has a bearing on whether it should be classed as a separate dwelling for the purposes of SDLT. HMRC has been reviewing the use of the term “dwelling” as it pertains to a number of different tax issues.
At one point, the HMRC Stamp Taxes Head of Policy indicated to tax professionals that a dwelling’s definition should be based upon its physical configuration, not what it could legally be used for.
The revised Guidance Note, which is now in the Manual, says at 2.1 that: “A self-contained part of a building will be a separate dwelling if the residents of that part can live independently of the residents of the rest of the building, including independent access and domestic facilities.”
At 2.7, it adds that a dwelling is considered to be “a building, or a part of a building that affords to those who use it the facilities required for day-to-day private domestic existence”.
At 2.8, it also notes that holiday homes count as dwellings, even if they are not able to be used throughout the year. This suggests that planning positions are not afforded a great deal of weight when it comes to deciding what will be classed as a dwelling for the purposes of SDLT.
The issue of how much weight to assign planning positions relating to whether a granny flat is able to be disposed of separately from the main home, or that state that it can only be used by a relative of the main house’s occupant, is also not clear. In a draft of the Revised Guidance Note, HMRC had said that whether the annexe was able to be sold separately would indeed be extremely relevant, but this suggestion was removed from the final publication that emerged on 29 November 2016.
Council Tax banding rules have their own definitions of dwellings being “a building or part of a building, which has been constructed or adapted for use as separate living accommodation”, but again, this should not be seen as determinative for the purposes of SDLT.
In the final analysis, the position of a property with a granny flat will often be open to interpretation. HMRC is not the final arbiter in a dispute that goes to court but only presents its own view of the situation. As a self-assessed tax, however, it is buyers and their representatives who initially have to try to interpret these often unclear regulations.
Several examples could be given of set-ups where it is not initially clear whether a property should be counted as one or more separate dwellings for the purposes of SDLT.
Let us consider:
- A home with a detached two-storey garage building. Above the actual garage, the second floor is a “guest suite” with a bedroom-cum-living area, a small kitchenette and a bathroom. It is accessible without passing through the main part of the property and has what amounts to its own front door, as well as heating, water and power controlled from the suite. It has not been rented out but is used by the family living in the main part of the property. This is clearly capable of being used as a separate dwelling, but it still remains unclear whether significant weight should be given to whether it has its own Council Tax band and any other planning positions.
- A four-storey house in the city has a basement that has its own access (stairs and an effective front door) from the street. It has all the facilities generally required of a dwelling (its own lighting circuit, power, heating, bathroom, kitchen, etc.) and cannot be directly accessed from the main building. Even if it is only used by the same family living in the main parts of the building, it is likely that it would be treated as a separate dwelling by HMRC. This could be the case even if planning permission would need to be granted before it could be used by different occupiers.
- A house has a flat or living quarters for staff. This has a lockable door and facilities, including a small bathroom and kitchenette. It is only accessible via the living areas of the main home, however. In this case, the lack of its own access would probably see it viewed as a part of the main property rather than a separate dwelling.
- A house has a flat attached that, again, has all the facilities you would expect from a dwelling. This time, however, the flat has entrances both from the outside and from the living area of the main house or home. This would be open to interpretation but would probably be counted as a separate dwelling, especially as it could be argued that the interior door access could easily be closed or blocked off. Another important factor would be whether the services (power, heating, etc.) operated independently.
- A property consisting of a main house with a separate holiday lodge in the grounds or garden. This has all the usual facilities for a dwelling, but planning consent says that it can only be used at certain times, not all year round. This means that it is not legally suitable for a permanent dwelling, yet HMRC seems to favour the stance that it would count as a separate dwelling for the purposes of SDLT. This is because HMRC puts more weight on the physical suitability of the structure to be used as such.
Regulations under the 2016 Budget Resolutions
The law as set out under the 2016 Budget Resolutions (pre-amendments) said that the 3% surcharge would apply to the whole cost of the transaction if a single transaction pertained to two dwellings and:
- The part of the price realistically attributed to each was £40,000 or more.
- Neither dwelling was subject to a long lease with more than 21 years to expire. Note, this does not refer to leasehold properties, but rather to those subject to a long lease, where the purchaser would ordinarily get just a ground rent.
