Multiple Dwellings Relief (MDR) – Part 2 – The Granny Annex Conundrum.
Part 1 outlined the basics of MDR for standard purchases involving several dwellings and for mixed purchases of dwellings and non-residential property. This part concerns the more contentions area of Granny Annexes and Subsidiary Dwellings. Part 3 covers MDR and building projects and also the main exclusions and post completion events which trigger clawback.
The Granny Flat/Annex relief discussed in the in the media recently comes from FA 2003 Sch6B para 2 and para 7(2). Para2 applies MDR:-
“where its main subject matter consists of … an interest in at least two dwellings”
And dwelling (which is different from the definition of residential property at s116 FA 2003) is partially defined in FA 2003 para 7(2) which says that:-
“a building or part of a building counts as a dwelling if –
- It is used or suitable for use as a single dwelling, or
- In the process of being constructed or adapted for such use …” (my underlining)
“Dwelling” is not further defined in the legislation.
All the cases decided so far in the First Tier Tribunals (the “FTT”) (which are persuasive but not binding) look at the state of the property on the date of completion. I have not yet come across a granny annex claim based on “in the process or being constructed or adopted”, that argument is the province of property developers.
Some have tried to stretch the definition to include bedsits, where there are shared bathrooms and toilets and the cooking facilities are simply a kettle and a hot plate on a table in the bedroom. HMRC and the FTT have not looked favourably on these suggestions as the facilities are inadequate and not sufficiently independent.
For an MDR claim to succeed the different parts of the property must be suitable for separate occupation as a dwelling independent of the rest of the property. The key elements to consider are that it must
- have its independent provision for
- preparing and eating food (a kitchen);
- basic hygiene needs (toilet and bathroom);
- somewhere to sleep; and,
- be suitable for human habitation.
There are other factors to consider include whether there are separate services (electricity, gas, water), a degree of privacy/independent access, a separate address, council tax and planning restrictions and even the sales particulars. These are indicators and not essential.
HMRC manuals say that where a dwelling is part of a building, then there must be a separate lockable door between the dwelling and the rest of the building. Originally it was thought that needing minor works to be able to lock off access between dwellings was sufficient. This would be consistent with HMRC’s view in non-MDR SDLT cases that a house was still suitable as a dwelling if the toilet and kitchen were not functioning but could be easily reinstated. It would also be consistent with a claim under para 7(2)(b) above “in the process of … being adapted for such use”. However, a recent tribunal case noted that putting in a lockable door in an existing doorframe where a door had been removed was not enough, and in another case a door lockable from one side only did not provide sufficient privacy to the other dwelling and so was not sufficient. These cases are, I understand, being appealed as is a case where the annex was for the independent living of the sons of the owner of the main house where the mother prepared their meals in her kitchen.
Knowing whether to claim MDR on a subsidiary building conveyancers have to drill in to get all the facts and then decide if, on balance, the annex does provide a separate, private, dwelling in its own right for occupation by people who may not be related to the occupiers of the main house. All factors should be considered.
A secondary issue with granny annexes is that the purchaser is buying two properties and would normally expect to be caught by the 3% HRAD surcharge. However, where the value of the granny annex (or other subsidiary dwelling) is less than 33% of the total property price then for 3% HRAD purposes the different dwellings are treated as a single property. If the main property is relieved of HRAD, so will the subsidiary dwellings.
This article was submitted to be published by SDLT Compass as part of their advertising agreement with Today’s Conveyancer. The views expressed in this article are those of the submitter and not those of Today’s Conveyancer.