Tax Relief For Landlords on Multiple Dwellings
It’s little secret that landlords have found the staggered changes to tax relief rules over the last few years challenging.
As a brief recap, from April 2021, landlords cannot claim tax relief on mortgage interest costs. This change has been implemented in phases, with each tax year seeing a 25% drop in the allowance. However, it’s not all bad news. Along with the Stamp Duty holiday, which has injected a pace and energy into the property market that continues to be massively buoyant, there are reliefs available for portfolio landlords.
In this article, we’ll summarise how it all works. We hope this information may be helpful to some of our West Sussex clients choosing this pivotal moment in property market history to invest in expanding their portfolio.
The Benefits of Multiple Dwellings Relief
Let’s explore the advantages on offer through claiming Multiple Dwellings Relief (MDR). This relief works by calculating the Stamp Duty payable across all properties purchased simultaneously, rather than calculating that charge individually for each residence.
Landlords can make substantial savings, with the calculation process as:
- The total sale price divided by the number of separate homes, rather than
- A calculation based on the sale value of each property.
In essence, if you diversified your asset portfolio by investing in a range of smaller properties or existing residences with separate dwellings on the same site, you could reduce the total Stamp Duty liability quite considerably.
Each property is classed as a separate home, so this rule applies to any property format that is a standalone rental investment. To qualify as a single dwelling, an investment property needs to be suitable for the living needs of a tenant, so:
- It needs to have an independent entrance and locking internal doors to separate it from other residences in the same building.
- The home should have washing and kitchen facilities, so a garden office with a kitchenette and bathroom could qualify as an individual residence.
For instance, a range of apartments, several smaller homes, or a property divided into two residences would all be split into individual properties for the MDR calculation.
Stamp Duty Savings Available Through MDR
We’ll look a little closer at which properties qualify shortly, but let’s consider a theoretical example to illustrate why the savings here are likely very substantial.
Take a property selling for £1.5 million – that could be a family home with generous living space, a sea view over Chichester Harbour, and a sizeable garden, for example. With the existing Stamp Duty holiday, investing in this home would cost £78,750 in the Stamp Duty charge.
However, if the same property sold for the same price has a separate annexe that was self-contained and included a shower room and kitchenette, MDR would apply.
Therefore, this additional residence qualifies for relief and would mean that the investment is equivalent to two homes being purchased for an average of £750,000 each. The reduced Stamp Duty liability works out as £25,000 – an impressive £53,750 saving.
Stamp Duty Rates in 2021/22
Given the changes to the Stamp Duty holiday and threshold caps, it’s worth reminding ourselves that these are the following purchase values at which Stamp Duty becomes payable:
||Until 1st July 2021
||Until 30th Sept 2021
||From 1st Oct 2021
|Land and non-residential
The allowances for first-time buyers will remain in place when the general Stamp Duty threshold reverts in October.
Current chargeable rates based on the purchase price are:
- Zero for purchases up to £500,000.
- 5% on the value from £500,001 to £925,000.
- 10% on values from £925,001 to £1.5 million.
- 12% on the value above £1.5 million.
Note that MDR is independent of the Stamp Duty holiday, and can be used alongside the temporarily higher thresholds, so both schemes are eligible for simultaneous use.
For example, if you purchased a property for £1 million with a similar standalone annexe or garden office with separate shower and kitchen facilities, each dwelling in the purchase would be assumed as being sold for £500,000.
Therefore, each residence is assessed as purchased at the £500,000 Stamp Duty threshold, and no Stamp Duty is payable. That amounts to a saving of £78,750.
Properties Qualifying for Multiple Dwellings Relief
There are some critical criteria for a property investment to qualify for Multiple Dwellings Relief. It is highly advisable to seek professional advice before proceeding with a purchase on the assumption this will apply. Do get in touch with the Tod Anstee team if you are considering an investment that you think may be eligible and would like to clarify.
However, wide ranges of dwellings do qualify, provided they have an independent access route, plus the washing and cooking facilities. Examples might include:
- Barn conversions
- Garden offices or studios
- Garage conversions
- Converted loft apartments
- Self-sufficient units
Suppose the dwelling does not have a separate entrance. In that case, making minor enhancements can boost the property value significantly and ensure it presents a competitive deal for interested buyers.
When is Multiple Dwellings Relief Advantageous?
MDR isn’t just beneficial when purchasing one residence with a separate dwelling on the property grounds. It can also be worthwhile when buying several investment properties, particularly if one is of a higher value and falls into a higher Stamp Duty band.
As a final example, if you were expanding your portfolio and buying three apartments in West Sussex, you could average out the purchase price between the three to claim the relief:
- Property A is sold at £530,000
- Property B is sold at £325,000
- Property C is sold at £290,000
Under the current thresholds, your Stamp Duty liability would be £1,500, with 5% duty payable on the balance of the cost of Property A over the £500,000 threshold. However, if you apply for MDR, the average of each purchase becomes £381,667 – and therefore, no Stamp Duty applies.
Multiple Dwellings Relief is highly advantageous to investors and professional landlords who are considering making new property acquisitions.
To discuss MDR further and other strategies for expanding your portfolio, please contact the Tod Anstee team for independent advice from the West Sussex property experts.