How to legally avoid paying too much Stamp Duty – Multiple Dwellings Relief MDR

An investment property purchase will, depending on location, attract Stamp Duty Land Tax (SDLT) in England and Northern Ireland, Land Transaction Tax (LTT) in Wales and Land and Buildings Transaction Tax (LBTT) in Scotland.  For the purposes of this article, I have referred to SDLT and Her Majesty’s Revenue and Customs (HMRC).

Please note that stamp duty legislation is the most complex tax that we have in the UK.  Things change, and frequently do.  It is very likely that this article will be out of date come the next Budget.

SDLT Collection

There are numerous stamp duty reliefs that the property purchaser may be able to claim.  However, your conveyancing solicitor is not a tax expert.  Typically your conveyancing solicitor will not give advice, they will convey information and take your instruction.  This of course will always depend on the scope of the retainer agreed but please keep in mind that it is not uncommon for conveyancers to specifically exclude from the terms of engagement any liability to give advice on tax mitigation.

HMRC have delegated responsibility to your conveyancing solicitor to collect and pay over, within 14 days, SDLT.  HMRC will provide a receipt for the SDLT paid and this will facilitate registering the title of your new property at HM Land Registry.

It could be argued that your conveyancing solicitor is working for HMRC as a tax collector.  They will receive penalties from HMRC is they don’t action things correctly.  Therefore, with regards to calculating the SDLT due, it is not surprising that they will tend to ‘play safe’ and use the stamp duty calculator supplied by HMRC on their web site.

TIP: Understand the scope of the retainer agreed with your conveyancer.  Is tax advice excluded from the terms of engagement?

SDLT Calculation

HMRC’s SDLT calculator, available on their web site, provides two calculations, one for ‘residential’ property and the other for ‘non-residential’.

If applicable, the ‘residential’ calculations can take into account the ‘First Time Buyer’ relief and if necessary, add the extra 3% for an additional property.  (And no doubt, after the 2020 spring Budget, also add a further 3% for purchasers based overseas.)

It is my experience that conveyancing solicitors are extremely reluctant to stray away from these ‘vanilla’ calculations provided by HMRC, and unfortunately this can cost the ill-informed property investor dearly.

Why you should avoid over paying SDLT

As a business owner it is your responsibility to avoid over paying tax.  I have deliberately used the word ‘avoid’ rather than ‘mitigate’ so that there is no ambiguity.  HMRC may not like tax avoidance but it is perfectly legal.  However, on the other side of the coin is tax evasion.  Tax evasion is NOT legal, it is a crime.  Tax evasion happens when people deliberately don’t pay the tax they should.

Multiple Dwellings Relief – MDR

One of the many SDLT reliefs, that is often over looked, is called Multiple Dwellings Relief (MDR).

MDR can be claimed where two or more ‘dwellings’ are purchased from the same vendor.  The ‘dwellings’ may be on different titles and there can be a time delay between the purchases (linked transactions).

MDR allows for SDLT to be calculated upon the average price of each dwelling (and then multiplied by the number of dwellings), rather than the total purchase price paid in the transaction. As the stamp duty payable on the average purchase price will often be less than the aggregate purchase price paid, there will be a saving in SDLT.  In high-value purchases, the SDLT saving can be considerable.

Back in October 2019, HMRC published guidelines regarding the definition of a ‘dwelling’ within their SDLT Manual.  Entries SDLTM00410 to SDLTM00430 explain what to consider when working out how many dwellings form a property.

Factors include:

• physical configuration (facilities, independent access and privacy)
• control of utilities (such as electricity and heating)
• other factors (such as council tax or separate post).

Additionally, section SDLTM00400, “Relevant properties that are in the process of being constructed will be treated as dwellings at the point where building works on top of the foundations have begun”.

Let’s take a look at a couple of case studies…..

MDR Case Study 1.

Mr Patel had his offer of £450,000 accepted on a converted School House and a partially constructed bungalow within the grounds.  He calculated that the ‘residential’ SDLT due would be £26,000.

The School House had been converted and extended to contain 11 self-contained dwellings.  Mr Patel was informed, quite rightly, that when purchasing a property with 6 or more dwellings that the SDLT could be calculated using the ‘non-residential’ rates.  The SDLT owed on a purchase of £450,000 using the ‘non-residential’ calculation is £12,000.

What Mr Patel didn’t know, until we had a conversation, was that the partially constructed bungalow within the grounds of the School House would be treated as a dwelling for SDLT purposes.

Therefore, calculating the SDLT using MDR on a purchase of 12 dwellings for £450,000:

£450,000 divided by 12 = £37,500

SDLT on a residential property costing £37,500 = £nil

£nil x 12 dwellings = £nil

The minimum rate of tax under the MDR relief is 1% of the amount paid for the dwellings.

Mr Patel completed on the £450,000 purchase last month.  Using MDR, he paid £4,500 SDLT.  This is a massive saving of £21,500.

MDR Case Study 2

Recently, I was tagged into a Facebook post.  I tend not to get involved in Facebook Community group discussions that are open to the general public.  However, given that I was tagged in by a respected ‘property professional’ I joined the conversation.

It was a simple question which to the less well informed warranted a simple answer.