Multiple Dwellings Relief abolished

Multiple Dwellings Relief (MDR) previously provided a significant reduction in the amount of Stamp Duty Land Tax (SDLT) paid on multiple residential properties purchased under a single contract.

Although initially intended as a relief to support the acquisition of blocks of flats or property portfolios, MDR was increasingly used in private residential transactions involving large properties with so-called “granny flats” or other annexes; the UK government decided to withdraw the relief as of 1 June 2024.

It should be noted that transactions where contracts exchanged prior to 6 March 2024 will continue to benefit for MDR – this could include “off plan” purchases which have yet to complete.

PBSA

MDR has been important for the Purpose Built Student Accommodation (PBSA) sector, allowing SDLT rates, using MDR, to be as low as 1%.

MDR reduced the SDLT payable on the purchase of more than one dwelling by permitting the purchasers to apply SDLT rates to the average price per dwelling (rather than whole purchase price as a single transaction), subject to a minimum rate of 1%.

Where PBSA units had an average value of less than £250,000 in a single transaction, the marginal rate of SDLT would have been 1% on the value above £150,000 per unit on the basis that six or more properties were acquired at the same time.

Following the withdrawal of MDR, the total consideration paid for the entire collection of units is now subject to SDLT as a single transaction and therefore SDLT liabilities will be a much higher cost to the investor. In such cases it’s possible to use the “six pack rule”, which states that where at least six properties are purchased in a single transaction, the purchase is considered to be of non-residential property and to use the non-residential rates of 5%.

Since most PBSA transactions involve purchases of at least six dwellings, this means that in practice the effective rate of SDLT on PBSA transactions has increased from 1% to 5%.

Move to wrapper sales rather than asset sales

With these changes coming into play we expect to see an increase in the number of transactions involving the purchase of corporate structures holding the PBSA units by way of acquiring shares, opposed to the dwellings.

The purchase of shares is subject to Stamp Duty of 0.5% on the purchase of shares in a UK company (or non-resident company where the share register is in the UK), which now provides a significant saving for any purchaser acquiring more than one dwelling now that MDR is no longer available.

Holding companies not resident in the UK may be free of any Stamp Duty charge on the acquisition.

Although there is a positive financial impact, there are considerations to be made regarding the future liability of the companies being purchased as well as the corporate ownership of the dwelling going forward (and the compliance obligations of operating via a corporate entity).

The individual will acquire the shares at a base cost for capital gains tax (CGT) purposes equal to the consideration paid or the build costs of the properties. Thus the acquirer is taking on a contingent tax liability on a future sale of the block. It’s therefore necessary to agree on acquiring the holding company the extent to which the purchase price should be discounted for this tax liability.

An additional issue arising on the purchase of the PBSA holding company is the higher level of due diligence needed. This includes financial due diligence  to outline the performance of the asset, as well as an investigation of matters pertinent to the building itself such as fire safety. Furthermore, the buyer needs to understand the financial and legal history of the holding company itself, as it will be taking on any such liabilities when it acquires the shares.

In our experience, this can be a significant additional due diligence requirement and materially complicates PBSA transactions. Historic VAT and SDLT issues in particular have been relevant in transactions we have been involved in.

Alternative structures

There is an array of alternatives structures that could be considered, including Jersey Property Unit Trusts and other similar offshore collective investment vehicles. Such vehicles are treated for most UK tax purposes as corporate bodies, and are usually established outside of the UK.

With collective investment vehicles, the return on investment is taxed as income in proportion of the individuals’ holding units in the entity. The investor may sell their units in the structure, and these units may be subject to CGT in the UK depending on the individual’s residency status.

An election can be made for ‘transparency’, whereby the entity can be taxed as a partnership for chargeable gains (ie the investors are subject to CGT on any disposals of the property), eliminating any double of layer of tax.

How we can help

We can advise you on the purchase structure, the correct rates of tax, and the reliefs the purchase may qualify for. We can also advise you on re-organising or dismantling existing structures that no longer meet your requirements.

We can also assist in undertaking due diligence for proposed holding company acquisitions.

For advice on the new SDLT rates and how best to structure your property investments going forward, please get in touch.