Annexes, Cottages and Stamp Duty: A Practical Guide for Country House Buyers
Until very recently there was a huge difference from a SDLT perspective between buying a house with a mere annex (with a bedroom and en-suite) versus buying a house with a subsidiary dwelling.
The abolition of multiple dwellings relief (MDR) in 2024 (potentially still relevant for buyers who exchanged contracts before 6 March 2024 and have not altered that contract) has meant that this distinction is less immediately relevant. MDR meant that the chargeable consideration was divided by the number of dwellings and the SDLT rates then applied to that quotient whilst the higher rates of SDLT were not chargeable if the subsidiary dwelling test was met as discussed below. Counting dwellings could save a large amount of SDLT. Sellers were often throwing up stud walls, putting locks either side of doors, installing cooking facilities to increase the number of dwellings.
The tax tribunals became log jammed with cases where some taxpayers were aggressively claiming that multiple dwellings existed if a house had a front door and a back door (and so that it had two separate entrances and there were two separate dwellings) and so eventually the relief was abolished entirely.
Abolishing MDR has not really simplified SDLT as buyers of residential property face a surprisingly wide range of SDLT outcomes. Depending on the nature of the property and the buyer there are potentially over 7 different SDLT rates when buying a house. This increasing complexity adds further unnecessary stresses to an already difficult process and adds a layer of uncertainty as purchasers struggle to know what their budget may be, with SDLT, at potentially up to 19%, being a significant part of the house buying cost.
Normal Rates
The current standard residential rates are a banded system, with the purchase price for the property being split into different bands and taxed at the appropriate rate
Premium value and SDLT rate
Up to £125,000 Zero
The next £125,000 (the portion from £125,001 to £250,000) – 2%
The next £675,000 (the portion from £250,001 to £925,000) – 5%
The next £575,000 (the portion from £925,001 to £1.5 million) – 10%
The remaining amount (the portion above £1.5 million) – 12%
Higher Rates
The Higher or Additional Rate of SDLT is the largest surcharge potential facing individuals buying a property, this adds 5% to every band of the rates, so the first £125,000 of purchase price, that would have been taxed at 0% now is taxed at 5% etc. The higher rates apply where the purchased dwelling is an additional dwelling (the purchaser already owns a dwelling somewhere else in the world, and has not sold their previous main residence in the last 3 years intending for this new purchased dwelling to become their new main residence) or if the transaction involves the acquisition of 2 or more dwellings at a single time.
Subsidiary Dwellings, Annexes and Cottages
Many country properties consist of more than just one house. Common examples include:
Cottages or converted outbuildings capable of separate use, granny annexes, or large houses subdivided into wings or flats.
For SDLT purposes it is important to consider if these additional units are “subsidiary dwellings” that is:
– Within the same building or grounds of the “Principal Dwelling”
– Where the Principal Dwelling (and associated gardens and grounds) are valued at least 2/3rds of the total value of all dwellings.
Where all dwellings beside the principal dwelling are subsidiary dwellings then they are disregarded for the purposes of the higher rates. A purchaser is not treated as buying multiple dwellings and so the higher rate surcharge will not apply because more than one dwelling is being purchased ((although they may still apply if the buyer already owns another property elsewhere).
Before June 2024 these subsidiary dwellings did still count for the purposes of the now abolished multiple dwellings relief, which in some cases significantly reduced the SDLT bill.
However, if the total value of all subsidiary dwellings exceeds 1/3rd of the total price, then there is no principal dwelling for SDLT purposes, and the transaction is treated as one where the purchaser is acquiring multiple properties (and so the higher rates of SDLT will apply). This may be the case where an estate home has been split into equally valued flats, or the two wings which make up over 1/3rd of the house, have been hived off into separate homes.
Six or More rule
One potential saving grace of purchasing multiple dwellings is the “six or more” rule. When a transaction comprises of six or more dwellings then it is not taxed to the residential rates of SDLT at all but the significantly lower (top rate 5%) non-residential rates. The six properties must be acquired in a single transaction.
Key points to check
When buying a large country home, it is worth checking
Does it contain more than 1 dwelling – are there cottages, separate flats etc
Are there six or more dwellings as part of the estate?
If there are more than 1 but less than six dwellings what is the value of each dwelling, what proportion of the overall purchase price does each make up
Potential Steps
Even in less favourable scenarios, there may still be options to explore. For example, where a property comprises two equally valuable dwellings:
Pre‑exchange discussions with the seller may be worthwhile. This could result in a price adjustment to reflect the SDLT cost, or the seller may be willing to take relatively minor steps (such as removing lockable internal doors or stud walls) so that the property is genuinely a single dwelling at completion.
Where physical amalgamation is not feasible (for example, where the property consists of three distinct flats), it may be possible to acquire the dwellings under separate transactions on different days. In that case, the first dwelling may avoid the Higher Rates altogether, provided the buyer does not already own another property. Subsequent purchases would then fall within the Higher Rates.
Equally sellers when gearing up to market their property may want to consider whether some minor subdivision or amalgamation could improve the buyer’s tax position and so make the property more attractive overall.
In any event, it is wise to consider the SDLT position at the earliest possible moment, ideally even at the stage of making an offer on a property, so you can avoid potential future pitfalls that could have been solved had they been acted on earlier.
And remember there are different rules in both Scotland and Wales.
