Little in the March budget touched on housing, but one announcement caught the attention of UK build-to-rent: the abolition of multiple dwellings relief (MDR) from 1 June 2024. The reason? Scrapping MDR will impact the viability of BTR schemes, particularly outside London and in the rapidly growing single family housing market.
Introduced in the 2011 Budget, MDR was devised to support a growing private rented sector. It allowed investors to pay tax on each home based on the average value of the homes they acquired, rather than paying commercial SDLT on the aggregate value. In other words, someone purchasing 50 homes in bulk would pay the same tax as 50 investors individually purchasing those homes. As JLL's Paul Winstanley argued in a recent article, MDR levelled the playing field between individual buy-to-let investors and institutions, helping to fuel the growth of the sector over the last decade.
A hit to regional BTR
Scrapping MDR will have the most significant negative impact outside London because BTR schemes with the lowest unit value have the most to gain from tax relief.
To illustrate this point, the table below shows three assets at three price points, alongside the amount of tax paid using either MDR or non-residential SDLT and the resulting impact on the net price of the asset.
Table 1: Impact of scrapping MDR at various price points
| Example 1: £210,005 per unit | Example 2: £387,505 per unit | Example 3: £652,966 per unit | |
|---|---|---|---|
| Net initial yield | 4.5% | 4.5% | 4.2% |
| Gross price | £16,199,820 | £18,008,680 | £133,167,218 |
| Commercial SDLT | £750,548 (4.9%) | £835,471 (4.9%) | £6,241,975 (5.0%) |
| Multiple Dwellings Relief | £465,067 (3.0%) | £794,299 (4.7%) | £7,469,694 (6.0%) |
| Net price | Commercial SDLT: £15,220,958 MDR: £15,502,220 | Commercial SDLT: £16,919,418 MDR: £16,959,982 | Commercial SDLT: £125,049,500 MDR: £123,839,925 |
| Change in net price if forced to use commercial SDLT over MDR | -£281,262 | -£40,564 | +1,209,575 |
| Change % | -1.8% | -0.2% | +1.0% |
Table 2: SDLT rates compared
| Multiple Dwellings Relief* | Commercial SDLT | ||
|---|---|---|---|
| <£250,000 | 3% | <£150,000 | 0% |
| Next £675,000 | 8% | Next £100,00 | 2% |
| Next £575,000 | 13% | Anything else | 5% |
| Anything else | 15% | ||
| *Note: includes additional property surcharge | |||
In the first example, requiring commercial SDLT instead of MDR results in a 61% increase in tax. Under MDR, the investor would have paid 3% tax on each individual unit – the rate charged on homes below £250,000. By contrast, commercial SDLT is charged on the aggregate value of the transaction. The bulk of the price paid, therefore, is taxed at 5%.
However, the benefits of MDR disappear in more expensive schemes. A rate of 8% is charged on homes between £250,000 and £925,000. As a result, once the net price per unit tops £416,667, MDR becomes more onerous than commercial SDLT.
The impact, therefore, will be concentrated in regional cities where the per unit price of typical multifamily schemes falls between examples 1 and 2. With regional multifamily homes outnumbering ones in London and many institutions employing a national BTR strategy, the impact on the sector will be felt far and wide.
Moreover, suburban single family housing – which experienced a sharp rise in activity in 2023 – is particularly exposed, due to low capital values relative to multifamily.
Additional costs will have to be absorbed by stakeholders and bid levels could be reduced to maintain returns. From a longer-term perspective, asset owners will also need to factor in a discount to their assumed exit price, due to a larger tax deduction from an incoming buyer. All this creates additional hurdles to viability and, ultimately, housebuilding in the sector.
Another rising cost
The change to MDR follows a period of rising development and financing costs, which have already stretched viability in BTR. Investment in multifamily housing, for example, fell 50% in 2023. Investors took a cautious approach to development, while strong rental growth and occupancy in an otherwise uncertain economic environment stoked uncertainties for pricing. This was partly offset by a stellar year for single family investment, which surpassed an annual total of £2bn for the first time on record.
The industry’s concern is that last week’s announcement adds a further cost to an investment environment already grappling with high costs. This time, the areas that could be hardest hit are the parts of the market that showed most resilience and growth last year: regional investment driven especially by single family housing.
