Multiple Dwelling Relief Stamp Duty Question

Mrcsmrs

Anyone anyone able to advise if this can be applied in a case where there’s an annex, but also a requirement to pay the second home surcharge of 3% please? Annex is a one bedroom separate building, with its own heating system, has a little garden area but is part of the main gardens, although screened off. Currently let to a tenant who’s been there more than 6 months and previously used as family accommodation whilst the main bungalow was being done up. Solicitor initially said yes we should get it but now saying he doesn’t think we can because we have to pay the second home surcharge. 

I don’t think the annex has utilities billed separately, nor is it council tax rated but I believe the vendors have used it as a holiday let as well as a residence. It’s very clearly part of the main property although much smaller. I’ve been trying to discuss it with solicitor today but not in the office apparently. 

Very grateful for any advice anyone can offer as we don’t want to end up being fined but equally would rather not pay more than we need to. Thank you. 

SDLT_Geek

I think you want us to make a working assumption for now that the property is suitable for use as two dwellings and that the 3% surcharge will apply to the purchase anyway.  The question is whether multiple dwellings relief can apply in conjunction with the 3% surcharge.

The answer is yes.  For example, if the price is £900,000 then the SDLT with the extra 3% but without MDR comes to £47,000 (during the holiday).  Applying MDR (but still with the 3% surcharge) the SDLT works out at £27,000.

claire111

This really helped me understand a similar situation recently - 

https://www.blakemorgan.co.uk/additional-3-stamp-duty-land-tax-surcharge-on-granny-flats-and-other-dwellings/

https://www.blakemorgan.co.uk/wp-content/uploads/2020/01/Stamp-Duty-Land-Tax-3-surcharge-on-Granny-Flats-such-as-self-contained-annexes-and-other-subsidiary-dwellings-14-April-2020.pdf

Mrcsmrs

SDLT_Geek said:

I think you want us to make a working assumption for now that the property is suitable for use as two dwellings and that the 3% surcharge will apply to the purchase anyway.  The question is whether multiple dwellings relief can apply in conjunction with the 3% surcharge.

The answer is yes.  For example, if the price is £900,000 then the SDLT with the extra 3% but without MDR comes to £47,000 (during the holiday).  Applying MDR (but still with the 3% surcharge) the SDLT works out at £27,000.

Thank you, yes, those assumptions are correct and our intention is for my parents to live in the annex, rent free and until they need more support than we can give them. Your figures are also eerily close to our actual figures so thank you. I will try again to speak to our solicitor tomorrow about it. I get the impression he thinks we’re trying to dodge the surcharge, and of course we don’t want to pay more tax than we should, but we definitely don’t want to do anything illegal, or end up getting fined for submitting the wrong return. 

Thank you for your help. 

Mrcsmrs

claire111 said:

This really helped me understand a similar situation recently - 

https://www.blakemorgan.co.uk/additional-3-stamp-duty-land-tax-surcharge-on-granny-flats-and-other-dwellings/

https://www.blakemorgan.co.uk/wp-content/uploads/2020/01/Stamp-Duty-Land-Tax-3-surcharge-on-Granny-Flats-such-as-self-contained-annexes-and-other-subsidiary-dwellings-14-April-2020.pdf

Thank you! By coincidence I have literally just been reading those articles and working out how the floor plan would demonstrate what I believe to be the right to apply the MDR. I am a little confused that my solicitor doesn’t seem able to see it. He states that there would be many large homes with a holiday let that would be able to dodge (implying that the dodge is the 3% surcharge, which isn’t what we’re trying to do anyway!) whichever way we do this we are second home buyers so I fully agree that the surcharge is due, it’s just whether we could apply MDR in addition which SDLT_geek has clarified for me. 

All I need to do now is to convince him to listen to me! 

Thank you. 

Mrcsmrs

@SDLT_Geek sorry to ask again but I’ve had this conversation with my solicitor and it seems he feels that applying the MDR to a property with an annex is a form of exploitation of a loophole that isn’t strictly legal for all intents and purposes. He advises that MDR is intended to only apply for blocks of flats and that we may or may not ‘get away with it’ in his words. Is applying MDR in this situation exploiting a loophole or is it a legitimate application of the relief? I’ve done an awful lot of reading online but even with my best efforts I simply cannot make sense of the stamp duty manual. I’ve even contacted the chap at the link shared above and asked for paid legal advice but my solicitor doesn’t seem to feel he needs it, but equally doesn’t appear to want to apply MDR to our purchase. He’s a lovely chap and very knowledgeable but I cannot seem to get a reply from him that makes sense! 

If we did attempt the SDLT return with the MDR applied and it was declined, presumably provided we paid any outstanding amount we wouldn’t then be fined additionally would we? Though I suspect the solicitor thinks we want him to try to do the return without the second home surcharge which isn’t what we’re asking at all.

SDLT_Geek

Multiple dwellings relief can be legitimately claimed for a property with a self-contained annexe so long as the property overall is suitable for use as two dwellings.  There can be grey areas as to how separate the two parts need to be which have been explored in Tribunal cases such as Fiander v HMRC and Merchant v HMRC.

