Lee Sharpe looks at recent tax developments that affect houses in multiple occupation.
Houses in multiple occupation (HMOs) typically comprise several separate rooms or ‘units’ occupied by independent tenants, but sharing common amenities. In some cases, a tenant may have their own bathroom and even ‘kitchenette’; in other scenarios, the individual rooms might be less well furbished and share kitchen, bathroom and living room facilities.
HMOs are typically developed from large dwelling houses, and the extent to which the property may have been adapted for multi-occupancy use can vary significantly from one HMO to another. The landlord may let rooms independently, but will typically sell the entire freehold as a single asset.
The question of whether an HMO comprises a single dwelling or several can be important for tax purposes – potentially with a different answer for different taxes. Some recent developments are outlined below.
Council tax update (England only)
Some councils have recently been assessing individual rooms or units separately for the purposes of council tax by designating each room or unit with its own council tax band. For council tax purposes, a ‘dwelling’ is defined at LGFA 1992, s 3 (thence to ‘hereditament’ as per the old GRA 1967, s 115).
The government’s 2023 consultation on this issue warned that:
‘A consequence of [this disaggregation] is that tenants, who had not previously been liable for council tax, are now becoming liable and receiving bills significantly in excess of any sums they may have been charged had the liability remained with the landlord.’
The government’s recent consultation gave an example where a Victorian dwelling-house with five separately-let rooms, shared kitchen and bathroom and only minor physical adaptations to the property would comprise five dwellings but likely be rated as a single unit by the Valuations Office Agency (VOA). In contrast, a 14-bed HMO where each room had been adapted to be more self-contained, enjoying separate en-suite facilities, might well have had each of the 14 units rated separately by the VOA.
The government was concerned that landlords might be put off improving their HMO properties (or from further HMO conversions) if more self-contained units meant the VOA rated each one.
So, new council tax rules (Chargeable Dwellings and Liability for Owners (Amendment) (England) Regulations 2023 (SI 2023/1175)) were published in December 2023, that require an HMO (as defined for council tax purposes) always to be assessed as a single dwelling for council tax. The government seems to accept that each room or unit may naturally comprise a dwelling, but council tax legislation will nevertheless treat the HMO as a single dwelling, going forward.
Stamp duty land tax (England only)
Multiple dwellings relief (MDR) was withdrawn for purchases on or after 1 June 2024 (following F(No.2)A 2024, s 7). Given that the marginal rate for SDLT rises as the total purchase consideration passes through price bands, MDR was useful in allowing the rates to be set instead by reference to just the average purchase price per dwelling. So long as an HMO could be treated as several dwellings, MDR could make a significant difference to the total SDLT chargeable on its purchase.
HMRC’s Stamp Duty Land Tax Manual defines a dwelling as taking ‘its everyday meaning: a building, or part of a building, that affords those who use it the facilities required for day-to-day private domestic existence, with a sufficient degree of permanence’ (SDLTM00372).
With this in mind (prior to archiving in February 2024 as MDR was being withdrawn), the guidance also included a useful example of HMRC’s position in relation to ‘ordinary’ residential accommodation that happens to be let to students, falling within the ambit of HMOs:
“…a block of flats… where each floor consists of a lockable entrance door from a communal stairwell and behind it a number of individual study bedrooms, each with en-suite facilities, but only one communal kitchen and living area... MDR may be claimed. For the purposes of MDR, each floor (not each bedroom) within the block will be treated as used, or suitable for use, as a single dwelling. The same treatment would apply if the en-suite facilities were instead single shared bathroom facilities on each floor. [emphasis added]” (SDLTM00377, SDLTM00377A).
This remains relevant because it is likely instructive as to how HMRC will choose to approach the legislation going forward, and notably in relation to FA 2003, s 116(7), which states that the (usually lower) non-residential SDLT rates should be applied when a single transaction involves the purchase of six or more dwellings; if a single room or unit in an HMO amounts to ‘a dwelling’, then numerous HMOs might easily qualify as non-residential acquisitions, and landlords might not miss MDR all that much (this is not to say the rules for non-residential acquisitions have changed like they did for MDR, but landlords’ focus may shift more to the ‘six or more dwellings’ threshold now that MDR has gone).
Alas, it seems HMRC will disagree that each room will amount to a single dwelling (unlike for council tax prior to the recent change in legislation, as noted above), so may only be prepared to consider non-residential rates apply where there are at least six floors, each with the facilities for day-to-day domestic existence such as communal kitchen and bathroom. But I am not convinced that HMRC will always be right in this approach.
Moving with the times?
I think it is fair to say that consistent demand and the scarcity of suitable land means that space for rentals is, and will continue to be, a critical factor. Likewise, HMOs in city areas may have self-contained rooms with their own bathroom facilities but no more than basic kitchenette or cooking facilities.
HMRC’s guidance on ‘How Many Dwellings’ at SDLTM00410 to SDLTM00430 includes an expectation that a dwelling should have a kitchen. And in Dowers v HMRC [2022] UKFTT 170 (TC), the lack of ‘proper kitchen facilities’ weighed heavily in the judge’s finding that a separate annexe did not amount to a separate dwelling for MDR purposes. So far, so reasonable.
However, in Winfield v HMRC [2024] UKFTT 00734 (TC), the judge (referring to the Upper Tribunal case of Fiander and Brower v HMRC [2021] UKUT 0156) affirmed that HMRC’s manuals merely record HMRC’s views rather than inform the proper construction of the statute. And, while that judge endorsed the occupier’s need to sleep and to attend to personal and hygiene needs as basic functions essentially to be catered for in a dwelling, he was notably more circumspect about “the extent to which they necessarily include the need to prepare food”. I think this is fair; of course, one must eat, but we are fast living (or even fast-living?) in a world where the most commonly-used items of kitchen equipment are a smartphone, a credit card and internet access. Looking back, it is not that long ago that outside loos were still ‘a thing’!
Furthermore (and despite its orienting around CGT and main residence relief), while most people may remember Yechiel v HMRC [2018] UKFTT 0683 (TC) as the case where the taxpayer “ate his meals standing up” because of a lack of furniture in the claimed property, I think the case should perhaps be remembered for how badly he was let down by his mother, who apparently fed, laundered and… mothered him so much that he lost the case. To put it another way, the judge could not decide if the taxpayer’s main residence or his parents’ house nearby was the claimed property.
Conclusion
Assuming the landlord can effectively recharge the HMO’s council tax bill to their tenants, then who is billed initially should not be too problematic for the landlord in years to come.
As to whether HMRC is right on what is a dwelling, this is more nuanced – perhaps even more mutable. Simply put, one has to live somewhere. And ordinarily that ‘somewhere’ will naturally amount to one’s abode – one’s dwelling. Over time, shared kitchen and living room facilities may cease to be a key feature in HMOs as landlords seek to maximise rents by focusing on the facilities in each HMO room or unit (assuming such adaptations will still meet or maybe dictate tenants’ lifestyle priorities).
If such shared amenities become less pivotal, HMRC may struggle to argue that each room or unit in an HMO is not a dwelling in its own right (although, developing this line further, the landlord may ultimately find they no longer have an HMO but a more conventional block of flats). Meanwhile, landlords and their advisers who stand to gain from a ‘one room or unit = one dwelling’ approach may want to carefully evaluate HMRC’s stated position (which, after all, is largely opinion rather than fact or law) and whether or how it should be challenged.
