“Multiple Benefits” – Multiple Dwellings Relief in SDLT

Despite some concerns to the contrary Multiple Dwellings Relief (‘MDR’) survived the Autumn 2018 budget and remains an important, if underused, relief from Stamp Duty Land Tax (‘SDLT’). This article explains how MDR operates, before examining how VAT and council tax cases could be relevant to identifying whether a transaction may qualify for relief. In particular it looks at the correct weighing up of certain physical characteristics of a dwelling in determining whether it is ‘suitable for use as a single dwelling’ for the purposes of MDR.

MDR

MDR is contained in FA 2003 sch 6B and, broadly, may be claimed where the main subject matter of a transaction (or linked transactions) is two or more dwellings. If MDR applies then the SDLT liability on the transaction is not calculated by reference to the total value of the transaction but the average value of the dwellings purchased, multiplied by the number of those dwellings. Accordingly, lower rates of SDLT may be available.

For example:

Harry purchases, as an additional residence, the unencumbered freehold to a house, which has a basement flat and a ‘granny annex’ over the garage, for a total of £1 million. The basement flat is worth £150,000; the ‘granny annex’ is worth £250,000; the rest of the house is worth £600,000.

If the additional residence is treated as one dwelling so that MDR cannot be claimed the transaction would attract an SDLT liability of £73,750 (giving an effective rate of 7.375% which is calculated as follows: £0-£125,000 taxed at 3%; plus £125,000-£250,000 at 5%; plus £250,000-£925,000 at 8%; plus £925,000-£1,000,000 at 13%)

If the basement flat, ‘granny annex’, and the rest of the house each qualify as ‘dwellings’, and MDR is claimed, then the calculation is as follows:

£1,000,000 ÷ 3 = £333,333.33 (being the average price of each dwelling).

SDLT (at an effective rate of 5%) on £333,333.33 is £16,666. This is then multiplied by the number of dwellings such that if MDR applies the SDLT charge is £49,998, giving a saving of £23,752 in this simplified example.

The application of MDR

Crucial to the application of MDR is the existence of multiple dwellings as the subject matter of the transaction. This turns on the meaning of ‘dwelling’ for the purposes of the relief.

FA 2003 sch 6B para 7 provides a somewhat circular definition of ‘what counts as a dwelling’, specifying at para 7(2) that:

‘A building or part of a building counts as a dwelling if-

• It is used or suitable for use as a single dwelling, or
• It is in the process of being used constructed or adapted for such use.’

As para 7(2)(b) is relates back to para 7(2)(a), the availability of MDR rests upon the application of the term ‘used or suitable for use as a single dwelling’.

The term ‘dwelling’ is not otherwise defined for the purposes of this relief, and therefore takes its natural meaning in para 7(2)(a).

In the context of the Housing Act 1988 s.1, the House of Lords considered that the ordinary meaning of the term was accommodation where a person ‘lives and to which he returns and which forms the centre of his existence’ (Uratemp Ventures Ltd v Collins [2001] UKHL 43 Millet L at [31] (‘Uratemp’).

In the context of VAT, the First-tier Tribunal in Carson Contractors Ltd v Commrs for HMRC [2015] UKFTT 530 (TC) (‘Carson”) considered Uratemp and held (at paragraph 45 of the decision) that, applying a natural meaning of the term ‘dwelling’, a building (or part of a building) would contain as a minimum ‘facilities for personal hygiene, the consumption of food and drink, the storage of personal belongings, and a place for an individual to rest and to sleep.’

In defining a ‘dwelling’, both Carson and Uratemp give it a broad meaning. In the context of VAT and the Housing Act 1988, respectively, this has led to a bedsit (Amicus Group Ltd v Commrs of C & E (2002) VAT decision 17693) and a hotel room (Uratemp) qualifying as dwellings. These authorities might suggest that it is easy to meet the requirement of there being multiple dwellings for MDR purposes. However, para 7(2)(a) requires that the building, or part thereof, must be used, or suitable for use ‘as a single dwelling’ (emphasis added), requiring an element of separation; it must be a ‘standalone’ dwelling.

