As we set out briefly in our comment on the Government's Budget on 6 March 2024, the Government is abolishing MDR for transactions that complete (or are "substantially performed") on or after 1 June 2024. With the draft Finance Bill now published, it is worth considering this change in more detail.
The background
It is fair to say that not many saw this coming. Abolishing MDR was not one of the options given in the Government's recent consultation on MDR and mixed use properties. As the Government admits in its response to that consultation: "the potential options for reform to MDR set out in the consultation document have now been overtaken by the decision to abolish MDR".
The Government's decision comes after significant number of victories for HMRC in the Tribunal against private individuals claiming MDR. The number of these cases seeking to push MDR beyond what the Government saw as the relief's intended target clearly contributed to the Government's decision to abolish MDR. However, the Government's response to its consultation does not make clear why abolition was favoured over the (in some cases popular) alternatives offered.
Even going by the Government's own research, abolishing MDR will have an effect on businesses, including those engaged in the private rental sector. At paragraph 1.21 of the qualitative analysis commissioned by the Government, it states that: "For businesses the results were more mixed. Three fifths (60%) said the availability of the relief had at least some influence on their decision to purchase dwellings, with 30% saying it had an important or very important influence. Two fifths (38%) said it had no influence on their decision making".
With an increasing squeeze on financing and materials costs, abolishing MDR could have a significant effect, both on private landlords now, and on the pipeline for residential developers bringing new homes to market.
The Government's analysis even notes (at paragraph 4.58) that property developers are particularly sensitive to MDR. In our experience, MDR is commonly claimed on acquisitions made as part of a development site aggregation, including by local authorities (where other more beneficial reliefs are not available).
Transition
MDR is still available prior to 1 June 2024 and, with the draft Finance Bill now published, we are able to properly consider the transitional provisions.
Broadly, the transitional provisions permit MDR to be claimed where a transaction completes (or is "substantially performed") on or after 1 June 2024 under a contract entered into before 6 March 2024 (i.e. before the Budget).
However, this is subject to the proviso that the contract is not "excluded".
Contracts will be excluded if:
- there is any variation of the contract, or assignment of rights under the contract, after 6 March 2024,
- the transaction is effected in consequence of the exercise after that date of any option, right of pre-emption or similar right, or
- after that date, there is an assignment, subsale or other transaction relating to the whole or part of the subject-matter of the contract as a result of which a person other than the purchaser under the contract becomes entitled to call for a conveyance.
There are quite a few points emerging from this, such as:
- How strictly will HMRC apply these transitional rules in practice? Does "any variation of the contract" include substituting one erroneous plan in a large turnkey residential development contract?
- What is an "assignment of rights" in (a) and how does it differ from the "assignment" relating to the whole or part of the subject-matter of the contract in (c)? Does it include assigning rights in the contract that are only indirectly related to the relevant property (such as those related to a property's development)? Does it include assignment of rights as part of a security package under standard finance documentation?
Until we have clearer answers to these question, caution would seem appropriate.
Is this the end of MDR?
Subject to the transitional rules discussed above, the answer to this question, at least for now, would seem to be "yes", but with a few more caveats.
First, in the Finance Bill, the Government has left open the possibility of bringing back MDR for certain types of transactions, to be described in later regulation. We are not clear exactly what is intended here, although material released by the Government refers to the agriculture industry and carers as being areas for which the abolition of MDR is a concern.
Second, MDR has not (yet) been abolished for either Scottish Land and Buildings Transaction Tax, or Welsh Land Transaction Tax (both of which apply in their respective jurisdictions in place of SDLT).
Abolition of MDR in Scotland and Wales will depend on the devolved legislatures in those countries. However, it is at least very possible that Scotland and Wales will follow suit and abolish MDR.
Where does that leave us?
Without MDR, SDLT is likely to become a greater burden for residential landlords and for developers, and the SDLT consequences of any acquisition should be considered at an early stage.
Large scale acquisitions may be able to rely on the "six or more" rule so that the lower non-residential SDLT rates (rather than the significantly higher residential SDLT rates) apply to those acquisitions.
Mixed acquisitions of residential and non-residential property (following the Government's indication that they are not looking to make changes in this area) should benefit in the same way.
However, smaller scale acquisitions (or acquisitions of a small number of high value properties) may now be subject to significantly greater rates of SDLT, creating a significant (and artificial) disparity between what might appear to be similar transactions.
What to do now
The DWF Tax team has extensive experience advising on SDLT, Land and Buildings Transaction Tax and Land Transaction Tax, as well as other tax issues arising on property acquisition and development. To find out more, as see if we can help you, please contact Jon Stevens, Tom Rank, Alex Tolcher or speak to your regular DWF contact.
