SDLT Multiple Dwelling Relief on Annexe

snusria

Hi all,

I hope you can help me with an SDLT Multiple Dwelling Relief question. We are buying a large house with 3 separate units / annexes. One unit is a converted garage, and the other two are in a converted outbuilding (barn). All three are not physically connected to the main house. All three have lockable doors, small kitchens (equipped with a hob, oven, fridge), shower rooms and electric boilers and radiators. They are laid out as open spaces, the smallest one is about 40 square meters. At least two of them have beds there at the moment.

Description from the listing is as follows:

“…detached double garage building that has been converted into a 27' studio room with kitchenette and shower room and additional separate garage as well as further brick built outbuildings that has been converted into two large studio rooms with kitchenettes and modern shower rooms.”

We have been told that seller’s adult children lived in the units throughout lockdown, and that there were some plans to let them out, but they never have been.

Water and electricity is connected through the main house, there are no separate meters, the units are not on a separate Council Tax band. There are letterboxes in two of the doors (the third is a garage door), but not a separate address. There is a planning approval for the two units in the converted barn, however it explicitly states that “The living accommodation hereby approved shall be ancillary to the use of the main dwellinghouse and shall not be occupied at any time as a separate and un-associated unit of accommodation.” The garage has no planning applications at all.

I’ve contacted a few tax specialists and they are giving contradictory advice in terms of whether applying for relief is tenable or not. We could save an astronomical sum of £65k though because there are 4 total dwellings, so are very keen to give it a go. We are happy to reserve the sum in case it needs to be paid to HMRC in the end and the relief would not impact our decision to buy.

I would be very grateful on any views and advise on the above, but my main questions are as follows:

1. Are there any risks associated with applying if the relief application gets denied? Will we be liable to pay a penalty? Can the whole application process delay our completion? Or is paying back the tax difference the worst that can happen?
2. Are there any advantages in hiring a tax advisor at this stage? What would they be able to do exactly rather than just advise us to apply or not to apply?
3. Do I understand correctly that at the initial stage we just need to send the completed SDLT form, and HMRC will be in touch to ask questions relevant to the relief? Or are we meant to accompany the SDLT form with a letter explaining all the reasons why we think we’re eligible? Are there any examples of such letter I could use?
4. We would assume that the main house accounts for 2/3 of the value (i.e., anyone would have happily bought it for that price if it had none of the units), so the 3% surcharge is not payable. However, we have no idea how and whether we should support this with any evidence or just apply and see what they come back with.

What would be a strategy here?

middleclassbutpoor

snusria said:

We have been told that seller’s adult children lived in the units throughout lockdown, and that there were some plans to let them out, but they never have been.

Sorry can't help with the tax issue but you may want to consider reporting this. Im sure its not good to let children - even the adult kind -  be locked up like this. 

SDLT_Geek

snusria said:

Hi all,

I hope you can help me with an SDLT Multiple Dwelling Relief question. We are buying a large house with 3 separate units / annexes. One unit is a converted garage, and the other two are in a converted outbuilding (barn). All three are not physically connected to the main house. All three have lockable doors, small kitchens (equipped with a hob, oven, fridge), shower rooms and electric boilers and radiators. They are laid out as open spaces, the smallest one is about 40 square meters. At least two of them have beds there at the moment.

Description from the listing is as follows:

“…detached double garage building that has been converted into a 27' studio room with kitchenette and shower room and additional separate garage as well as further brick built outbuildings that has been converted into two large studio rooms with kitchenettes and modern shower rooms.”

We have been told that seller’s adult children lived in the units throughout lockdown, and that there were some plans to let them out, but they never have been.

Water and electricity is connected through the main house, there are no separate meters, the units are not on a separate Council Tax band. There are letterboxes in two of the doors (the third is a garage door), but not a separate address. There is a planning approval for the two units in the converted barn, however it explicitly states that “The living accommodation hereby approved shall be ancillary to the use of the main dwellinghouse and shall not be occupied at any time as a separate and un-associated unit of accommodation.” The garage has no planning applications at all.

I’ve contacted a few tax specialists and they are giving contradictory advice in terms of whether applying for relief is tenable or not. We could save an astronomical sum of £65k though because there are 4 total dwellings, so are very keen to give it a go. We are happy to reserve the sum in case it needs to be paid to HMRC in the end and the relief would not impact our decision to buy.

