The end of the granny annexe? How scrapping multiple dwellings relief could affect your property portfolio

Yet another property investing relief has been scrapped.

Chancellor Jeremy Hunt used his Spring Budget in March to abolish multiple dwellings relief (MDR), claiming it was being regularly abused, and it was officially scrapped from 1 June.

The relief was introduced in 2011 to help property investors and landlords invest in the property market and boost housing supply.

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It could be used when purchasing a block of flats, a building that will be part-commercial and residential or even a house with a separate granny annexe.

To work out the relief, buyers could divide the total amount paid for the properties by the number of dwellings, work out the tax due on this figure and then multiply it by the number of dwellings.

The minimum rate of tax under the relief is 1% of the amount paid for the dwellings.

But critics warned that this created a stamp duty loophole as buyers could purchase a home with a ‘granny annexe’ or other self-contained rooms that aren’t being used separately and present it as two properties to lower their bill.

Property investors can still claim MDR if contracts were exchanged on or before 6 March 2024 and if deal is “substantially performed” or completed before 1 June 2024.

“This was a loophole that has unfairly favoured developers and large portfolio landlords to the detriment of retail buyers and should have been removed a while ago,” says Kundan Bhaduri, property developer at The Kushman Group.

What does the end of MDR mean for property investors?

This is the latest tax relief to be removed for property investors.

It comes after the introduction of restrictions on mortgage interest relief for buy-to-let loans and higher stamp duty on additional purchases.

There are also plans to scrap the furnished holiday lets tax regime.

“In the current unfavourable climate to landlords, it is another nail in the coffin for the sector,” says Michelle Lawson, of Lawson Financial.

“Those landlords who do buy multiple properties however, on the whole I doubt it will be missed by many.”

There is an argument that the MDR failed to set out what it was supposed to do.

It was supposed to lower the barriers to property investing.

But the relief was rarely used and cost HMRC just £700 million between 2022 and 2023. That is a drop in the ocean compared to the £11.7 billion the taxman received in stamp duty receipts over the same period.

Additionally, a recent review of MDR claims by HMRC found that 40% were contentious. 

There will be consequences for property investors though.

The removal of MDR could limit the market for buying and investing in blocks of flats.

“The most common use of the MDR relief for portfolio landlords is when buying a block of flats. In the Midlands and across the North East, it is not uncommon for portfolio landlords and investors to buy a block of say eight £60,000,” adds Bundari.

“That's still under £0.5M which would barely buy you an apartment in outer London. So, you see, MDR came to the aide of investors looking to buy blocks. 

“Other use cases for MDR would have been semi commercial blocks with shops on the ground and apartments above across high streets in most major towns. These types of transactions will now slow down and will increase the cost of converted apartments, since the developer will have to pay more.”

Stevie Heafford, tax partner at HW Fisher, says there was an influx of people trying to complete or substantially perform the contracts before the deadline. 

Heafford highlights that property investors who purchase six or more properties in a single a series of linked transactions will still be able to claim the non-residential rates.  

“Whether or not this will mean that investors look to purchase more units than they might otherwise have done or whether it will have a detrimental impact on property investment full stop remains to be seen,” adds Heafford.

Ann-Marie Daly, real estate solicitor at Primas Law, says this relief will still represent a loss of value in comparison to MDR.

Buying agency JM Chase warns that the impact of the scrapping of MDR extends beyond landlords and investors. 

George Burnand, a partner at JM Chase, has helped rush through a client’s purchase of a main house and secondary accommodation. 

“The stamp saving was approximately £80,000,” he says.

“The scrapping of this relief is going to have an impact on the top end residential market and the prices buyers are prepared to pay.”

Accountants warn that buyers legitimately purchasing a home with a granny annexe could also now face higher stamp duty costs.

For example, a homeowner moving to a £550,000 property with a separate annexe would now pay £15,000 in stamp duty but the bill could have been as low as £5,500 using MDR, according to RSM.