In this issue, we focus on the subject of Multiple Dwellings Relief (MDR) which can offer significant savings in Stamp Duty Land Tax (“SDLT”). Yet, until recently, it was often overlooked.
Clarification from HMRC has however prompted claims against conveyancers who have failed to claim the relief where it would have been available. This growing trend in professional negligence claims will be of interest to conveyancers and their professional indemnity insurers.
We would like to thank Scott Ashby and Michelle Bakker of specialist professional indemnity solicitors, at Beale & Co who have written this bulletin for us.
What is MDR?
MDR can be claimed where two or more ‘dwellings’ are purchased at the same time. It allows for SDLT to be calculated upon the average price of each dwelling (and then multiplied by the number of dwellings), rather than the total purchase price paid in the transaction. As the average purchase price will often be less than the aggregate purchase price paid, there will be a saving in SDLT. In high-value purchases, the SDLT saving can be considerable. MDR needs to be claimed on the SDLT return, but the return can be amended to claim MDR if it was not previously claimed within 12 months of completion of the purchase.
Determining whether a client’s purchase involves multiple dwellings has however not always been clear. Legislation defines a ‘dwelling’ as a building (or part of a building), existing or in construction, which is used (or suitable for use) as a single dwelling. Gardens and interests in separate dwellings can also constitute a ‘dwelling’ for the purposes of MDR. This lack of clarity often led to MDR being overlooked by conveyancers and their clients paying more SDLT for their property purchases than they might otherwise have done.
HMRC have, however, recently clarified that a self-contained part of a building with its own access and domestic facilities, and which allows the residents of that part of the building to live independently of the residents of the rest of the property, will be deemed a ‘dwelling’. This includes an annexe or a ‘granny flat’.
What does this mean for conveyancers?
The clarification offered by HMRC is welcomed. It has however brought to light previous purchases where MDR arguably could/should have been claimed but was not. This has prompted claims against the conveyancers and solicitors that acted on those purchases. In what has been dubbed as a new wave of “PPI” claims, it is suggested that previous purchasers are being encouraged to bring claims against their former conveyancers on a no-win-no-fee basis for their failure to apply for MDR.
Going forward, conveyancers should carefully consider the availability of MDR where a client intends to purchase, for instance, a house with a self-contained granny-flat annexe or an estate with multiple buildings. It is common for buildings to be registered under a single title – despite being separate ‘dwellings’. With busy caseloads and often working on a fixed fee or very tight margins, conveyancers can easily miss the existence of multiple ‘dwellings’ and expose themselves to claims - especially given the considerable SDLT savings that can be achieved.
What is the exposure?
The increase in claims against conveyancers for their failure to advise on MDR reflects a general misconception of the scope of the duty of care owed by the profession. Whilst conveyancers will routinely calculate the SDLT due on a purchase, they should not be expected to deliver complex tax advice on the reliefs available to minimise the SDLT due. It will of course always depend on the scope of the retainer agreed but it is not uncommon for conveyancers to specifically exclude from the terms of engagement with their clients any liability to advise on tax mitigation. This could arguably include advising on MDR, but it will very much depend on the terms of business agreed and what work a conveyancer does assume responsibility for in respect of calculating SDLT and completing the SDLT return.
The information available to the conveyancer at the time of advising should also be considered. It would, for example, be very rare for it to fall within the scope of a conveyancer’s duty to physically inspect a property and so if the existence of multiple dwellings could not be known, the conveyancer may be able to escape liability. If however it was clear that the transaction involved the purchase of multiple dwellings, then the conveyancer may well have owed a duty to advise the clients on the availability of MDR or to seek alternative tax advice. Further, it should be carefully analysed whether a claim for MDR would have succeeded, but for the conveyancer’s failure to submit it. HMRC do have the power to scrutinise SDLT returns and an apparently successful MDR claim can subsequently be challenged and fail.
Establishing a conveyancer’s liability will not be clear-cut. Careful consideration should be given to the terms of their engagement, their general duty of care, the information that was available to them and whether any claim for MDR would have succeeded. Conveyancers should take active steps now to tighten up their procedures, revisit internal training and revisit their standard retainer terms to mitigate the risk of being exposed to claims for failure to advise on and claim MDR for their clients.
For further information please contact Joel Harding, Legal Practices Group on +44 (0)20 7528 4307.