This would be the case even if:
- The purchaser had no other property interests counting against them.
- They did own other property but would qualify for relief on the basis that they were replacing their only or main residence.
This meant that under that regime, most properties that included a granny flat or similar would have been taxed with the separate dwelling surcharge.
It may help to mention the passages that detail the circumstances under which a transaction would attract the surcharge as set out in the Budget Resolutions legislation. The relevant sections are paragraphs 3 to 7. These are the “charging paragraphs” setting out various conditions and exceptions, and they deal with the following general circumstances:
- Paragraph 3
The buyer is an individual buying a single dwelling (i.e. not one where a granny flat counts as a separate dwelling). Exceptions here to the surcharge include where the buyer is replacing their main or only residence, or does not have any other property interests counting against them.
- Paragraph 4
The buyer purchases a single dwelling but is not an individual. This means businesses, collectives and organisations. There are very few exceptions to the surcharge.
- Paragraph 5
The buyer is an individual buying two or more dwellings of the kind that the surcharge is intended for. Again, there are very few exceptions in this case.
- Paragraph 6
The buyer is an individual buying two or more dwellings, but only one of these is of the type for which the surcharge is intended. Exceptions again apply when the buyer is replacing their main residence or does not have other relevant property interests counting against them. This is the provision that was amended to try to ensure that genuine granny flats and the like do not fall under the type of property that the surcharge is intended to catch.
- Paragraph 7
The buyer is not an individual (again, this tends to mean that they are a business, organisation, etc.) and buys two or more dwellings. Even if only one counts as the type that the surcharge is intended for, there are very few exceptions.
This article is concerned largely with the circumstances described in paragraph 5, including where failing a condition set out in that charging paragraph results in the transaction being covered by one of the other (generally less favourable) charging paragraphs.
Amendments to the legislation regarding granny flats and similar annexes
The relevant amendments to the Finance Bill 2016 were tabled on 28 June 2016 and came into force on 15 September, with retroactive effects back to 1 April of that year. The amendments effectively acted to treat properties with a granny flat like the purchase of a single property or dwelling, as long as some conditions were met.
As a note issued with the amendments explains: “The amendments affect purchasers of dwellings with self-contained annexes or outbuildings that are, themselves, dwellings. These purchasers will not be subject to the higher rates of SDLT only because they have purchased such a pair of dwellings. The purchases will still be subject to the higher rates of SDLT if the purchaser already owns another dwelling and is not replacing a main residence.”
The amendments effectively called for a relevant transaction to pass the following test:
- The granny flat or subsidiary dwelling must cost no more than a third of the total cost of the purchase. This is based on a fair and reasonable valuation, not the actual splitting of the payment or transaction.
- It must be part of the same building or within the garden and grounds of the main building.
It should not now matter how the subsidiary dwelling is used or intended to be used, even if it is rented out to a tenant rather than a family member. The test does not take into account any planning conditions that require the annexe to be occupied, or limit the ways that it can be disposed of.
The statutory provisions are not always easy to follow. We will provide some examples later, but for now, these are the parts of the rules that determine whether the surcharge will be applied to a transaction involving a property with two or more dwellings.
Essentially, the surcharge will apply under charging paragraph 6 as set out previously if all the following conditions (i to v) are met:
- The buyer is an individual. This means that they are not a company, organisation, etc
- The property includes two or more dwellings. If it only counts as a single dwelling, then other charging paragraphs will apply. This does not mean that the surcharge will automatically apply, however, as other conditions may not be met.
It is also worth noting that in some cases, multiple dwellings relief may be applicable if the buyer has two or more dwellings and passes the subsidiary dwelling test set out above.
- Only one of the dwellings meets the following conditions (A, B and C). In practice, this is more likely to apply to the main dwelling.
A and B: The conditions previously set out, where the deemed price of the part under consideration is £40,000 or more; along with the dwelling not being subject to a long lease.
C: Only one dwelling (i.e. the main one) is not subsidiary to any of the others. If this is not the case, then you will move into the auspices of one of the other charging paragraphs. The purpose of this provision is essentially to filter cases where there are more than one main residential dwelling, rather than a main dwelling and a subsidiary one. Two matching flats, for example, would fail this provision.
