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Multiple Dwellings Relief for House of Multiple Occupancy

Published by UK Property Accountants
Published Date: January 5, 2023

Interested in investing in property? Every property investors have to deal with Stamp duty and land tax (SDLT) at some point in their business. Despite this, SDLT is one of the easily misunderstood taxes.

Stamp Duty Land Tax (SDLT) is an important source of government revenue and an important factor for people buying a place to live and for business when investing in property as an asset or a place to trade.

Investing in property usually costs a huge amount of SDLT if you are unaware of the reliefs available. Knowing some useful reliefs that might apply to the House of Multiple Occupancy (HMO) is crucial.

One of the major reliefs available for Stamp Duty and Land Tax (SDLT) is Multiple Dwellings Relief (MDR). Which will be the main point of discussion in our article.

Note: Did you know when you purchase a property of £ 2 million, if the property qualifies for Multiple Dwellings Relief with two separate dwellings, you can save up to £ 68,750 on Stamp Duty and Land Tax (SDLT)?

Learn more here: Multiple Dwellings Relief - A Complete Guide.

What is House of Multiple Occupancy (HMO)?

Suppose a property is rented to at least three unrelated tenants, and all tenants share facilities such as bathrooms and kitchens. In that case, such properties are known as 'Houses of Multiple Occupancy'.

Though typically, HMOs have shared common areas such as bathrooms and kitchens, they may be constructed so that the houses may be divided into self-contained flats, beds-sitting rooms or simple lodging.

A house or an apartment rented by four university students with a common bathroom and kitchen area would be an HMO.

House of Multiple Occupancy and Multiple Dwellings Relief

It is important to note that the mere existence of at least three bedrooms let to unrelated tenants with a common or shared kitchen or bathroom does not qualify for Multiple Dwellings Relief.

A property to qualify for Multiple Dwellings Relief has to qualify as a separate dwelling.

The calculation of Multiple Dwellings Relief depends on the number of single dwellings within the transaction.

HMRC defines a dwelling as a building, or part of a building, that affords to those who use it the facilities required for day-to-day private domestic existence and a sufficient degree of privacy.

The facilities required to qualify for a separate dwelling are:

  • Suitability for use as a dwelling: Each dwelling should provide occupants with basic domestic living needs such as a sleeping area, living area, kitchen, bathroom, etc. the idea is that the dwelling is capable of existing independently.
  • Independent Entrance: Each dwelling must have a separate entrance; this can be a separate entrance from the common part of the building or outside the building.
  • Privacy: There must be a degree of privacy for each dwelling from another. For example, any door interconnecting between two dwellings must be locked from both sides to ensure privacy.
  • Control utilities: A single dwelling must have access to basic utilities such as water, heating, electricity, etc., and each dwelling must be able to control utilities provided to them.
  • Separate bills and posts: Though separate letter boxes, bills, etc., can act as strong evidence for separate dwellings, it is not conclusive. Lack of it will not be a deciding factor on whether a separate dwelling exists.

Examples of HMO with multiple dwellings relief?

Well, you need to look at how the property can be used, how it is structured, whether there are any legal restrictions on separate use of the property and what kind of facilities it has.

In our experience, HMRC will accept a claim for MDR where sufficient evidence is provided that can demonstrate there are separate dwellings.

Here are some examples to give you an idea:

Example 1:

Suppose you purchase an HMO with five bedrooms, ensuite facilities, a common kitchen, and a common room. Those rooms will not qualify as separate dwellings simply because they are not self-contained and cannot exist independently.

Example 2:

Now, if you are purchasing a building with a separate lockable entrance from the common staircase, each floor has five bedrooms with ensuite facilities, a common kitchen, and a common room. In addition, each floor has access and control to utilities such as water, heating, electricity, etc.; each floor qualifies as a separate dwelling.

Example 3:

Similarly, if you are purchasing an HMO with an annexe attached to it, the annexe has a separate entrance with no interconnecting door to the main dwelling.

It has a bedroom, a separate kitchen, a bathroom, and access and control to utilities such as gas, electricity, heating, etc., then it can qualify as a separate dwelling.

If my purchase of HMO qualifies for Multiple Dwellings Relief how much can I save?

Let’s take example 2 from above,

Mr. A is purchasing a building for £ 2 million with four flats, each floor having a separate lockable entrance from the common staircase. And each floor has five bedrooms with ensuite facilities, a common kitchen, and a common room. Each floor has access and control to utilities such as water, heating, electricity, etc.; each floor qualifies as a separate dwelling.

In this case,

  • Without MDR, the SDLT for the transaction, including the 3% surcharge, would have been £211,250
  • If MDR is claimed, the total amount of SDLT payable by Mr. A of £110,000.
  • MDR reduces the SDLT payable by £101,250

SDLT rates applied in this calculation are based on the rates for the tax year 2021/22

  • Without MDR, the SDLT for the transaction, including the 3% surcharge, would have been £211,250
  • If MDR is claimed, the total amount of SDLT payable by Mr. A of £110,000.
  • MDR reduces the SDLT payable by £101,250

SDLT rates applied in this calculation are based on the rates for the tax year 2021/22

52%
Payable
48%
Saving

Pitfalls to look for

Below are some common pitfalls to look for when claiming Multiple Dwellings Relief for HMOs:

  • Lack of kitchen/ food preparation and washing up facilities: It is a common feature of HMOs that the kitchen is shared among the tenants. However, to qualify for Multiple Dwellings Relief each dwelling must have a separate kitchen, as evidenced by PAUL AND JANE WILKINSON vs HMRC.
  • Lack of privacy: In ANDREW AND TIFFANY DOE vs HMRC the court considered, a degree of privacy for a dwelling to qualify as a separate dwelling. A secured lock in interconnecting doors was regarded as securing privacy in the dwelling.
  • Legal restrictions: The property may be subject to legal restrictions such as planning restrictions and restrictive convenants that may hinder use as a separate dwelling.

Conclusion

We understand the house you might be looking to purchase may differ from the one we discussed above. There are a lot of things that can come into play when looking at whether a property qualifies for Multiple Dwellings Relief.

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