Multiple Dwelling Relief (‘MDR’) for ‘annexes’

Three recent cases (Lovell v HMRC [2021] UKFTT 291 (TC), Morse and another v HMRC [2021] UKFTT 292 (TC) and George and another v HMRC [2021] UKFTT 305 (TC)) have continued HMRC’s generally successful opposition to granting this relief from SDLT on residential purchases. 

SDLT on property purchases that contains two or more parts ‘suitable for use as a single dwelling’, such as a main house and a ‘granny annex’, can be substantially reduced if HMRC can be convinced that each part is in fact capable of use as a single dwelling. 

Unfortunately there is no handy guidance produced by HMRC to as to what ‘suitable for use as a single dwelling’ means, so we have to look at the particular facts of each case as an objective, independent third party (ie a tenant or purchaser) who was looking to buy or rent the annex on the date of completion and ask whether it would have been suitable at that point to enable occupants to live there independently of the occupiers of the main house.  HMRC take the date of completion of the purchase as the latest point at which an annex has to be ‘suitable for use as a single dwelling’, ie it is not sufficient for the annex to have the potential on the date of completion to become suitable, it either is or is not.  So what makes an annex suitable for use as a single dwelling?

Facilities

HMRC take the view that part of a building can be suitable as a dwelling ‘only if it accommodates all of a person’s basic domestic living needs’ ie sleeping, eating, personal and hygiene requirements.  These three recent cases have emphasised that lack of a suitable kitchen will be fatal to a claim for MDR.  As a minimum requirement, there must be sufficient infrastructure, space and connections for a fridge, a cooker or a washing machine (a microwave alone would not be sufficient) and there must be areas for the storage or preparation of food (again, these must be in place at completion).  If part of an annex is being used for a use other than basic domestic living on the date of completion (eg it contains a gym which could be turned into a living area), this will probably cause the claim to fail. HMRC also takes the view that there must be at least a reasonable degree of privacy and security. Lockable doors must be in place, on the date of completion, although it’s not clear whether these need to be lockable from both sides. Access to shared outdoor areas will also be looked at closely. These are the issues to which HMRC give most weight.

Of lesser weight, but still persuasive is the marketing material produced prior to completion.  HMRC will take this into consideration, on the basis that this tends to give an accurate picture of how the whole property was being used immediately prior to the completion date.  Not infrequently, marketing material leads to the conclusion that the arrangement of the property as a whole shows that an annex simply provided additional bedrooms consistent with the accommodation offered by the main house.

Other issues that carry less weight but which can still be persuasive are whether an annex’s utilities are separate from the main house, whether there is a separate council tax bill for the annex and whether the annex has a separate address or alarm system.  Lack of a separate title number can also weigh against the argument of a separate dwelling.