Mark McLaughlin looks at claims for ‘multiple dwellings relief’ from stamp duty land tax when a main residence is bought with a ‘granny flat’.
Granny flats are popular these days. The term ‘granny flat’ is broadly shorthand for part of a main house (usually an annexe) made into self-contained accommodation suitable for an elderly relative.
SDLT rates
For stamp duty land tax (SDLT) purposes, the existence of a granny flat potentially reduces the amount of SDLT payable on the whole property (NB this article focuses on properties in England and Northern Ireland; separate rules apply in Scotland and Wales).
When buying residential property (over £250,000), SDLT is generally payable on increasing portions of the property price, currently at 5% on the portion of the purchase price from £250,001 to £925,000; at 10% from £925,001 to £1.5m; and at 12% on the portion above £1.5m. These SDLT rates apply if, after buying the property, it is the only residential property owned by the buyer; a further 3% is payable on top of these rates if another residential property is owned.
Multiple dwellings relief
However, a reduced rate of SDLT potentially applies when buying multiple dwellings.
If multiple dwellings relief (MDR) is claimed (NB the relief is not automatic), the rate of SDLT on the consideration attributable to the dwellings is determined by reference to the amount of this consideration divided by the number of dwellings.
MDR is subject to a minimum rate of 1%. Furthermore, a purchase of multiple dwellings, which is subject to the 3% extra SDLT for additional dwellings, will still be eligible for multiple dwellings relief; the rate of tax on the average consideration will take into account the higher rate.
One residence or two?
For MDR to be available, the granny flat must constitute a separate dwelling. HM Revenue and Customs (HMRC) may enquire into the land transaction return, particularly if a return was originally made on the basis that the granny flat formed part of the main residence (hence no MDR claim).
The status of granny flats has been the cause of many disputes between HMRC and property buyers. For example:
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Fiander & Anor v Revenue and Customs [2021] UKUT 156 (TCC) – The main house and annexe were found to be suitable for use as one joined dwelling, based on witness evidence, photographs, marketing materials and floorplans.
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Doe v Revenue and Customs [2022] UKUT 2 (TCC) – The property was not configured in such a way that it comprised two self-contained living units generally suitable for separate occupation but was suitable for use as a single dwelling.
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Dower v Revenue and Customs [2022] UKFTT 170 (TC) – The annexe did not have a gas oven, designated kitchen area or separate postal address, nor was it a separate property for council tax purposes. The annexe was held not to be a second dwelling.
Unfortunately, many buyers fall foul of ‘SDLT reclaims agents’, some of whom make spurious claims for MDR, hoping that the claims will keep below HMRC’s radar. A realistic view should be taken of whether granny flats constitute separate dwellings.
Practical tip
Be very careful when claiming MDR to ensure that the granny flat is genuinely a separate dwelling. Furthermore, the MDR rules provide for the SDLT calculation to be adjusted if the number of dwellings involved is reduced within three years of the effective date of the transaction.
