The Government has announced that multiple dwellings relief (MDR) is being abolished for purchases completing on or after 1 June 2024.
What does this mean?
It is important to note the exceptions to this, which are:
- Completions where substantial performance of the contract occurs on or before 31 May 2024; and
- Completions that occur pursuant to a contract entered into on or before 6 March 2024 (provided the contract is not varied, assigned or similar), even if completion is after 1 June 2024.
In the context of student accommodation, the effect of claiming MDR is that SDLT is paid on the average price of the dwellings but using the residential rates and subject to a minimum rate of 1%. If MDR is not claimed then SDLT is typically paid under the non-residential rates which have a maximum SDLT rate of 5%. Whether MDR produces a better SDLT result depends on the average price of the dwellings and whether the 2% non-resident surcharge and/or the 3% surcharge applies. Where both the 2% and the 3% surcharges apply it is better to not claim MDR as the effective rate of SDLT under MDR would always be at least 5%.
MDR is particularly helpful to the purpose-built student accommodation sector because HMRC accepts that the units are dwellings for MDR purposes but not for the 3% surcharge purposes. If the average price of the dwellings is within the first rate band (currently £0 - £250,000), SDLT is charged at 1% (being the minimum rate under MDR) or 2% (if the non-resident surcharge applies).
HMRC's guidance
Purpose-built student accommodation differs from "halls of residence" and must not be ordinary residential accommodation which happen to be let to students. HMRC's guidance on these points is that:
- A "hall of residence" is accommodation that is restricted to use by students of a particular educational establishment;
- Purpose-built student accommodation is accommodation that is restricted to use by students (e.g. in the permitted planning use) but a particular establishment does not own, nor is involved in operating, the accommodation;
- In ascertaining how many dwellings are contained in purpose-built student accommodation, a "cluster flat" (sharing a kitchen and living space behind a lockable front door and with individual lockable bedrooms) as one dwelling - a studio unit (with own kitchen area and bathroom) is also counted as one dwelling; and
- Ordinary residential accommodation is housing for which there is no obligation for residents to be students e.g. a HMO in a student village next to a university.
Other points to note
It should be noted that "purpose-built" can be somewhat of a misnomer in this situation, as the category can extend to conversions (e.g. of an office or a pub). The key point is that there is an obligation for all residents to be students.
In contrast, a "hall of residence" is treated as non-residential property for SDLT purposes whilst residential accommodation which happens to be let to or otherwise used by students is subject to the 3% surcharge unless the property consists of both dwellings and non-residential units e.g. a ground floor retail unit.
Purchasers of student accommodation should look to preserve the availability of MDR wherever possible. This includes:
- Not varying or assigning contracts entered into on or before 6 March 2024 (Budget Day); and
- Substantially performing prior to 1 June 2024 a contract entered into after Budget Day. It is possible to claim MDR where the process of constructing or adapting dwellings has not yet begun although this does, of course, bring the tax point forward and there may be other tax and legal implications to consider.
