Multiple-Dwelling Relief Provides Little Relief for UK Conveyancing Firms

This article has been co-written by Beth Caygill and Tim Barr of law firm Womble Bond Dickinson LLP and Joel Harding and Nicola Vince of Howden.

It’s Monday morning, you arrive in the office, make a coffee and turn on your computer ready to start a busy week only to find an email received over the weekend from a client whose conveyancing transaction completed over a year ago.

You recall that the transaction went very smoothly and the buyer was delighted to be in their new home. Surprise sets in when you realise that the client is now making allegations against you and your firm that they could have saved thousands of pounds on their Stamp Duty Land Tax (“SDLT”) payment. The accusation relates to an annex to the property that was not taken into account when calculating the SDLT payable on the purchase and the client believes they would have been entitled to Multi Dwellings Relief (“MDR”).

No-one mentioned an annex at the time, the plans did not show the potential for multiple dwellings and you make it clear that you do not give tax advice. Are you liable? How do you respond?

Womble Bond Dickinson LLP discuss the implications of Multiple Dwellings Relief (“MDR”)

Conveyancing firms are well acquainted in having to face large volumes of claims when an element of the conveyancing process is questioned.  This time it’s the turn of tax.  In particular, MDR, where disgruntled purchasers are claiming that they have overpaid SDLT because MDR was not secured at the time of the purchase. The consequent rise of claims is starting to hit the legal conveyancing community.

What is MDR?

MDR was introduced in July 2011 as a measure to boost the private rental sector. It is a relief on SDLT payable by property purchasers and applies where two or more dwellings are the subject of a single transaction and in certain linked transactions. [1]

If MDR applies, considerable savings can be made as the SDLT is calculated on the average price of each dwelling multiplied by the number of dwellings (unlike individual property transactions where SDLT is calculated on the total price paid). 

When does MDR apply?

There is currently a lack of clarity on what constitutes a dwelling for MDR purposes.  Multiple dwellings can include a house with an annex or a barn with multiple outbuildings. The Finance Act 2003 states that a dwelling includes a building, or part of a building, that is used or is suitable for use as a single dwelling, or is in the process of being constructed or adapted for such use. [2] This is self-evidently a short and ambiguous definition and does not elaborate on what amounts to "suitable".

HMRC issued further guidance in October 2019. [3] It seems that whether a dwelling is “a single dwelling” depends not only on it being a separate property with its own front door, but also on it having all of the amenities of a dwelling to allow for independent living.  Similarly, any restrictions in the deeds or in planning conditions as to the dwelling's use should be considered, although this is not determinative if the actual use is different from theoretical use. [4] It is the position at the time of the conveyance that determines whether MDR is available, even though it might be possible for the annex/basement to be regarded as a separate dwelling once any requisite planning applications/consents have been obtained. 

How is MDR claimed?

A claim for MDR should be included on the SDLT return at the time of transaction, or by amendment to the return within 12 months of the filing date.[5] It is important to note that, although the time limit for claiming repayment of an overpayment of SDLT is four years, a claim for MDR is not considered to be a claim for overpayment of SDLT, where the time limit is one year. [6]

Claims against conveyancers

The scope of duty of a conveyancing solicitor does not typically extend to (i) physically inspecting the property or (ii) advising on complex tax issues. However, solicitors are usually obliged to advise on the application of SDLT.  The application of MDR is therefore also likely to fall within this duty. That being the case, it may still be worth firms reviewing their terms of business to limit the scope of duty by specifically excluding any liability to advise on MDR or any other property related tax matters.

Even if solicitors are duty bound to advise on MDR, this does not mean that solicitors will be held responsible for failing to claim MDR as there may well be a question of whether MDR was available in any event. We therefore consider that purchasers should not prematurely focus on bringing professional negligence claims against their advisers, but instead take straightforward steps to:

1. Determine whether it is possible to file an amendment to their SDLT return, and if not;
2. Determine, by reference to HMRCs guidance and assistance whether MDR would have applied at the date of purchase.

Professional Indemnity Insurance (PII) considerations according to Joel Harding and Nicola Vince of Howden

It goes without saying that professionals should be mindful of the notification conditions stipulated in their PII policies and should act promptly on receipt of any correspondence that constitutes a defined claim or circumstance, regardless of their thoughts on liability. Notifications should not only be made where a claim has been intimated, but also if a firm becomes aware that a claim for MDR should have been considered during the transaction but was not.

Firms should consider revisiting their MDR procedures and ensure that up to date training is provided and procedures tightened. In addition, firms could ask the prospective purchasers to sign a form at the outset of the transaction stating that the property comprises of one dwelling which might help flag any possible MDR issues to the conveyancer. If the potential for MDR is identified, firms should either seek guidance from HMRC prior to completion or advise their client to seek additional tax advice from a specialist.

Howden and Womble Bond Dickinson LLP are both defending a large number of conveyancing firms who are facing MDR claims.  Due to our respective experience in the solicitors’ PII market, we have developed a robust and cost-effective approach to handling these claims. Nicola Vince at Howden comments:

 “In recent times, we have seen a significant increase in notifications relating to MDR claims. Some of these are claims where there are risks on liability but others appear much weaker. For example, we have seen many occasions where it was simply impossible for the conveyancer to know that there could be multiple dwellings involved in the transaction, so how can they be expected to advise their client on something they do not know about? Claimant solicitor firms appear to be taking a bullish approach to these claims and targeting a large number of conveyancing firms. However, insurers and their claims representatives have developed a catalogue of arguments on liability, causation and limitation to combat these claims.”

It remains to be seen whether the fear of future claims will pass once there is clearer guidance on whether MDR would ever have been granted to purchasers in the first place. However, until then, both Howden and Womble Bond Dickinson LLP will continue to support conveyancing firms in tackling these claims.

For any further information, please contact Beth Caygill or Tim Barr at Womble Bond Dickinson LLP, or Joel Harding or Nicola Vince at Howden.

References

[1] Schedule 6B Finance Act 2003

[2] http://www.legislation.gov.uk/ukpga/2003/14/schedule/6B

[3] https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm00210

[4] We understand that an Upper Tribunal decision is imminent on whether a property is suitable for use as two dwellings.

[5] s58(D) Finance Act 2003 http://www.legislation.gov.uk/ukpga/2003/14/section/58D

[6] Secure Service Ltd v HMRC [2020] UKFTT 0059 (TC)