I would be very grateful on any views and advise on the above, but my main questions are as follows:

1. Are there any risks associated with applying if the relief application gets denied? Will we be liable to pay a penalty? Can the whole application process delay our completion? Or is paying back the tax difference the worst that can happen?
2. Are there any advantages in hiring a tax advisor at this stage? What would they be able to do exactly rather than just advise us to apply or not to apply?
3. Do I understand correctly that at the initial stage we just need to send the completed SDLT form, and HMRC will be in touch to ask questions relevant to the relief? Or are we meant to accompany the SDLT form with a letter explaining all the reasons why we think we’re eligible? Are there any examples of such letter I could use?
4. We would assume that the main house accounts for 2/3 of the value (i.e., anyone would have happily bought it for that price if it had none of the units), so the 3% surcharge is not payable. However, we have no idea how and whether we should support this with any evidence or just apply and see what they come back with.

What would be a strategy here?

Some elements of the blog here https://www.tax.org.uk/stamp-duty-refunds-too-good-to-be-true might help, especially the discussion of SDLT being a self assessed tax and the responsibility that puts on the taxpayer.

snusria

@SDLT_GeekThank you, this does help a lot!

I have reached out to a couple of tax advisors and will be guided by their professional opinion. It does feel very frustrating though that the dwelling criteria seem to be extremely vague, and it appears that minor things like an extractor hood or presence of a letterbox in a door might sway the decision one way or another. I suppose there is no way around it really in a borderline case like ours?

In your opinion, does this case have legs or not?

Strummer22

middleclassbutpoor said:

snusria said:

We have been told that seller’s adult children lived in the units throughout lockdown, and that there were some plans to let them out, but they never have been.

Sorry can't help with the tax issue but you may want to consider reporting this. Im sure its not good to let children - even the adult kind -  be locked up like this. 

Pfft! 

Have you read https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm00425 and https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm00430? This looks like the section of the SDLT manual which helps define whether something is a 'dwelling' or not. 

An extractor hood or letterbox will not sway the decision (see SDLTM00430). From the description you gave it's not clear whether they meet the criteria "A single dwelling should be able to control all or most of the utility services supplied to it" - this doesn't mean they have to have their own supply, but that the occupant can control their own utilities without going into another dwelling (e.g. be able to turn off the water/gas/electricity, and can control heating system independently from other dwellings). 

As 'open spaces', is that open plan living, or is it literally just one room with kitchen, living area, sleeping area AND bathroom all in a single space? Studio flats count as separate dwellings so theoretically kitchen, living and sleeping areas could all be one room, but the bathroom area has to be a separate room.

Overall I think you have a strong case that MDR applied. The acid test is whether some some randomer off the street could live there; they don't have to live there comfortably, or happily (or even wilfully; see @middleclassbutpoor's comment!) but with separate lockable entrance and control of own utilities and spaces to live, sleep, cook, and wash are essential. 

I applied for MDR on a purchase last year, with MDR for two dwellings and the added complication of it being a mixed-use property. I took tax advice from a company called Schofield Sweeney. They were fine, and the advice was affordable (less than £1,000) - other advisors are available. I saved well over £10k. As far as I'm aware, their advice was for us and to inform our solicitor in completing the SDLT return, and was not submitted to HMRC. It would form part of a response if HMRC challenged our position (which they haven't - yet).

One key point to note is that it's the status at completion that matters. So if you would have to undertake remedial work (e.g. fit new consumer units, stop taps, whatever, in order to comply with the utilities point) you would have to convince the seller to do this prior to your purchase. It might be acceptable to do this on the day of completion, after you complete, in order to comply; I'm not sure, and that would be stressful. And risky, if for example your plumber lets you down!

Brief answers to your questions:
1) As far as I'm aware the only risk is paying the tax if HRMC decide you're liable. There might be a penalty if your application was outright fraudulent, but if uncertain (as in this case) it seems highly unlikely you'd be penalised. I'm sure SDLT_Geek can advise futher.

2) Having some advice to rely on would put your mind at rest! Ask an advisor how much reliance you can put on their advice.

3) As I said above, I think you just submit the return. If HMRC allowed cover letters to be submitted they'd be inundated with sob stories.

4) You just have to make a judgment and if HMRC disagree they will let you know. 

snusria

@Strummer22 Wow, thank you so much! A lot of very useful information in your post!

This looks like the section of the SDLT manual which helps define whether something is a 'dwelling' or not.  

It appears I have missed or skimmed over this particular bit. That clarifies a few questions for sure.

From the description you gave it's not clear whether they meet the criteria "A single dwelling should be able to control all or most of the utility services supplied to it" - this doesn't mean they have to have their own supply, but that the occupant can control their own utilities without going into another dwelling (e.g. be able to turn off the water/gas/electricity, and can control heating system independently from other dwellings). 