The test in para 7(2)(a), phrased in the alternative, is satisfied if the dwelling is used as a dwelling, whether or not it is suitable for such use. However, it is difficult to imagine many circumstances in which a dwelling is unsuitable for single use, but is nevertheless used as a single dwelling. In addition, FA 2003 sch 6B para 6 contains a clawback provision which provides that if an event occurs: (1) within the shorter of 3 years of the effective date of the transaction or when the dwelling or dwellings are disposed of to an unconnected person; and (2) had that event occurred before the transaction it would have led to more tax being payable; then tax is charged as if the event had happened before the transaction. In short, this means that if within 3 years of purchase something changes that means the purchase would not qualify for MDR at all, the tax saved by applying the relief is lost. It is therefore somewhat precarious to rely entirely on the use of the building rather, which is likely to be more fluid than its suitability for use as a single dwelling, which would typically require deliberate physical alterations to make it unsuitable.

Whether or not a purported dwelling is ‘suitable for use as a single dwelling’ will turn primarily on its physical characteristics (although it may also be necessary to consider any legal constraints on the use of the property that may prevent it being suitable for use as a dwelling, e.g. a lease which prohibited people sleeping in the building). In determining whether a purported dwelling’s physical characteristics prohibit it from being a ‘dwelling’ for the purposes of MDR, caselaw from VAT and council tax may prove helpful.

Council tax

The Local Government Finance Act 1992 (‘LGFA 1992’) s.3(5) provides for orders to be made by the Secretary of State to treat what might otherwise be one dwelling as two or more. This is done by the Council Tax (Chargeable Dwellings Order) 1992 (SI 1992/549) (‘the 1992 Order’) art.3 of which states that:

‘where a single property contains more than one self contained unit… the property shall be treated as comprising as many dwellings as there are such units included in it and each such unit shall be treated as a dwelling’.

Art.2 of the 1992 Order defines a self-contained unit as:

‘a building or part of a building which has been constructed or adapted for use as separate living accommodation.’

There are clear differences between the council tax regime and the MDR regime, and the language that they use. However, as with the MDR legislation, this part of the council tax code is concerned with determining whether a building, or part of a building, has been built or adapted such that it can be used, alone, as a place for someone to live. To that extent the caselaw around council tax is instructive, if not binding, in determining whether there is a ‘dwelling’ for the purposes of MDR.

VAT

The Value Added Tax Act 1994 (‘VATA 1994’) sch 8 Group 5 Items 1, 2 and 3 provide for the zero rating of supplies in relation to a ‘building designed as a dwelling or number of dwellings’. The interpretation of this term is informed by Note (2) which requires the following conditions to be met by each ‘dwelling’:

1. the dwelling consists of self-contained living accommodation;
2. there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling;
3. the separate use, or disposal of the dwelling is not prohibited by the term of any covenant, statutory planning consent or similar provision; and
4. statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent.

Again the test is not exactly the same as that set out in FA 2003; it concerns a matter of design and the Notes refer to specific elements that go to constitute the dwelling. However, the VAT and MDR tests both seek to establish whether a building or part of a building is capable of being used alone as a dwelling. To that extent the VAT caselaw can be instructive, if not binding, in determining whether there is a ‘dwelling’ for the purposes of MDR.

Application of council tax and VAT cases

When applying the test in FA 2003 sch 6B para 7(2)(a), a multi-factorial assessment of the characteristics of the dwelling is required in order to determine the nature of the dwelling as a whole. Whilst it might be thought that the following characteristics may be indicative of a dwelling being ‘suitable for use as a single dwelling’, the case law from council tax and VAT would suggest, perhaps unexpectedly, that they are not necessary features.

A separating door

Self-evidently, the presence of a door dividing purported dwellings supports the contention that they are separate and so each suitable for use as a single dwellings. The VAT Tribunal in Agudas Israel Housing Association Ltd v Commrs of C & E 2004 VAT Decision 18798 noted at paragraph 40 that ‘premises with their own front door, en-suite bathing facilities and the ability to cook with a microwave cooker and kettle are self-contained living accommodation.’ In McColl v Sabacchi (LO) [2001] EWHC Admin 712 the High Court put some weight on the fact that a flat was separated from the main residence of a house by a lockable door, when deciding that they were both ‘self contained units’ for the purposes of council tax.

However, in the context of council tax, following on from Jorgensen (LO) v Gomperts [2006] EWHC (Admin) 1885 (‘Jorgensen’) (in which Kenneth Parker QC held that a lockable door was not a necessary condition for there to be a self-contained unit) the High Court in Ramduhn v Coll (LO) [2014] EWHC 946 (Admin) (‘Ramduhn’) came to the conclusion (at paragraph 31) that it was ‘plainly not the case’ that ‘a door separating the self-contained units is a necessary pre-condition of having self-contained units’. Haddon-Cave J came to this conclusion because:

• there is nothing in the council tax regulations that suggest there is any such precondition;
• ‘there are many different ways in which separateness (and a sufficient degree of privacy) can be achieved… for instance by stairs or simply by geographical separation.’
• In Jorgensen the High Court had held that a lockable door was not necessary in order for there to be separate units.