It’s also worth noting that where there are more than one subsidiary dwelling, the transaction might still fall into one of the other charging paragraphs.
- The main dwelling part of the property in the transaction is not acting as a replacement for the buyer’s existing main or only residence. This condition can provide an exception to the surcharge if the main dwelling is replacing a former residence, though conditions apply and these were revised and tightened up in 2017’s Autumn Budget. The buyer must be intending to live in the main (i.e. most expensive) dwelling rather than the subsidiary one in order to avoid the surcharge on these grounds.
- The buyer has other property interests counting against them at the time of the transaction’s completion. It’s worth remembering that these property interests have to be valued at £40,000 or more in order to count against the buyer.
Multiple dwellings relief (MDR)
This type of relief has been around since 2011 and can be very useful for buyers where multiple dwellings are bought within the same or a series of linked transactions. The definition of a “dwelling” in reference to this relief is pretty much the same as that used for the application of the 3% surcharge. When applying MDR, you will first need to calculate the average cost of the properties. The SDLT is then applied using this average. It can result in a saving as you can benefit from the lower rate tax bands on each of the properties.
In the case of properties purchased through linked transactions, a notional tax is worked out for all of the combined payments in the series of transactions. This is then shared proportionally between the transactions based on the price of each.
Mixing surcharged and “normal” properties
According to HMRC, the rules “do not allow for a single transaction to be a combination of higher and normal residential rates”. This is clearly stated in paragraph 4.1 of the Guidance Note, but the note does not provide examples of how SDLT should be calculated for linked transactions, where some of the properties may attract standard stamp duty while others have the surcharge applied.
During a meeting with tax professionals in March 2016, HMRC’s Head of Stamp Taxes Policy said that it was the case that linked transactions could incorporate some purchases that were affected by the 3% surcharge and others that were not. He approved of a Finance Act 2003 formula that could be used to calculate the tax owed in a way similar to that described above – using a notional tax amount on a combined figure. A proportion of the different figures would then be taken using the relevant proportion of the chargeable consideration.
At this point, even the explanations are getting extremely convoluted and complex.
The surcharge and multiple dwellings relief
HMRC’s revised Guidance Note, which was issued in November 2016, included some guidance on how MDR and the higher surcharged rate of SDLT are intended to interact.
They provide examples in paragraph 5.12 and explain that MDR can be claimed when multiple dwellings are bought in a single or series of linked transactions. If MDR is claimed on these transactions, however, then the surcharge will apply.
The Explanatory Note issued alongside the 2016 Budget Resolution adds: “Subsection (4) provides that where a claim to multiple dwellings relief is made, the higher rates apply in calculating that claim.”
Despite this written guidance, it does not always appear to be true that claiming MDR automatically sees the 3% surcharge applied. It does not appear to apply, for instance, in cases involving linked transactions and/or properties with granny flats.
Perhaps crucially, the wording of the revised MDR provisions says that account should be taken of the surcharge “if the relevant transaction is a higher rates transaction” (bold added).
For linked transactions, the MDR provisions work by treating each individual transaction as a “relevant transaction”. The stamp duty owed is worked out independently for each transaction as a fraction of a notional amount. This notional amount is worked out based on the payments of all the linked transactions combined.
If we consider the way that the MDR provisions are worded and apply them to a typical “granny flat” case where two or more dwellings fall within a single transaction and the surcharge would not normally be applied, it appears to be true that MDR can sometimes be claimed without the 3% surcharge necessarily becoming applicable as a result.
It’s worth noting that even if the Explanatory Notes suggest that this was not the intention of the legislation, what counts more is the actual wording of the legislation. If taken to a conclusion, it is ultimately down to the courts to decide on the proper interpretation of this legislation.
While it may ultimately be down to the courts to interpret these rules, it is still the buyer and their representatives who have to provide their calculations in the first place. In order to help with this process, we will now consider some examples that will hopefully clarify some of the issues.
