Multiple Dwellings Relief abolished

Perhaps the most surprising announcement in yesterday's budget from the perspective of the real estate sector was the abolition of multiple dwellings relief (MDR).

The headlines are: 

• MDR will be abolished with effect from 1 June 2024.
• The rule that allows SDLT on the purchase of six dwellings or more as part of a single transaction to be assessed using the non-residential property rates of SDLT is unaffected.

What is multiple dwellings relief?

MDR enables a buyer of two or more residential properties in a single transaction, or linked transactions, to pay SDLT based on the average price of each dwelling. For example, if a buyer purchases a country home with a cottage in the grounds, or a town house with a self-contained basement flat, the buyer will be able to apply MDR. This works by adding up the total price of the dwellings, calculating the SDLT on the average price and then multiplying this figure by the number of dwellings. This can generate significant savings for a buyer as it allows them to get the benefit of two (or more) lower rate bands of SDLT.

MDR was originally introduced in 2011 to encourage investment into residential property and to support the private rented sector. However, research commissioned by HMRC indicates that there is no strong evidence that MDR has played a significant role in supporting residential investment, and has had a minimal positive impact on overall housing supply. This research was commissioned by HMRC following a 2021 consultation on MDR.

There have been concerns that some private buyers have been stretching the concept of MDR to save tax in scenarios that were never intended to be subject to MDR. This has seen an increasing number of firms springing up, making unsolicited approaches to buyers, suggesting that they have "over paid" tax and offering to make a claim for a refund from HMRC, subject to receipt of a commission. It's fair to say that many of these claims proved to be spurious.

Is there a transitional period?

The change does not apply to contracts that were entered into on or before 6 March 2024 regardless of when those transactions complete (as long as there is no variation to the contract after 6 March 2024).

Any contract entered into after 6 March 2024 can only benefit from MDR if it completes, or is substantially performed before 1 June 2024. 

What does this mean for the property market?

It will be interesting to see what impact this has on the property market in the short term, particularly for developers and investors and whether there will be a scramble to complete deals prior to 1 June 2024. The perception of exploitation of the MDR rules by individual purchasers is seen as the driver to the removal of the relief although the impact is likely to be on genuine developers and investors. The removal of the relief is not likely to impact the prime residential markets where MDR rarely comes into the equation on the negotiation of price and is often seen by buyers as something of a potential bonus. For bulk investors, the fact that the non-residential SDLT rates (with a top rate of 5%) can still be applied to the acquisition of six or more dwellings is significant.