SDLT and the Granny Annexe Conundrum
The 3% surcharge was introduced in 2016 to assist families being squeezed out of the property market by the increased number of buy to let and second home purchases. In a nutshell, the surcharge sought to penalise those acquiring any additional property which was not a first time purchase (in the UK or abroad) or a replacement of a family home.
When the draft legislation was published it clarified that where two or more residential dwellings were being acquired at the same time such as a portfolio purchase, regardless of whether one of those properties was a first time purchase or it met the disposal and replacement of the main residence test, the 3% surcharge would apply to the entire portfolio.
The draftsman had not it seemed considered family homes with 'granny annexes'. A granny annexe in itself is a dwelling, sometimes a separate cottage in the same grounds or sometimes attached to the main house but in either case with its own entrance, kitchen and bathroom facilities. The question remained, would the acquisition of the family home with a granny annexe be caught by the multiple acquisitions drafting. On the facts, as two self-contained residential dwellings would be acquired in the same transaction, it seemed that regardless of whether this was the first purchase or a replacement of a main residence which had been disposed of, the 3% surcharge would apply to the purchase price of the family home.
The legislation was amended after being debated in Parliament, and with some external pressure from the public, to include the concept of a 'subsidiary dwelling'. Where a dwelling is 'subsidiary' to another purchased dwelling, such that the value of that 'subsidiary dwelling' does not exceed more than one third of the value of the consideration attributed to the other purchased dwelling then that subsidiary dwelling is not considered a separate dwelling for the 3% surcharge i.e. the family home and granny annexe is one acquisition for the purposes of the 3% surcharge.
This was in most cases good news as the purchase of the family home would fall outside of the 3% surcharge if it were a first purchase or a replacement of a disposed main residence provided the property valuations met the test. However, the good news does not stop there. The additional drafting did not prevent the granny annexe, or rather the subsidiary dwelling, from being considered a separate dwelling in the context of the rest of the SDLT legislation and most importantly, the availability of multiple dwellings relief (MDR).
MDR is a relief which broadly allows the SDLT to be calculated on the average purchase price of the dwellings rather than the total price. With the rates of SDLT increasing from 0% to 12% as the price increases, this can give quite a saving.
Should you be acquiring a family home with a granny annexe, we recommend taking advice as to the valuation of the granny annexe to determine whether the 3% surcharge applies and legal advice on the availability of MDR to mitigate any SDLT payable (whether the family home is in the 3% surcharge or not).
For any readers who have acquired such a property within the last 12 months, but may not have claimed MDR or paid the 3% surcharge mistakenly, the SDLT return can still be amended a tax refund reclaimed. We would be happy to advise you further.
This article is taken from Private Wealth newsletter - May 2019