Gotcha! Water and electricity is TBC, but I assume so (might need to pay another visit!). Heating system - definitely, as there is a separate electrical boiler and electrical radiators fitted.

As 'open spaces', is that open plan living, or is it literally just one room with kitchen, living area, sleeping area AND bathroom all in a single space? Studio flats count as separate dwellings so theoretically kitchen, living and sleeping areas could all be one room, but the bathroom area has to be a separate room.

No, shower room is separate and the units are laid out like your normal studio flat (we used to live in one just like that when we first moved here) and are plenty spacious for a studio.

Overall I think you have a strong case that MDR applied. The acid test is whether some some randomer off the street could live there; they don't have to live there comfortably, or happily (or even wilfully; see @middleclassbutpoor's comment!) but with separate lockable entrance and control of own utilities and spaces to live, sleep, cook, and wash are essential. 

Surely control of utilities is not essential in the case @middleclassbutpoor hinted to  But in all seriousness, thank you, that sounds very reassuring! Do you think planning application restriction is a serious problem though as it appears to preclude that?

I took tax advice from a company called Schofield Sweeney. They were fine, and the advice was affordable (less than £1,000) - other advisors are available.

thank you for the recommendation! I will check them out!

As far as I'm aware, their advice was for us and to inform our solicitor in completing the SDLT return, and was not submitted to HMRC. It would form part of a response if HMRC challenged our position (which they haven't - yet).

Wow, now that's interesting. I assumed that the well-written cover letter to HMRC is the essence of their service. Our solicitor has not challenged the idea of the relief and does not seem to be bothered by it (can't advise on this though) and the SDLT form we're completing ourselves - have done it before and it is quite straightforward. Do you think it is possible to go to tax advisors for help with report only if / when HMRC challenges the relief application? TBH, I don't think they could write there anything that we can't write ourselves, apart from legal precedents on the matter or something highly specialised like this.

If you don't mind me asking, has it been more or less than 9 months?

One key point to note is that it's the status at completion that matters. So if you would have to undertake remedial work (e.g. fit new consumer units, stop taps, whatever, in order to comply with the utilities point) you would have to convince the seller to do this prior to your purchase. It might be acceptable to do this on the day of completion, after you complete, in order to comply; I'm not sure, and that would be stressful. And risky, if for example your plumber lets you down!

I am aware of that, although didn't think about doing it ourselves it on the completion day, cheeky! Our vendor has been lovely to us so far, I would be hopeful that he might accommodate a reasonable small request (like installing a stop !!!!!!), especially if we pay for it. 

1) As far as I'm aware the only risk is paying the tax if HRMC decide you're liable. There might be a penalty if your application was outright fraudulent, but if uncertain (as in this case) it seems highly unlikely you'd be penalised. I'm sure SDLT_Geek can advise futher.

Wouldn't the interest be payable from when the tax was originally due? Or only from when they issue a decision that the relief was applied incorrectly? @SDLT_Geek, WDYT?

Strummer22

No problem. Our purchase completed in January 2022 so it's been well over 9 months - although I think HMRC can undertake a compliance review up to nearly 6 years after the event. 

If you're confident in your position and filling in the SDLT form you can probably do without paying for tax advice at this stage. 

NLM2703

We have purchased a house with an annex and received SDLT relief. We moved in December 2023. We are planning to integrate the annex into the main house ie remove separate kitchen, entrance etc. Are there any rules we should be aware of eg if you remove the annex within a given period, you have to pay the SDLT relief back?

Strummer22

NLM2703 said:

We have purchased a house with an annex and received SDLT relief. We moved in December 2023. We are planning to integrate the annex into the main house ie remove separate kitchen, entrance etc. Are there any rules we should be aware of eg if you remove the annex within a given period, you have to pay the SDLT relief back?

https://www.ukpropertyaccountants.co.uk/multiple-dwellings-relief/#t-1685514118402

"If an acquisition has been made and the relief claimed and obtained, it is clawed back if events of certain types occur subsequently, events which give rise to a situation where relief is presumably thought not to be merited. The rule is that if, in the period ending:

• Three years from the effective date of the purchase; or
• If earlier, on the date the purchaser disposes of the dwelling in question on to someone unconnected with him,

An event, change of circumstance or change of plan occurs, which, had it occurred immediately before the effective date of the original purchase, would have denied or reduced the relief, the tax on that purchase is recalculated accordingly. Within 30 days of the event, the purchaser must send in an SDLT return and pay the extra tax."

So if within 3 years you make changes that would have meant MDR is not applicable, you should pay the extra tax.

NLM2703

Thank you for your response. Much appreciated.