Single or Multiple Dwellings: beware of the tax traps

Conveyancers are experiencing an extraordinarily busy time as they work hard to meet clients’ expectations to complete transactions before the stamp duty holiday expires at the end of June this year.

But be that as it may, the increasing pressure on property lawyers to advise clients on the wider potential issues that may impact their client’s purchase remains. This includes flagging up the likely tax implications that could arise, as a recent ruling illustrates.

In this case1, HM Revenue & Customs won its argument – another win to add to its raft of wins against the taxpayer – in a case involving multiple dwelling tax relief (MDR). A buyer can claim MDR when they buy more than one dwelling where a transaction or a number of linked transactions include freehold or leasehold interests in more than one dwelling.

To work out the rate of tax chargeable to HMRC, you/the buyer is required to:

  • Divide the total amount paid for the properties by the number of dwellings
  • Work out the tax due on this figure
  • Multiply this amount of tax by the number of dwellings
  • The minimum rate of relief is 1% of the amount paid for the dwellings.

A key question, bearing in mind that there is no statutory definition of what amounts to being ‘suitable for use as a single dwelling’, is - how does HMRC decide what amounts to a separate dwelling for these purposes

What’s the background?

A couple bought a six-bedroomed property for £875,000. They submitted an SDLT return and self-assessing their liability as £35,750 (on the basis the property did not qualify for MDR). The following year, their representatives sought to amend the return so that they could claim MDR on the basis that the purchase was of the main house together with a separate annex.

The amount of SDLT self-assessed was reduced by £10,000 to £25,750. HMRC rejected their claim and said MDR did not apply to their purchase. A closure notice was accordingly issued and sent to them and the couple appealed. The closure notice was then upheld and so the couple brought an appeal.

The crux of the issue for the First-Tier Tax Tribunal was whether the buyers had purchased one large house or whether it should be created for tax purposes as two separate dwellings.

The tribunal paid close attention to the physical nature and layout of the property itself, the rooms and areas that were particularly in issue, even the fuse board, circuit breakers and utilities.

It also made clear that to claim MDR, the disputed area must be suitable for use as a single dwelling at the time of completion. That does not include properties with the capacity to be used as dwellings after modification (it pointed out, for instance, that the bedroom would be suitable for use as a dwelling with minor modifications).

It was a balancing act but the tribunal found that the factors for and against the disputed area’s suitability as a single dwelling came down firmly against. The property was not suitable for use as a single dwelling and did not, therefore, qualify for MDR.

What does this mean?

When advising purchasers, conveyancers must consider the potential tax implications of the transaction and, at the very least, advise them to take specialist tax advice where necessary.

Conveyancers will find the tribunal judge’s comments on what amounts to a single dwelling useful in practical terms. She said: “The use of the word ‘single’ shows that the dwelling must have some sense of unity. It should have coherence as one identifiable property”.

Conveyancers and tax lawyers in particular need to be alert to the ruling and how the tribunal approached the issues.

1Wilkinson v HMRC [2020] TC/2020/01097


Posted on 07.06.21