Rules around how higher rates of Stamp Duty Land Tax apply to homes with granny flats are complex. Property lawyer and expert on the tax, John Shallcross breaks it down.
UPDATED ON MAY 9, 2018
When the higher rates of Stamp Duty Land Tax (SDLT) for additional homes were introduced in 2016, it was never going to be a straightforward job.
One standout example of how tricky the rules were to implement is the case of ‘granny flats’ – self-contained separate dwellings in the same building as the main property (or occasionally in the grounds of the main property).
Whether a property comprises one dwelling or two can, in itself, be a difficult question. You’ll need to look at factors such as whether each part has all its own independent facilities – for cooking and washing, for example – that you’d expect in a dwelling.
Shifting the granny flat goal posts
When the higher rates of SDLT first came into force on 1 April 2016, the effect of the rules was that purchasers of properties with a granny flat that counted as two dwellings would be liable to pay the extra 3% SDLT. (The surcharge applies to the whole property price and is then added onto the regular SDLT due).
In this case, the higher 3% rates of SDLT would have applied even if this was your only property or it was replacing your only or main residence (read more about replacement of main residence rules).
However, the Government thought better of it and, due to what it described as a ‘technical unfairness’, made amendments to the Finance Act which was passed (became law) on 15 September 2016.
The first HMRC Guidance Note (16 March, 2016) did not cover the granny annex rules because they were introduced later than this. HMRC issued a revised Guidance Note on 29 November, 2016 which gives some explanation of the operation of these rules.
This Guidance Note was archived after the text was moved (with some alterations) at the end of March 2018 into HMRC’s Manual. The text on subsidiary dwellings in the Manual can be found here.
The subsidiary dwelling test
A new test (which I will call the ‘subsidiary dwelling’ test) was introduced by the Finance Act 2016. The test is applied to cases where two or more dwellings are being purchased in a single transaction – which will, of course, often include properties with a granny flat.
The amended rules apply where:
- At least two-thirds of the overall price is attributed to the main dwelling (this will need to be a ‘just and reasonable’ apportionment)
- The subsidiary dwelling (or ‘granny flat’) forms part of the same building as the main dwelling OR is within the grounds of the main dwelling.
The good news is that it does not matter how the granny flat is to be used. For example, it could be let out privately rather than lived in by a family member.
There are also no rules within the subsidiary dwelling test around whether planning conditions limit how the granny flat is occupied, or around how and when you can sell or dispose of it.
If you are buying a home with a granny flat, it is important to understand the new subsidiary dwelling test. It means the higher rates of SDLT will not automatically apply to the purchase of properties with granny flats (so long as it is either your only property or is replacing your only or main residence).
Can I qualify for Multiple Dwellings Relief?
As part of this, it is important to mention Multiple Dwellings Relief (MDR). This is a legitimate means of reducing the SDLT payable on purchases involving several dwellings – granny flats often included.
The original HMRC guidance suggested that, if you claim MDR, the 3% surcharge automatically applied. The updated guidance of November 2016 no longer said that, nor does the text carried forward into the HMRC Manual.
The revised Guidance Note which HMRC issued on 29 November 2016, has a new set of examples. One of these (Example 21 in Chapter 9) came within a whisker of saying that Multiple Dwellings Relief can be claimed in an appropriate granny flat case WITHOUT the surcharge applying.
Unfortunately, when the contents of the Guidance Note were moved into the Manual at the end of March 2018 the examples involving granny flats (Examples 20 - 22) were not carried through. This has been pointed out to HMRC and on 3 May 2018 they said that they would look at adding the examples into the Manual. If you need to look at the archived Guidance Note of November 2016 you will find it here.
Going through the amended rules with a fine-toothed comb, it would appear that MDR can sometimes be obtained without the surcharge automatically becoming due.
This is the assumption we have made on the first ‘granny flat’ scenario below.
Buying properties with a granny flat: how it works in practice
To illustrate some of the complex rules around how the purchase of properties with a granny flat work, here are some worked examples:
1. Buying a house with granny flat WITHOUT paying the surcharge
Under the amended rules it is possible to buy a property which counts as two dwellings in a single transaction and escape the 3% SDLT surcharge if the following conditions can be met:
• The less valuable dwelling is part of the same building as the more valuable one OR is within the grounds of the more valuable one.
• The more valuable dwelling amounts to two-thirds or more of the overall value.
The property will also either have to be your only property or a replacement of your only or main residence. And if it is the latter, you will need to be moving into the more valuable of the two dwellings you are buying.
Price of both dwellings: £500,000
SDLT payable: £5,000
How it is worked out: (2 x £2,500. £2,500 being the SDLT on the average price of £250K without the surcharge)
2. Buying a house with granny flat PAYING the surcharge
It is not always the case that you will be able to avoid the SDLT surcharge when buying a property comprising two dwellings in a single transaction. For example, the transaction might not satisfy the subsidiary dwelling test on one or more of the following grounds:
- The granny flat is neither in the same building NOR in the grounds of the main dwelling.
- The more valuable dwelling is not worth at least two-thirds of the total price.
Alternatively, it could be that the subsidiary dwelling test IS satisfied, but the surcharge still bites because you have other property interests and are not replacing an only or main residence.
Price of both dwellings: £500,000
SDLT payable: £20,000
How it's worked out: (2 x £10,000. £10,000 being the SDLT with the surcharge on the average price of £250,000)
3. Buying a single dwelling with a non-residential property
What if the purchase of a single dwelling comes alongside a property that is non-residential? This could be a flat with a shop below it for example or a house with an adjoining field that is let to a farmer.
In this case, different non-residential rates of SDLT apply. And this means there is no question of the surcharge applying.
Price of combined property: £500,000
SDLT payable: £14,500
How it is worked out: On the non-residential slice rates, so 0% on the first £150,000, 2% on the next £100,000 (£2,000) and 5% on the rest (£12,500)
Where new granny flat rules won’t apply
In some cases, you can buy what looks like one property comprising two dwellings – but it transpires that different connected sellers own different parts of the property. For example, a husband owns the main house and his wife owns the gardener’s cottage.
In this case, the granny flat rules cannot apply as the properties are not being purchased in a single transaction but in two ‘linked transactions’. You can read more about linked transaction rules on HMRC’s website.
If you would like further information on how 3% Stamp Duty Land Tax applies to granny flats and other dwellings, read my article here.