Stamp Duty Land Tax (SDLT) is a complex replacement for the much simpler Stamp Duty. In broad terms, it is a tax which applies to most property transactions and is payable by the purchaser. The amount of SDLT payable depends on the value and nature of the property being acquired, and is calculated on a “slice” system, with different rates within each slice. So, for example, currently a single freehold residential property costing £600,000 would involve SDLT of 0 per cent up to £125,000, 2 per cent between £125,000 and £250,000, and 5 per cent over that. In other words, the actual rate of SDLT increases with the value.
Prior to July 2011, a purchaser buying two or more properties in the same or linked transactions would find that the price of each of them was aggregated for SDLT purposes. For example, if they bought two houses in a single transaction in June 2011, each individually worth £240,000, these would be added together and SDLT of £8,150 would be payable on the aggregated value of £480,000.
The introduction of MDR
In July 2011, the Government introduced a concession: the “Multiple Dwelling Relief” or MDR. This applied to the purchase of residential dwellings in a single transaction. Instead of aggregating the value, it was averaged out and SDLT charged by reference to each average values. This usually led to a lower amount of SDLT being paid overall. So, in the example above, the total price paid was £480,000, but the average for each property was £240,000. Had the same transaction completed in August 2011, SDLT would have been payable at the much lower figure of £2,300, because of MDR. This offered a potentially-significant saving for those who could bring themselves within the scope of MDR.
2016 change to SDLT affecting MDR
The relief was short-lived. On 16 March 2016, the government introduced higher rates of SDLT where an additional residential property was bought. So, anyone already owning a residential property who bought, say, two buy-to-let residential properties, would pay an enhanced rate of SDLT on both. This cancelled out any benefit from MDR for most transactions.
However, in between July 2011 and March 2016 was a window of about 4.5 years where MDR applied without the restriction of higher rates for additional properties. During this time, it is possible the application of MDR was not fully understood by all conveyancers. MDR had to be specifically claimed in the SDLT return which purchasers are required to submit to HMRC on completion of a transaction. This means that conveyancers had to a) identify that MDR applied or might apply and b) actually claim the relief on the form. In some circumstances, the first is less easy than it sounds.
Claims to MDR
To justify the basis for an MDR claim, the properties being purchased in the same transaction had to be separate “dwellings”. This is obvious where, say, the purchase is of two separate houses. It is much less clear-cut where a single property has been sub-divided to form 2 dwellings – say 2 flats, or a house and a granny annexe. No doubt worried that MDR would be used inappropriately by purchasers keen to lessen the tax bill on a purchase, HMRC identified a number of factors which were relevant to whether there was a separate “dwelling”. Inevitably, these created grey areas where some factors applied and others did not.
The factors mainly included issues relating to the physical structure of the dwelling, for example separate water and electricity supplies and meters; separate access; consideration of floorplans and the degree of physical separation. Separate postal address and council tax listing were also relevant. However, the factor most likely to be obvious to a conveyancer – separate legal titles for each “dwelling” – was simply one of many, so that a purchase involving a single title and at best a possible physically separate “dwelling” might be difficult to identify as a possible candidate for MDR.
Potential claims against conveyancers
We are aware of at least one claims company that has identified this as a viable area of claim against conveyancers and is actively seeking out such claims. The basis appears straightforward: the purchaser paid more SDLT than they should because MDR was not claimed. This masks the “grey areas” identified above and the fact that conveyancers focus on the legal title rather than the physical structure, but there is a risk that some claims could be valid. In high-value cases, these could amount to tens of thousands of pounds.
Possible defences include the extent of the knowledge of the conveyancer about the property, and whether relief would have been allowed at all in the “grey areas”. There may also be issues of mitigation: HMRC do permit a claim for retrospective relief, but this is time-limited and most of the transactions will be too old. It is also worth considering what has happened to the properties subsequently: in some circumstances, relief could be clawed back by HMRC.
Finally, given the uncertainty over whether relief applied in the grey areas, a loss of a chance argument could be justified. All that said, some such claims will be valid and with several years to run on limitation, insurers can expect to receive MDR claims for several years to come.