What do you get if you cross a property purchase involving residential and non-residential elements with Multiple Dwellings Relief?

Previously, the answer might often have been a 3% SDLT surcharge (which is usually payable if, after completion of the purchase, the buyer will own in some way - either legally or beneficially - more than one residential property) on the portion of the consideration attributable to the residential element. However, earlier this month HMRC updated its guidance on the application of the 3% SDLT surcharge in these transactional circumstances.

Currently, if a buyer purchases non-residential or a mix of residential and non-residential property then the consideration is taxable at the non-residential rates of SDLT and the 3% surcharge doesn’t apply. If a buyer purchases a mix of residential and non-residential property and claims Multiple Dwellings Relief (MDR) on the residential element, then the previous position was that the 3% surcharge was applicable on the residential element.

Now the HMRC guidance states that the 3% surcharge applies to purchases of residential and non-residential land only if:

1. MDR is claimed on the residential element; and
2. The non-residential element is “negligible or artificially contrived”.

HMRC provides an illustrative example in their updated guidance to demonstrate this principle. The overall effect is that, so long as the non-residential element of a mixed transaction is not negligible or artificially contrived, the 3% surcharge should not apply when claiming MDR in respect of the residential element.

Unfortunately HMRC does not define “negligible or artificially contrived” but it is possible to make a non-statutory clearance application to HMRC to ask whether the non-residential element in a transaction is “negligible”. Ultimately we will have to see how this is treated through challenges in the Tax Tribunal.

Some technical questions remain in respect of how HMRC’s updated position operates with regard to the underlying legislation. In particular, the mechanics for calculating the tax due when claiming MDR do not dovetail neatly with the conditions for determining when the 3% surcharge applies.

Accordingly, while this update to HMRC’s guidance represents a welcome development, each transaction where this may be relevant should be looked at carefully.