The multiple impacts of abolishing Multiple Dwellings Relief (MDR)

JLL’s Paul Winstanley reflects on the impact that the Government’s choice to rid Multiple Dwellings Relief (MDR) will have on the Build to Rent sector.

Paul Winstanley, Head of Living Strategic Advisory at JLL | BTR News
Paul Winstanley, Head of Living Strategic Advisory at JLL.

It was astonishing to see a statement contained within the Chancellor’s budget on the 6 March that an external evaluation found no strong evidence that MDR had supported investment in the private rented sector. From the Government’s perspective, this evidence justified the Chancellor’s decision to abolish MDR from 1 June 2024.

By Paul Winstanley, Head of Residential Strategic Advisory, JLL

Although only a single line of what was a wide-ranging budget speech (in which housing itself barely featured), that such an unequivocal conclusion had been reached is in sharp contrast to the proactivity of our industry in driving large-scale residential investment for the last decade.

The Build to Rent sector has been prolific in terms of driving up standards of our country’s renter experience while simultaneously creating 100,000 new build rental homes available to the UK private rented sector since 2013. But what was the cornerstone policy which provided our industry with the solid legislative foundations to invigorate risk averse institutional investment in residential? No need for answers on a postcard: it was MDR. 

The Coalition Government introduced MDR in 2011 following years of discussions and mathematical analysis from industry, before the Montague Review was then commissioned in 2012. MDR was specifically and purposefully created to level the playing field of large-scale residential investment in stamp duty land tax terms when compared to an individual investor buying a single property to rent out. The calculations underpinning MDR then did exactly what it said on the tin, and subsequently ensured that larger scale investors did not have to pay any more stamp duty than any other individual residential investor would. MDR succeeded in creating a level playing field to encourage large scale new build housing investment – and encourage new build housing it did.

Somewhere along the line there has clearly been some misunderstanding in the Government information chain of what MDR means in practice – as well as the importance of leveraging large-scale investment in this sector. It obviously isn’t the only factor in investment decision making, but has certainly been a vital component which has been relied upon as part of the fundamental rules of the game within the large-scale residential investment framework. MDR has also been a critical component of levelling up regional UK investment in Build to Rent, with the biggest Stamp Duty Land Tax (SDLT) savings being experienced in areas where average capital values were lower. This incentive will now be lost and places more pressure on viability for Build to Rent developments, including those on brownfield land, in the pipeline.

Although MDR does of course have the word ‘relief’ in its title (akin to ‘tax break’ on first reading), MDR doesn’t give any larger-scale investor in the Private Rented Sector (PRS) or Build to Rent a ‘relief’ or tax reduction from that which would be the case for an individual residential buy-to-let investor. We need to make sure everyone is clear that all MDR has meant in practice is that larger-scale investors are no worse off buying residential investments at scale than if they were to acquire units one by one.

According to the latest British Property Federation (BPF) BTR Map, there are now just under 267,000 Build to Rent homes in the development pipeline in the UK. Of these, 100,300 are complete, c.54,000 are under construction and 112,000 are in planning. In England alone, 97,144 are complete, 48,960 are under construction and 97,094 are in planning.

Putting into context these figures, the English Housing Survey for 2022-23 reported that there are 4.595 million homes in England which are privately rented. So, in just over a decade as an investable asset class, Build to Rent will account for over 3% of all English rented homes (when all units currently under construction and planned for have been finished). That represents an incredible pace of growth. With MDR being central to viability and valuation calculations, how can this not have made a difference?

In viability terms, stamp duty costs on the way in, and for onward purchasers on the way out, are a vital component of a valuation. By mandating commercial stamp duty rates for, effectively, all blocks of apartments or collections of houses, taxation costs will rise, and values must have to fall to compensate investors whose return requirements remain unchanged. Less viability means fewer new developments and fewer new developments means less housing supply. This is not a good look for UK plc given our known – and exacerbating – supply and demand imbalance.

And, looking wider, it is not just Build to Rent that could be affected here. Looking at the important growth needed in affordable housing, where grant is not available to For Profit Registered Providers (FPRPs), commercial stamp duty rates will prevail without MDR, increasing stamp duty from 3% for schemes with average values of £250,000 or less, to nearly 5%. Again, less viability, less new affordable housing.

I remain hopeful that there has been a substantial misunderstanding somewhere and the Government will see how our industry has delivered a lot of housing on the original cornerstone of MDR and retrace its steps. As ever, what is needed is a level playing field – and for larger-scale investment, MDR was just that.