The reasoning of Haddon-Cave J is equally applicable in an MDR context. On that basis, whilst the presence of a door, or lockable door, is certainly indicative of a ‘dwelling’, the absence of one is not fatal to such a classification. Although there will need to be some way in which ‘separateness’ is achieved.

Shared utility meters

On a normal reading of the term ‘single dwelling’, purported dwellings sharing a utility meter would suggest that they are not in fact single dwellings, but are merely part of one larger dwelling.

However, in Ramdhun the Valuation Tribunal held that there was no requirement for there to be separate meters in order for there to be a dwelling for council tax purposes. On appeal, the High Court did not find any grounds on which to interfere with the conclusions of the Tribunal, making it clear that shared utility meters are also not fatal to there being a self-contained unit.

Similarly, in Agudas Israel Housing Association Ltd v Commrs of C & E 2004 VAT Decision 18798, it was held that the fact that residential units did not have their own ‘separately monitored electricity supply’ was not fatal to them being self-contained living accommodation for the purposes of VATA 1994 sch 8 Group 5 Item 2 Note (2).

Returning to the example of Harry’s purchase above, although it will certainly support Harry’s claim for MDR if the house, basement flat and ‘granny annex’ have lockable doors and/or separate utility meters, on the basis of the above cases it is not necessarily fatal to such a claim if they do not.

Access to the dwelling.

The importance of privacy and separateness to make a dwelling ‘suitable for use as a single dwelling’ are self-evident. As noted in Ramdhun, and on a natural reading of the legislation, there must be a ‘sufficient degree of privacy’ in order for there to be a self-contained dwelling. Allied with that, independent access to a dwelling is likely to be a strong signifier that it is ‘suitable for use as a single dwelling’.

In Batty v Burfoot [1995] RA 299 (‘Batty’) four appeals from the Valuation Tribunal were heard in the High Court by Ognall J. Dealing with the appeal of Mr Merriman last, and although deciding the case on a different basis, the judge expressed sympathy (at page 313 of the judgment) with Mr Merriman’s contention that the annex to his house was not, on the facts, a dwelling in its own right because access to the annex had to be gained ‘by using the main front door to the house, and walking through the lounge and dining area of the main part of the house’.

However, this may be contrasted with McColl v Listing Officer [2001] EWHC Admin 712 (‘McColl’) which was concerned with whether a ‘main residence’ and a flat in the same building were self-contained units. The relevant facts are set out at paragraphs 7 to 9 of the judgment but for these purposes it is sufficient to note that access to the flat was via the front door of the main residence, then along the hall, up the stairs and onto a landing within the main residence (although as noted above the flat did have its own lockable door). Noting a distinction on the facts to Batty Sir Christopher Bellamy QC accepted at paragraph 27 that the ‘question of separate access, while a highly material factor, is not an essential condition of ‘separateness’ for the purposes of the construction of the Order’ such that the flat and the main residence were ‘self-contained units’ and so chargeable dwellings for the purposes of council tax.

Accordingly, on the basis of McColl, a lack of separate access will not be a fatal flaw to a building, or more likely part of a building, constituting a ‘single dwelling’ for the purposes of MDR.

Conclusions

1. Case law from VAT and council tax may be instructive in determining whether there are multiple dwellings for the purposes of MDR.
2. Whether a dwelling is ‘suitable for use as a single dwelling’ requires a multi-factorial assessment of the characteristics of the purported dwellings in which two criteria must be met:
   • it must be suitable for use a ‘dwelling’ in the ordinary sense of the word. It must be suitable to be treated as a place in which someone may live; that will normally require a place to sleep, facilities for hygiene, and some provision of facilities for eating and drinking; and
   • it must be a ‘single’ dwelling. It must have an element of separateness from other buildings or other parts of the same building. It must be capable of functioning as a dwelling in its own right and provide some form of privacy and security for the occupier. However, it appears from the case law that there are no absolute rules as to how that separateness can be achieved.
3. Accordingly, it would appear from the above case law that whilst the following characteristics are indicative of buildings, or parts of buildings, not being ‘single dwellings’, they are not necessarily fatal to a claim for MDR:
   • no door, or lockable door, dividing the properties;
   • shared utility meters;
   • shared access, or access to one dwelling via another.

If available, claiming MDR can lead to a significant saving of SDLT.