The number of tribunal cases for multiple dwellings relief (MDR) claims for stamp duty land tax (SDLT) involving houses with annexes had led me to suspect that there was a growing repayment claims market. When I purchased a house that (in estate agents’ speak) could be considered to have ‘annexe potential’ in spring 2021, I wondered whether I would be contacted. Once my purchase was registered at the Land Registry, the letters started arriving.

The legislative and policy background

MDR was introduced for SDLT with effect from 19 July 2011. The policy rationale was to promote the supply of private rented housing, to be achieved by reducing the amount of SDLT payable on a purchase of multiple dwellings, so that it is closer to the amount charged when purchasing those properties individually.

Where a transaction, scheme, arrangement, or series of linked transactions includes multiple dwellings, the rate of tax charged is determined by the mean consideration (the total consideration attributable to

the dwellings divided by the number of dwellings). This is subject to a minimum 1% charge.

Policy moved on: rather than stimulating the private rental market, the government wanted to re-focus support for housing towards low-cost home ownership for first-time buyers. As part of its five-point plan to achieve this, higher rates of SDLT were introduced for additional dwellings acquired by individuals with effect from 1 April 2016.

Concerns were raised that the higher rates would also apply to purchases of a family home with a ‘granny annexe’. An amendment was made at committee stage of Finance Bill 2016, introducing the concept of a subsidiary dwelling when considering multiple dwelling transactions. The higher SDLT rate does not apply where the purchase is of a dwelling together with a subsidiary dwelling (paras 2 and 5, Sch 4ZA, Finance Act 2003 (FA 2003)).

Dwelling A is subsidiary to dwelling B if:

• it is situated within the grounds of, or within the same building as, dwelling B; and
• the amount of the consideration attributable to it (on a just and reasonable basis) does not exceed one third of the total consideration attributable to dwelling A and dwelling B and any other purchased dwellings within the grounds of, or within the same building as, dwelling B.

Some might argue that this supports the concept that a house and an annexe purchased together are two dwellings and therefore eligible for MDR. That said, MDR is subtly different: a building or part of a building counts as a dwelling for MDR if:

• it is used or suitable for use as a single dwelling; or
• it is in the process of being constructed or adapted for such use (para 7, Sch 6B, FA 2003).

If an annexe meets the definition of being a subsidiary dwelling and is suitable for use as a single dwelling, it is a win-win situation: an MDR claim can be made and the purchase is not subject to the higher SDLT rates (provided that the higher SDLT rates are not triggered for another reason).

Example

Bob purchased a four-bedroom house with a one-bedroom annexe on 26 November 2021 for a total consideration of £750,000. This was a replacement for his main home and the annexe meets the definition of a subsidiary dwelling and is suitable for use as a single dwelling.

If Bob did not make a claim for MDR (it must be claimed – it’s not automatic), the SDLT payable would be:

With MDR, the SDLT is calculated as if there were two purchases, each for £375,000 (subject to a 1% minimum rate). For each part, the calculation is:

Therefore, if MDR is claimed on the house and annexe, the total SDLT payable would be £20,000 (a saving of £7,500).

The tribunal decisions

There has been a string of tribunal cases concerning MDR claims for house and annexe purchases that focus on whether the annexe is suitable for use as a single dwelling. However, at the time of writing, Fiander & Anor v Revenue and Customs [2021] UKUT 156 (TCC) is the only case to have been decided by the Upper Tribunal (UT), thereby creating a precedent.

The dwelling was a detached property consisting of a main house and an annexe situated to the rear of the main house. A corridor connected the main house and the annexe. There were door jambs in place at the point between the main house and the corridor, but no door. The annexe did not have its own separate postbox, council tax bill or utility supply.

The First-tier Tribunal (FTT) concluded that the lack of a physical barrier between the house and annexe meant that the annexe and the main house did not each count as a dwelling for MDR purposes; rather, they together counted as a dwelling.

The taxpayers appealed to the UT on the basis that the FTT had failed to take account of oral evidence of one of the appellants and if it had, it could not have reached the decision that it did. The UT held that it could not admit the evidence, but even if it could, it would have agreed with the FTT that the annexe was not suitable for use as a single dwelling.

The UT analysed the meaning of “suitable for use as a single dwelling” in para 7, Sch 6B, FA 2003. It considered that the phrase must be construed purposively and in the context of the SDLT code as a whole. It commented that:

• “The word ‘suitable’ implies that the property must be appropriate or fit for use as a single dwelling. It is not enough if it is capable of being made appropriate or fit for such use by adaptations or alterations.”
• “The word ‘dwelling’ describes a place suitable for residential accommodation which can provide the occupant with facilities for basic domestic living needs. Those basic needs include the need to sleep and to attend to personal and hygiene needs.”
• “The word ‘single’ emphasises that the dwelling must comprise a separate self-contained living unit.” This is an objective test.

Over the course of 2020 and 2021, there were eight further FTT decisions, all rejecting the taxpayers’ appeals in respect of their MDR claims on the basis that each part was not suitable for use as a single dwelling.

A tempting proposition

One of the justifications for the SDLT holiday announced on 8 July 2020 was that it would not only boost confidence in the housing market, it would also stimulate the wider economy as estimates suggested that moving house drives additional spending worth about 5% of the property’s value. Letters inviting reclaims for thousands of pounds of SDLT are therefore a tempting prospect for those who have not only incurred the costs associated with moving home, but who are also contemplating those additional purchases.

Based on the cases taken to tribunal so far, most statements made in the letters that I have received are disappointingly misleading. At best, my house has a bonus room above the garage and a shower room in the garage (frequented only by spiders). These spaces do not function as a separate dwelling.

Of course, the letters also do not highlight other tax considerations. Should the annexe be separately registered for council tax? Will private residence relief be restricted (see Crippin [2021] UKFTT 0351 (TC))?

Future change

One of the consultations that was issued on Tax Administration and Maintenance Day on 30 November 2021 concerns MDR and mixed-property purchases (another target of the SDLT reclaim agents). The consultation reveals that an analysis of MDR claims made on amended returns showed that 40% of claims may not qualify for relief. Although HMRC has a strong record of challenging the claims at tribunal, it is easy to imagine that the volume of claims being made means that many are slipping through the net unchallenged.

The consultation also highlights that conveyancers submitting SDLT returns without making a claim for MDR are facing professional negligence claims.

The consultation puts forward four options for reforming MDR:

1. Allow MDR only where all the dwellings are purchased for a ‘qualifying business use’ (business use being development or redevelopment and resale or exploitation as a source of rents).
2. Allow MDR only in respect of the dwellings purchased for a ‘qualifying business use’.
3. Restrict MDR by introducing a ‘subsidiary dwelling’ rule to align with the test for the higher SDLT rate.
4. Allow MDR only for purchases of three or more dwellings.

The consultation does not put a timeline on when change might happen but, given the high volume of potentially invalid claims being made, you would hope it will happen soon.

About the author

Lindsey Wicks, Technical Editor, Tax Faculty