A house with a granny flat and no other property interests
A couple are looking to sell their only home and move up to a larger one with a granny flat incorporated into the property. Their intention is to occupy the main part of the property themselves, while the woman’s mother moves into the granny flat. The flat is self-contained with its own utilities and comprises a living area, bedroom, bathroom and kitchen. It also has its own front door, and a reasonable assessment of the price would be £450,000 for the main part of the property and £150,000 for the granny flat. The couple do not have any other property interests.
In this case, it would be very likely that the main part and the granny flat would be classed as two separate dwellings for the purposes of SDLT.
As per the amendments brought in with the Finance Act 2016, the transaction would not be subject to the surcharge. This is because the granny flat is part of the same building as the main dwelling and the value of the main part is two-thirds or more of the total price. With no other property interests to account for, the transaction would attract the standard SDLT rate and they would pay £20,000.
There may be a case, however, for claiming MDR without triggering the surcharge. If the main residence and the granny flat can be counted as two separate dwellings, then you could average the price and pay standard SDLT as if it were for two properties worth £300,000 each. This would work out at two lots of £5,000 or a total tax bill of £10,000. In this case, it would be better for the property to be treated as two dwellings rather than one.
A house with a cottage and a paddock
A couple are buying a large house with its own grounds, including a paddock, orchard and gardens. There is also a cottage within these grounds. It used to be a gardener’s cottage but is currently vacant. They are paying a total of £1.2m and are planning on living in the main house while renting out the cottage. A fair apportionment of the total price has been assessed at £900,000 for the house, garden and orchard, £200,000 for the cottage, and a further £100,000 for the paddock. By the time the transaction has been completed, they will have no other property interests for the purposes of SDLT.
A main factor here will be whether the property can be classed as “mixed” or entirely residential. It could be classed as mixed residential and non-residential, for example, if the paddock is separate to the rest of the grounds and is used commercially by a local farmer. The 3% surcharge will not be applied to a mixed-use property and non-residential SDLT rates would apply. For a property of £1.2m, this would amount to £49,500.
If MDR were to be claimed, this would apply to £1.1m for the house and cottage, with the £100,000 for the paddock being taxed at 1/12 of that £49,500. The two residential elements (the house and cottage) would be averaged and taxed at £550,000, resulting in SDLT of 2 x £17,500 = £35,000. The non-residential portion for the paddock would add a further £4,125 for a total SDLT bill of £39,125.
If the paddock was not counted as non-residential, then the entire property would be residential and the rules for mixed-use would not apply. In this case, you could still potentially avoid the 3% surcharge via the amendments from the Finance Act 2016. The property must pass the subsidiary dwelling test. As the cottage sits in the grounds of the property and costs less than a third of the total price, this should not be an issue. With the surcharge not applied, the regular rate of SDLT would be £63,750.
If MDR could be claimed without triggering the surcharge, then this bill could potentially be reduced further. The SDLT would be applied to the average cost of the two dwellings or two lots of £600,000. This would give two lots of £20,000 or a total of £40,000.
If the 3% surcharge were to be applied – perhaps because the cottage did not sit in the grounds, therefore failing that part of the test – then the normal SDLT of £63,750 would also attract a surcharge of £36,000 for a total of £99,750. A valid MDR claim could reduce this to £76,000, which would be calculated as two lots of SDLT with the surcharge on average prices of £600,000 per dwelling.
Moving from a house to one with a granny flat while owning other properties
An unmarried couple are selling their only residence, a house they own jointly, and moving into a new house with a granny flat. This will be their only residence, but they have the granny flat in mind for elderly parents further down the line. Until then, they intend to rent it out, and this can be done with no meaningful alterations to the property.
Their other properties are a jointly owned holiday home in France worth £75,000 and a house that they rent out worth £250,000.
Firstly, the fact that they intend to rent out the granny flat should not matter as it will otherwise pass the test for a subsidiary dwelling. The fact that they own other properties may stand against them when it comes to the surcharge, however.
The holiday home in France will not actually count for the purpose of the SDLT surcharge. This is because properties must be £40,000 or more to count and the tests will be applied against the owners separately. Each has a joint share worth £37,500, which falls below the £40,000 threshold. The other house that they let will count against them, however, and even with the share taken separately, each is well above £40,000.
