Additional 3% stamp duty land tax surcharge on granny flats and other dwellings

The Stamp Duty Land Tax issues on the purchase of a property with a granny flat, an annexe or other subsidiary dwelling including multiple dwellings relief and the 3% surcharge rules are complex.

The higher rates of SDLT, introduced on 1 April 2016, are intended to apply to purchases of additional residential properties, such as second homes and buy to let properties. But there was a glitch in the ‘higher rates’ rules as they applied to properties with granny flats or other subsidiary dwellings.  This article looks at the issues for these transactions and similar transactions involving several dwellings.

As the rules were initially drawn, someone buying a property which counts as two dwellings would be liable to an extra 3% SDLT on the whole price above the ‘normal’ SDLT that would be due. This was the case even if it was going to be the buyer’s only property or if it was replacing the buyer’s only or main residence.

It will not always be straightforward to know if a property counts as a single dwelling or as more, nor whether the surcharge applies. For professional advice on the above or any SDLT query please contact Blake Morgan’s SDLT expert, John Shallcross. For a more detailed article on this with further examples see here:

Examples and Details: Stamp Duty Land Tax 3% surcharge on ‘Granny Flats’ such as self-contained annexes and other subsidiary dwellings 

Legislation changed

The original rules were altered during the passage of the Finance Act 2016. The explanatory note issued with the amendments explains: “The amendments affect purchasers of dwellings with self-contained annexes or outbuildings that are, themselves, dwellings. These purchasers will not be subject to the higher rates of SDLT only because they have purchased such a pair of dwellings. The purchases will still be subject to the higher rates of SDLT if the purchaser already owns another dwelling and is not replacing a main residence.”

A new test, which I will call the ‘subsidiary dwelling test’, was introduced with retrospective effect by the Finance Act 2016. This test applies where a single transaction comprises two or more dwellings. The amended rules apply where:

It is not relevant for the test how the subsidiary dwelling is to be used (for example it could be let out rather than used for a family member). Nor is there any requirement as to planning conditions requiring the subsidiary dwelling to be occupied or disposed of in limited ways.

HMRC issued some limited guidance at the time of the introduction of the 3% surcharge on cases where a property might count as two dwellings.  This can now be found in SDLTM09755. HMRC, on 1 October 2019 published further guidance as to the meaning of “dwelling” within the SDLT rules.  The pages between SDLTM00410 and SDLTM00430 deal with the issue of whether a property counts as two dwellings and how separate the parts need to be. This guidance was referred to in the Fiander and Brower case and perhaps will be updated in due course to refer to the decision.

Multiple dwellings relief

There is an important point about the application of Multiple Dwellings Relief (MDR) in transactions involving several dwellings. MDR works by calculating the SDLT on each dwelling by reference to the average price of all the dwellings. Savings in SDLT can therefore be achieved due to the multiple use of the lower rates in the SDLT charging bands. In some cases (including many purchases of properties with granny flats) MDR can be obtained without the surcharge automatically becoming due. HMRC confirmed this in a Talking Points webinar on 23 July 2019.

There are now different amounts of SDLT that can be due on purchases of residential property depending on the exact circumstances. To illustrate this, let us take different purchases, all for £800,000, of different properties and calculate the amount of tax. If you are buying a single dwelling and you aren’t sure if the 3% surcharge rate applies, see our earlier article HERE.

Example 1. Purchase of single dwelling without surcharge

Based on someone buying what will be their only property, or buying a house which counts as a replacement of their only or main residence, the surcharge does not apply. The SDLT on a price of £800,000 at slice rates is £30,000.

Example 2. Purchase of single dwelling with surcharge

Someone is buying a second home or a property to rent out where they already own a property, so that the surcharge applies. There is extra SDLT of 3% on the whole £800,000; the surcharge is £24,000 on top of the normal SDLT of £30,000 giving total SDLT of £54,000.