SDLT is self-assessed, so you could claim the relief and then make full disclosure of the strengths and weaknesses of your case.

HMRC are able to open enquiries into returns and might come to the decision to decline the relief.  If so, they will ask for the shortfall of tax and interest at about 3% pa.  They might consider a penalty if they taxpayer has been careless, but a penalty is unlikely where it is a genuine grey area which the taxpayer has researched.

oldbikebloke

as SDLT geek noted but did not challenge, why will the 3% surcharge apply, does the separate dwelling fail the subsidiary dwelling test (or is the purchase of house and annex not a replacement of your main home - sounds unlikely)?

The ability to claim MDR is a given

And just to be certain, I note you list the annex as having its own heating and being tenanted. Can we confirm that it has basic facilities of kitchen and bathroom so it will indeed be a dwelling in its own right
PS I think Blake Morgan is SDLT Geek

Mrcsmrs

oldbikebloke said:

as SDLT geek noted but did not challenge, why will the 3% surcharge apply, does the separate dwelling fail the subsidiary dwelling test (or is the purchase of house and annex not a replacement of your main home - sounds unlikely)?

The ability to claim MDR is a given

And just to be certain, I note you list the annex as having its own heating and being tenanted. Can we confirm that it has basic facilities of kitchen and bathroom so it will indeed be a dwelling in its own right
PS I think Blake Morgan is SDLT Geek

Thank you. To address your points, the 3% surcharge is due because we aren’t selling our existing property, rather retaining it in case we wish to return to it. 

The annex is a separate building placed approximately 6 feet from the back of the main bungalow, it consists of two bedrooms, a bathroom and a kitchen diner. It has a small fenced in piece of our garden that is solely for its use, but is contained within the boundary of our garden, if that makes sense. There is a separate EPC for the annex which I hadn’t realised when I first posted. The main house is much larger and definitely worth more than 2/3 of the price of the whole. 

From what both of you have said I think my approach will be to ask our solicitor if he will complete the return as applying the 3% surcharge and also then allowing for MDR relief, then I will write a letter explaining my thinking and with a diagram of the annex so that HMRC can see exactly how it works. Is there anything in particular that would be advisable to point out in such a letter please? 

If we are asked to pay interest on the SDLT should they reject our return, would I be right in thinking that this would happen fairly soon and that any interest would be calculated from the date of completion? Just trying to understand exactly what we might let ourselves in for if they reject our return. 

My final issue is in getting my solicitor to do the return as I’m asking rather than, as he seems to be indicating, that he’ll try to do it without applying the 3% surcharge which I know is most definitely due. He is hugely knowledgeable but did state that if MDR could be applied as I’ve tried to suggest, lots of bigger houses with annexes would ‘get away with it’. He insists it is only for flats! I will try to ask him to do it my way and see how I get on. 

Thank you both very much for answering me, it is very much appreciated. 😊

TTM

Mrcsmrs said:

oldbikebloke said:

as SDLT geek noted but did not challenge, why will the 3% surcharge apply, does the separate dwelling fail the subsidiary dwelling test (or is the purchase of house and annex not a replacement of your main home - sounds unlikely)?

The ability to claim MDR is a given

And just to be certain, I note you list the annex as having its own heating and being tenanted. Can we confirm that it has basic facilities of kitchen and bathroom so it will indeed be a dwelling in its own right
PS I think Blake Morgan is SDLT Geek

Thank you. To address your points, the 3% surcharge is due because we aren’t selling our existing property, rather retaining it in case we wish to return to it. 

The annex is a separate building placed approximately 6 feet from the back of the main bungalow, it consists of two bedrooms, a bathroom and a kitchen diner. It has a small fenced in piece of our garden that is solely for its use, but is contained within the boundary of our garden, if that makes sense. There is a separate EPC for the annex which I hadn’t realised when I first posted. The main house is much larger and definitely worth more than 2/3 of the price of the whole. 

From what both of you have said I think my approach will be to ask our solicitor if he will complete the return as applying the 3% surcharge and also then allowing for MDR relief, then I will write a letter explaining my thinking and with a diagram of the annex so that HMRC can see exactly how it works. Is there anything in particular that would be advisable to point out in such a letter please? 

If we are asked to pay interest on the SDLT should they reject our return, would I be right in thinking that this would happen fairly soon and that any interest would be calculated from the date of completion? Just trying to understand exactly what we might let ourselves in for if they reject our return. 

My final issue is in getting my solicitor to do the return as I’m asking rather than, as he seems to be indicating, that he’ll try to do it without applying the 3% surcharge which I know is most definitely due. He is hugely knowledgeable but did state that if MDR could be applied as I’ve tried to suggest, lots of bigger houses with annexes would ‘get away with it’. He insists it is only for flats! I will try to ask him to do it my way and see how I get on. 

Thank you both very much for answering me, it is very much appreciated. 😊

I know this post is rather old now, but in case you see this, how did this go in the end?
I find myself in a similar situation buying a house with an annexe and my solicitor mentioned MDR in an email today.  It’s the first time I’d heard of it, so have been reading all evening and found this.