One of the surprise (and less talked about) announcements from the Spring Budget this week was the abolition of SDLT Multiple Dwellings Relief (MDR) from 1st June 2024, following a consultation held over 2 years ago. 

How might this affect institutional property investors' appetite to invest in the Living Sectors?

What is MDR? It is a relief for a buyer of residential property where it consists of 2 or more “dwellings” (houses, flats, studios etc). The rules can be complex, but in short where you are buying 6 or more dwellings, you can choose to pay either the non-residential rates or the higher residential rates using MDR. The effect of using MDR means that SDLT liability is then calculated on the average value of each dwelling, rather than the total value of the transaction. So e.g. if you are buying a BTR block of 100 flats (all let on ASTs) at a price of £20m, MDR allows you to look at the average price of each flat (£200,000) and tax that at the residential rates (0% up to £250,000, but add the additional properties 3% surcharge), then multiply this by the number of flats - giving you a SDLT charge of £600,000. Take away MDR, your best choice would be paying the non-residential rate of SDLT on the whole £20m, giving you a SDLT charge of £989,500 - a significant difference therefore.

When is it being abolished? MDR will be abolished (mostly) with effect from 1 June 2024. Contracts exchanged on or before 6 March 2024 will be grandfathered and MDR will continue to apply, even if the contract is completed after 1 June 2024, so long as it isn't varied before completion. MDR will also apply to any contracts substantially performed before 1 June 2024 - so rush to get those Living Sector deals completed now!

Why the change? The view of government is that MDR doesn't necessarily serve its original purpose anymore. When first introduced, the relief aimed to support the institutional investors that were building up the Living Sectors - where they were buying more than 6 units and the non-residential SDLT rate was capped at 5%, the potential "win" for these investors using MDR was the gap between 1% and 5% (so often up to a 4% margin). However, since then, the 3% additional properties surcharge was introduced, and so the benefit of MDR to investors has been eroded (to about 2% most often). Anecdotally, MDR has also been an area where HMRC has been very active with their inquiries into tax returns and it's probably the area where there's been the most litigated cases. It's fair to say that MDR has often been abused, particularly in the classic example of the person who buys a £5,000,000 mansion and tries to argue that it is made up of a number of homes (a granny annex, a converted barn, a commercial field for grazing, etc) in order to significantly reduce their SDLT liability. The government basically thinks the relief is no longer worth the hassle and during the consultation, apparently a survey of various institutional property investors was carried out suggesting that the availability of MDR did not really influence their decision to invest.

I am not too sure about that though. Yes, the majority of new Living Sector assets are forward funded (and so MDR doesn't come into play), but my feeling is the abolition of MDR will be a disappointment to investors in the sector - particularly given the high interest rates environment and the challenge of pricing. There is also now an increased volume of operational stock being traded and where those few percent margin might just unlock some more deals - let's face it, every little helps!