Can the 3% SDLT surcharge apply in a transaction that involves non-residential property?

The issue

Multiple Dwellings Relief (MDR) is now a relatively well known and well used stamp duty land tax (SDLT) relief. It works by allowing a purchaser to calculate SDLT payable on the average property value and then multiplying that result by the number of properties to end up with a lower SDLT charge.

Example 1

John buys three residential properties for £1.5M. Without MDR he would have to pay SDLT at residential rates on £1.5M. This would currently give rise to SDLT of £123,750 calculated as:

3% of £500,000
8% of £425,000
13% of £575,000

By making an MDR claim he is allowed to calculate SDLT on £500,000 (£1.5M divided by 3) and then multiply that result by 3. This approach gives rise to SDLT of £45,000 calculated as:

3% of £500,000 x 3

MDR therefore provides an opportunity for a significant saving. However this saving can be even greater for transactions which include an element of non-residential land because, arguably, the 3% SDLT surcharge should not apply in these cases.

Transactions including non-residential land

Example 2

Following on from Example 1 assume that John also acquired £20,000 of non-residential farmland, meaning that the cost of the transaction increased to £1.52M.

Here the non-residential land would mean that John could return the transaction at non-residential rates which would give rise to SDLT of £65,500 calculated as:

0% of £150,000
2% of £100,000
5% of £1,270,000

However he would also have the option of paying non-residential rates in respect of the £20,000 and claiming MDR in respect of the residential properties. This approach would give rise to £15,862 of SDLT calculated as:

£20,000/£1.52M x £65,500


0% of £500,000 x 3 (but for MDR we must use a minimum of 1% for the total and so this comes to 15,000)

3% surcharge?

You will notice that I have not used the 3% surcharge in Example 2. That is because there is a strong technical argument that it should not apply in cases where non-residential property is included in the transaction. The position hinges around whether a transaction can be said to ‘consist of’ residential properties when it includes non-residential property. Linguistically this probably cannot be the case and this is supported by the fact that other areas of the legislation use the phrase ‘consists of or includes’ for cases in which something does not need to comprise all the subject matter of a transaction. By reference to Example 2 the transaction does include more than one residential property but it does not consist of more than one residential property (because there is also non-residential property).

Forbes Dawson view

This is a good example of where HMRC guidance does not quite accord with the SDLT legislation.

Anecdotally there is some support for this interpretation within HMRC and I believe they are currently seeking a legal opinion on it, however the currently published HMRC guidance would still involve using the 3% surcharge in the scenario set out in Example 2. Notwithstanding HMRC guidance, there seems to be a good technical basis for claiming that the 3% surcharge cannot apply in transactions involving non-residential property and it would seem appropriate to submit SDLT returns and make SDLT reclaims (where appropriate) on this basis.




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