Example 3. Purchase of single dwelling with non-residential property attached

A single purchase of £800,000 might include some non-residential property. The purchase could be of: (a) a house with land that is not part of the garden or grounds but which is let out to a farmer or (b) a property with a shop below or attached. In this circumstance, different non-residential slice rates of SDLT apply and there is no question of the surcharge applying. SDLT will be £29,500 worked out as follows:

Example 4. Purchase of house with granny flat without surcharge

Under the amended rules it is possible for someone to buy in a single transaction a property which counts as two dwellings and not pay the surcharge. For this to be the case, the following subsidiary dwelling test is applied:

For the surcharge not to be due, the property might be the buyer’s only property, or he might be replacing an only or main residence by moving into the more valuable of the two dwellings being bought.

On the face of it, the SDLT in this example would be the same as in example 1 above; £30,000.

As MDR can be claimed without incurring the surcharge, the SDLT is £20,000 calculated as follows:

Example 5. Purchase of house with granny flat with surcharge

The surcharge might be due for a number of reasons on the purchase of a property in a single transaction which counts as two dwellings. For example, the transaction might not satisfy the subsidiary dwelling test:

Or it could be that the subsidiary dwelling test is satisfied, but the surcharge still bites because the buyer has other property interests and is not replacing an only or main residence.

The SDLT in example 2 was £54,000, but that can be reduced in this case where there are two dwellings by a claim to multiple dwellings relief. The SDLT then is £44,000 calculated as follows:

Example 6. Purchase of two dwellings in transactions which are not linked, one with the surcharge

An example would be someone who buys adjoining residential properties from totally unrelated sellers. Let us assume the £800,000 is broken down to £600,000 and £200,000.

The granny annexe rules will not apply because the properties are not bought in a single transaction. The linked transaction rules cannot apply because the sellers are unconnected.

We will assume that the surcharge does not apply on the more valuable property (perhaps because the replacement of only or main residence exception applies to it) but the surcharge does apply to the less valuable property.

Using slice rates as in Examples 1 and 2 we get SDLT due of £27,500 as follows:

Example 7. Purchase of two dwellings in linked transactions, one with the surcharge

A property is to be bought for £800,000, but it turns out that different connected sellers own different parts of the property. For example the husband seller owns the main house; his wife owns the gardener’s cottage. The granny flat rules cannot apply here as the properties are not in a single transaction, but in two linked transactions.

Let us assume the £800,000 is fairly broken down to £600,000 and £200,000.

We will also assume that the surcharge does not apply to the more valuable property (perhaps because the replacement of only or main residence exception applies to it) but the surcharge does apply to the less valuable property.

Now the calculations get more complicated. The total SDLT for the two linked transactions is £26,000 if MDR is claimed, calculated as follows:

First Time Buyers’ Relief

First time buyers’ relief was introduced for some purchases for up to £500,000 by the Autumn Budget of 22 November 2017. But the relief can never be available where two or more dwellings are acquired in a single transaction or in linked transactions. Nor can the relief apply where the surcharge applies.  For information on this relief please see HERE.

Conclusion

So a set of purchases for £800,000 incur different amounts of SDLT as follows:

Example 1: £30,000

Example 2: £54,000

Example 3: £29,500

Example 4: £20,000

Example 5: £44,000

Example 6: £27,500

Example 7: £26,000

It will not always be straightforward to know if a property counts as a single dwelling or as more, nor whether the surcharge applies. The First-tier Tribunal released its decision on 9 April 2020 in the case of Fiander and Brower. There is an analysis of the decision here. The Tribunal decided that a property with an annexe did not qualify for multiple dwellings relief for stamp duty land tax because there was no lockable door on a corridor joining the two parts.

For professional advice on SDLT please contact Blake Morgan’s SDLT expert, John Shallcross.

This article is intended for general information purposes only and does not constitute legal or professional advice. Some of the examples are not covered by HMRC guidance and the official view of HMRC on the correct analysis is not known. Advice should be sought before proceeding with any transaction.

For Blake Morgan conveyancing clients, our SDLT experts are able to advise on complex property tax circumstances. Please contact our conveyancing solicitors if you have an enquiry.

Originally posted by John Shallcross on 3 January 2017; updated on 20 May 2019, 27 July 2019, 6 January 2020, and 15 April 2020.