Relief for Multiple Dwelling Relief claims

Background

So-called “MDR” claims have been a thorn in the side of conveyancers and their Insurers since mid-2019, and are showing no signs of slowing down. Typically, the claims arise from a residential conveyancing transaction which completed between 2012 and 2016, and are usually for sums in the region of about £10,000. The basis for them is the introduction in 2011 of an obscure relief to stamp duty land tax (SDLT) in 2011. SDLT is, essentially, a property tax which is payable on most acquisitions of land. It developed from “stamp duty” but is a significantly more complex system which can require specialist tax advice to understand. Broadly, SDLT is calculated by reference to the value of the property being acquired, but the calculation is done in value slices, with a higher overall percentage being payable the higher the value of the property.

MDR permits the purchaser of two or more dwellings in the same transaction to calculate the SDLT in a different way. Rather than calculate it on the single price paid for the properties combined, they can allocate an equal share of the price to each dwelling, and calculate the SDLT that way. The effect of the slicing system is that a lower amount of SDLT is payable, and the “saving” can be many thousands of pounds.

Where a purchaser buys two entirely separate dwellings – say an investor buying 4 houses on the same development – in a single transaction, then it is easy to see how MDR would apply. However, Claimants now argue that MDR also applies to the purchase of a single residential property which (it is alleged) includes an “annexe” sufficient to be a single, second dwelling, and so to qualify the whole transaction for MDR. They use this argument to pursue claims against residential conveyancers years after the transaction completed, often basing their claim on no more evidence than a simple floorplan of the property at the time.

There are a number of defences to such claims, but given that residential conveyancers do not usually consider themselves to have the specialist skills to offer tax-saving advice, these defences tend to focus on scope of duty, and causation/loss. There is a particular emphasis on whether the “annexe” would ever have justified a claim for MDR, and HMRC’s “Stamp Duty Land Tax Manual” provided some valuable advice on this in October 2019. However, so far there has been no case of any weight providing guidance, which is why the recent decision in Fiander & Brewer v HMRC  is of such interest.

The Fiander decision – released 9 April 2020

The first point to make is that this is not a judgment in a negligence case against conveyancers. Instead, it is the culmination of a dispute between purchasers (Fiander and Brewer) and HMRC as to whether they could claim MDR on their purchase. The decision was made by the Tax Chamber of the First-Tier Tribunal, which is effectively the appeal court from HMRC; it provides a useful insight into how HMRC does, and should, approach claims for MDR.

In many ways the facts of the Fiander purchase mirror most of the MDR claims being made at the moment. The purchase was of a residential property, in April 2016. The purchase price was £575,000. The purchasers claimed that the property contained an annexe which was a single dwelling for MDR purposes and so they were only liable to pay SDLT of £8,750; HMRC said it was one dwelling and the correct amount was £18,750 – so, a battle over £10,000.

The “annexe” in question was an extension reached along an internal corridor. In itself, the annexe had many of the features of a “dwelling”, including facilities for “living, sleeping, bathing and kitchen facilities” as well as an external door. The arguments focussed to a significant extent on the lack of any physical door on the internal corridor which meant that the annexe lacked privacy and security, but the Tribunal’s decision was broader than this narrow factual point, and this is where it is particularly helpful in the defence of these types of claim.

In particular, for an annexe to be a single or separate dwelling, the Tribunal said that it had to be capable of being used generally in that way.  Specifically, if an objective observer would have concluded at completion that the annexe could be used individually as a dwelling but only if a particular relationship existed between its occupants and those of the rest of the property, then the annexe did not meet the test. Examples were given of use as a ‘granny’ annexe or by grown-up children. In the decision itself, the lack of a door meant that the annexe failed this test, and this was reinforced by the lack of separate utilities or separate council tax rating.

This test of what the “objective observer” would have concluded at the time of purchase is very helpful. It blows away the deceptive simplicity of the argument being advanced in many of these claims, which is that so long as basic habitational facilities existed at the time of purchase, an “annexe” was in fact a single dwelling and the transaction would have qualified for MDR. Many of the claims being advanced are for collections of rooms in or attached to a larger property, many of which would (at best) be considered by an objective observer as suitable for occupation only by limited groups of people – family, guests, staff or perhaps a trusted lodger, but certainly not by the general public.

Conclusion

The Fiander decision now actively supports the argument that, other than in exceptional circumstances, a property containing a “granny annexe”, a converted games room, or other equally implausible standalone “dwellings”, would have stood no realistic chance of qualifying for MDR. It restores a significant element of practical and legal common-sense to these claims.  This argument is of course supplemental to arguments on scope of duty and the application of loss of chance principles.