A stamp duty change, set to take effect tomorrow, has been criticised as a missed opportunity to reform the private rental sector. This change involves the abolition of stamp duty Multiple Dwelling Relief (MDR), a move that has sparked debate among industry experts and stakeholders.
David Hannah, group chairman of Cornerstone Tax, voiced his concerns, stating that this decision overlooks the pressing need for comprehensive reform in the rental market. He believes that eliminating MDR could discourage investment in multiple dwelling properties, ultimately affecting the supply and affordability of rental homes.
Critics argue that while the government focuses on stamp duty adjustments, it misses the broader issues facing the rental sector, such as tenant protections, rent controls, and support for landlords. The hope for many was that the reform would address these challenges and create a more balanced and sustainable rental market.
Hannah explains: “MDR was initially implemented to encourage bulk purchases, providing developers with an effective means to deliver low-cost homes. With the demand for affordable housing at an all-time high, the government should be focusing on creating new incentives for developers rather than abolishing the existing ones.”
He elaborates further, stating: “The Chancellor’s decision to increase the tax that developers must pay from 1-2% to 5% will have a significant impact on Britain’s construction sector. This increase will likely result in many projects being abandoned, exacerbating the already critical shortage of affordable housing. As supply continues to lag behind the overwhelming demand, asking prices will inevitably rise. This is essentially a stealth tax increase, thinly veiled with weak justifications.”
Hannah also points out the missed opportunities for reform in the private rental sector: “The Chancellor could have taken this opportunity to introduce meaningful changes. Abolishing the second home surcharge for rental sector investors and reinstating full relief on mortgage interest payments would have reduced the costs of purchasing rental properties. These measures would have enabled landlords to freeze or potentially lower rents, providing much-needed relief to tenants.”
He concludes by highlighting the broader implications of the decision: “The lack of action on reforming the private rental sector, combined with the increase in taxes on developers, demonstrates a short-sighted approach. It fails to address the root issues in the housing market and risks further deepening the affordability crisis. The government needs to reconsider its strategy and focus on creating a more sustainable and equitable housing market for all.”
MDR has been available to any buyer purchasing two or more dwellings in a single transaction or linked transactions. It allows the tax to be calculated based on the average value of the properties, rather than their total value. This relief has been particularly useful for portfolio landlords or those buying a property with an annex.
Introduced in 2011, MDR aimed to reduce barriers to residential property investment and promote the private rental sector.
However, HM Treasury recently stated: “An external evaluation of MDR, conducted as part of HMRC’s Tax Reliefs Evaluation Programme, found no strong evidence that the relief significantly supports residential property investment. It has a minimal positive impact on overall housing supply or the private rental sector. The evaluation shows MDR is not cost-effective in meeting its original objectives. Therefore, MDR will be abolished from June 1, 2024.”
The government consulted on the future of MDR at the end of 2023, considering four options. However, abolishing the relief completely was not one of them. Yet, Chancellor Jeremy Hunt announced its abolition in March.
According to Osborne Clarke, an international legal practice, several factors likely influenced this decision. These include recent case law regarding MDR, the rise of tax reclaim agencies encouraging dubious claims, and a government-commissioned evaluation of MDR. This combination may have led to its termination.
The benefit of claiming MDR had already diminished for some investors due to the 3% surcharge for higher-rate transactions and the 2% non-resident SDLT surcharge. These additional costs often negated the advantage of claiming MDR, particularly for non-resident purchasers. With MDR’s removal, the cost benefit for UK purchasers over non-residents will no longer exist.
Certain transactions, such as student accommodation and mixed-use properties, could previously claim MDR without incurring the 3% higher-rate surcharge. These types of investments will be the most affected by the change.
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