They could, however, claim MDR to reduce the SDLT owed, presumably without automatically triggering the 3% surcharge.
Buying a house with two self-contained flats
A couple are buying a house with large grounds. There are two garages within the grounds, each of which has a self-contained flat above it. They are selling all their other property interests in order to fund the move. They intend to live in the main house and rent out both flats.
It is likely that, as per the amendments, they could escape the surcharge as long as both flats are clearly within the grounds of the main property and the house or main part of the property is deemed to be fairly valued at more than two-thirds of the total transaction.
It might also be the case that they could claim MDR without triggering the 3% surcharge. As there are three dwellings, you would divide the cost of the transaction by three to find the average price and work out the SDLT due on each, before multiplying by three. This could potentially provide a substantial saving.
Two flats within the same building
A new building contains eight flats. Six have already been sold on long leases with nominal rents. A couple are looking to buy a freehold on the building in order to get the two remaining ones, which consist of a large main flat on the top floor and a smaller one of less value in the basement. They intend to live in the larger flat and rent out the smaller one. They intend to sell their jointly owned main residence to fund the purchase but do have other property interests.
Even though these do not fit the traditional idea of a main dwelling and “granny flat”, this could still fall within the categorisation under the amendments to the Finance Act 2016. This is because both flats are in the same building and were purchased in the same transaction.
One factor would be the value, however. The more valuable flat would have to be fairly valued as being at least two-thirds of the overall cost of the transaction in order for one to count as a main and the other as a subsidiary dwelling. If the values were not different enough, then the whole transaction would attract the 3% surcharge.
This example is similar to one provided by HMRC in Chapter 8 of its Guidance Note. HMRC agrees that the whole transaction would be liable for the surcharge, but adds that MDR would be available.
A house and cottage bought in two linked transactions
A couple are buying a large house with a cottage on the grounds, but the two properties are held by different, though linked, sellers with separate titles. The two transactions are linked and will be signed on the same day with the contracts for £800,000 for the house and £300,000 for the cottage. It has been agreed between buyers and sellers that the transactions will only go ahead together.
The couple intend to sell their current and only residence to fund the move. They will live in the house and their elderly relatives will move into the cottage.
In this case, the “granny flat” amendments do not apply because even though they are linked, the two properties are not being purchased in the same transaction. As the main house is being bought to replace a current and main and only residence, however, then that should escape the surcharge. The cottage will not, so the situation is of two linked transactions with one liable for the surcharge and the other not.
Notional tax has to be worked out – one amount for the tax that would have been paid had the surcharge applied and another for the tax that would have been paid had it not. The actual amount owed is then worked out based on the proportional values of the property.
In this case, the total consideration is the combined value of the two linked transactions, which is £1.1m.
The SDLT due on that amount without the surcharge would be £53,750. With the surcharge, it would be £86,750.
To work out the actual SDLT owed, you would use a formula based on the relative values of the linked transactions.
This would be £800,000 / £1,100,000 x £53,750 = £39,090 for the house without the surcharge.
And £300,000 / £1,100,000 x £86,750 = £23,659 for the cottage with the surcharge.
These two figures are then added together to get a total SDLT figure of £62,749.
There’s more, however, as MDR can also be applied to the linked transactions.
First Time Buyers’ Relief
Another form of relief available to some buyers is First Time Buyers’ Relief, which was introduced in the Autumn Budget of 2017. As the name implies, it is available only for first-time buyers and also only for properties costing up to £500,000. This relief can never apply in transactions that attract the 3% surcharge, however, or where two or more dwellings are purchased in a single transaction.
Of the examples provided above, Example 6 would be the closest to qualifying for this relief as the cottage is being purchased in a separate transaction to the house. First Time Buyers’ Relief would still not apply, however, as the buyers are not first-time buyers, the cottage is liable for the surcharge, and the linked transaction does not only cover gardens and grounds.
Property tax in Wales
Please note that as of April 2018, most purchases in Wales are covered by “Land Transaction Tax” and not SDLT. The two systems are similar but have different rules and especially different rates of tax.
This article is intended to provide general information only and is not intended as professional legal or financial advice. You should seek professional advice regarding your specific circumstances before undertaking any transaction.
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