MDR Claims

The heat is being put on claims for Multiple Dwellings Relief (MDR) by H M Revenue & Customs (HMRC) as they continue to challenge a number of cases where they consider claims are being incorrectly made.  

Four cases have been recently heard at the tax tribunals, all of which were found in HMRC’s favours by the tribunal judges and MDR claims denied.

There is concern that claims for MDR are being marketed in the same way that reliefs for R&D, capital allowances etc. were done, whereby companies solely set up to claim reliefs and charge fees based on a percentage of the savings are putting in claims without the correct technical knowledge, or in the hope the claim is allowed without HMRC looking in to it. 

As a quick recap, MDR is intended to provide some relief from Stamp duty Land Tax (“SDLT”) where a purchaser acquires two or more dwellings in a single chargeable transaction and can result in significant tax savings as it averages out the total consideration over the number of dwellings purchased.

It is therefore not surprising that taxpayers buying expensive houses have tried to claim that parts of their properties, consisting of ‘annexes’ separable from the main house, are capable of constituting separate dwellings.

Recent tax cases where MDR claims were denied

Fiander [2020] TC 07676

An annexe was not sufficiently separate from the main residence as there was no separate access or any form of privacy or security from the main house.  The Upper Tier Tribunal upheld the decision in 2021.

Merchant [2020] TC 07783

Here access to the basement annexe was via a common hallway in the main house only, so again there was no sufficient separation and MDR was denied.

Partridge [2021] TC 07991

A similar conclusion to Fiander was decided upon, as access to the bathroom and a utility room in the annexe was maintained from the main house.

In Doe [2021] TC 08003

MDR was refused for a first-floor annexe. Access to the annexe was via the communal entrance hall and a half-landing on the first floor. Several doors of the main house were accessible from the entrance hall and the main house also included two first-floor bedrooms.  It was again held that insufficiency of privacy and security for the occupants of both the main house and the annexe meant MDR was denied.

Common themes?

The common theme that seemed to be emerging from these cases was that the test for a single dwelling is a strict one, with the focus on these being on separation, security and privacy from the main house to identify a separate dwelling.

In the Fianders case, paragraph 48 of The Upper Tribunal’s decision in 2021 set out a series of observations on the meaning of ‘suitable for use as a single dwelling’ which are likely to become the yardstick for future decisions in this area:

• The word ‘suitable’ means that the property must be fit for use as a single dwelling. It is not enough if it is capable of being made fit for use by alterations.

• The legislation provides that a dwelling is also a single dwelling if ‘it is in the process of being constructed or adapted’ for use as a single dwelling. The definition extends only to a situation where the process of such construction or adaptation has already begun, strongly implying that a property is not suitable for use as such if it merely has the capacity or potential with adaptations to achieve that status. Second, the status of a property must be ascertained at the effective date of the transaction. Whether the property is suitable for use as a single dwelling falls to be determined by the physical attributes of the property as they exist at the effective date, not as they might or could be. A caveat to this analysis is that a property may be in a state of disrepair and nevertheless be suitable for use as a dwelling or a single dwelling if it requires some repair or renovation; that is a question of degree for assessment by the FTT.

• The word ‘dwelling’ describes a place suitable for residential accommodation which can provide the occupant with facilities for basic domestic living needs. Those basic needs include the need to sleep and to attend to personal and hygiene needs.

• The word ‘single’ emphasises that the dwelling must comprise a separate self-contained living unit.

• The test is objective. The motives or intentions of particular buyers or occupants of the property are not relevant.

• Suitability for use as a single dwelling is to be assessed by reference to suitability for occupants generally. It is not sufficient if the property would satisfy the test only for a particular type of occupant such as a relative or squatter.

• The test is not ‘one size fits all’. For example, a development of flats in a city centre may raise different issues to an annexe of a country property. What matters is that the occupant’s basic living needs must be capable of being satisfied with a degree of privacy, self-sufficiency and security consistent with the concept of a single dwelling. How that is achieved may vary.

• The question of whether or not a property satisfies the above criteria is a multi-factorial assessment, which should take into account all the facts and circumstances. Relevant facts and circumstances will obviously include the physical attributes of and access to the property, but there is no exhaustive list which can reliably be laid out of relevant factors. Ultimately, the assessment must be made by the FTT as the fact-finding tribunal, applying the above principles.

Conclusion

From the cases above, it is safe to say that the courts will apply the tests strictly and HMRC are reviewing a lot of MDR claims against land registry records and sales information to check the validity of any claims before following up with the taxpayer to challenge the claim.

At ETC Tax, we prepare detailed advice reports to set out whether MDR is available to the sale of a property and will take an objective view of the changes of a claim for MDR being successful should it be reviewed by HMRC.

If you or your client are considering making an MDR claim or would like support with an existing claim, please do not hesitate to get in touch.