How the abolition of Multiple Dwellings Relief affects Build to Rent
Spring Budget 2024 – SDLT Update
One of the surprise announcements in the Spring Budget 2024 was that multiple dwellings relief (MDR) will be abolished with effect from 1 June 2024. We had anticipated that the government would publish its long awaited response to the 2021 consultation on mixed use purchases and MDR but the complete abolition of MDR came as something of a surprise.
MDR is a tax relief in the Stamp Duty Land Tax (SDLT) regime that can apply to both individuals and businesses buying more than one dwelling in one transaction (or linked transactions). It allows purchasers to calculate the tax based on the average value of the dwellings purchased as opposed to their aggregate value. This has been a valuable tax saving for purchases buying larger residential properties with a separate annex (assuming that relevant conditions for MDR were satisfied in the particular case).
It was introduced in 2011 to reduce a potential barrier to investment in residential property and promote institutional private rented sector housing supply (with Build to Rent or BTR now a fast growing part of this sector). As reported in the consultation response that was issued on on Budget day, an external evaluation of MDR (commissioned by the government) found no strong evidence that MDR played a significant role in supporting residential property investment. The HMRC further mentioned that it had a minimal positive impact on the overall housing supply. It found that MDR was not cost-effective in meeting these original objectives. HMRC It estimates that abolishing MDR will raise £220 million in 2025/26 and over £300 million in subsequent years. Some BTR investors may disagree with the HMRC’s conclusions, considering the tax savings that have been available through MDR can be potentially substantial. Consequently, they are dismayed by its imminent abolition.
Brendan Geraghty, CEO for the UK Apartment Association (UKAA), a trade association for the fast-growing Build to Rent sector, for instance, reacted to the announcement by emphasising that £40 billion has been invested in UK BTR in the last decade and expressing UKAA members’ views that the Treasury’s announcement had wiped between £400-800 million off the current valuations. He further cautioned that “The removal of MDR will also impact forward funds and forward commits in future – either the ability to compete for land or for developers who would have had the benefit of the additional pricing, further straining the current market.” With BTR being seen as part of the solution to the country’s longstanding housing shortage, anything that threatens to increase costs must be seen as unwelcome news.
Claiming MDR could sometimes, but not always, result in a lower SDLT liability when purchasing a BTR asset. Previously, buyers could choose whether to treat purchases of 6 or more dwellings as commercial transactions (paying non-residential SDLT) or as residential transactions (paying the higher residential SDLT but with the benefit of MDR). It was generally preferable to pay at the non-residential rate where the average price per dwelling was £250,000 or more (although the interaction with the 2% non-resident surcharge and/or the 3% surcharge for additional dwellings also had to be considered in each particular case). From 1 June 2024, buyers will no longer be able to claim MDR in this scenario but will continue to qualify for the lower non-residential rates of SDLT. This means that some BTR investors, particularly in the regions where unit prices tend to be lower, may face higher SDLT costs in future.
Those who have recently exchanged contracts should note that transitional rules mean that MDR can still be claimed for contracts which are exchanged on or before 6 March 2024, regardless of when completion takes place. However, this is subject to various exclusions (for example the contract must not be varied after that date). Contracts entered into after 6 March 2024 may also benefit from MDR if the contract completes or is substantially performed before 1 June 2024.
BTR is one of the fastest growing areas of the real estate investment market. It is a component of the “living sector”, an umbrella term that describes institutional-grade rental residential assets that typically provide a stable long-term income for owners and investors and which also includes student accommodation and later living. Residents of living sector homes enjoy high-quality, purpose-built residences with professional management, thoughtful amenities, community spaces and a strong sense of community. Amongst other characteristics, the business model encourages developers and operators to construct energy efficient buildings. Please check here for details of Charles Russell Speechlys’ expertise at the online home for our Living Sector focus area group.
