HMRC has recently updated its guidance and changed its position on the application of the scope of the 3% surcharge applied for higher rates transactions which will affect some acquisitions by companies and of additional or multiple dwellings. The new guidance changes HMRC's position and set outs that the acquisition of mixed use properties will generally not be treated by HMRC as higher rates transactions and accordingly the 3% surcharge will not apply.
This is particularly relevant in the context of claims for multiple dwellings relief (MDR) when the property acquired has both residential and non-residential aspects.
What is MDR?
MDR can reduce the SDLT liability for a purchaser buying multiple dwellings in one transaction. In broad terms, the relief works by charging SDLT at the residential rates on the average per-unit price of each dwelling as opposed to the aggregate price for the all the dwellings (subject to 1% minimum rate).
MDR arises where there are two or more dwellings acquired and, as a result, the 3% surcharge often applies (one notable exception being purpose built student accommodation which can fall outside of the surcharge).
Particular rules apply where a property acquisition includes both residential and non-residential elements, such as a building consisting of commercial units on the ground floor with residential flats above. The previous HMRC guidance set out that where a MDR claim was made in those circumstances, the price would need to be apportioned with the surcharge applicable to the residential aspects.
What has changed?
The recent update by HMRC is a material change and it worth considering the reason for it. The 3% surcharge applies where the main subject matter of the transaction consists of a major interest in the additional or multiple dwellings. We understand the change arises from the interpretation of "consists of" in this context.
HMRC now appears to take the view that the surcharge should only apply to transactions that consist wholly of the additional or multiple dwellings. Where the land transaction is a mixed use transaction, being one that has both residential and non-residential elements, HMRC does not now view this as a "higher rates transaction".
Where the acquisition is solely of dwellings, the surcharge will remain. HMRC guidance sets out that the surcharge will also still apply where the non-residential element of the transaction is negligible or artificially contrived. Clearly what amounts to negligible is open to interpretation and HMRC confirms that the non-statutory clearance process can be used to seek its view.
This is a welcome change and could give rise to an SDLT saving for certain transactions, especially in the context of build-to-rent properties which also include commercial units.
Taxpayers have a year from the filing date of an SDLT return to amend it. Therefore, we recommend that buyers revisit transactions from the last 12 months to see if any might now benefit from an amendment and a refund claim. The refund period is extended to four years in certain circumstances. Advice should be sought as to the scope of such a claim if applicable.