The UK government has generated another block to stopping the property market from making a recovery.

The abolition of Multiple Dwellings Relief (MDR) which came into effect over the weekend aims to raise £385 million annually for the Treasury. However, further significant financial challenges now face UK property buyers particularly those purchasing multiple dwellings in a single transaction, such as houses with flats or mixed-use properties. This change means buyers will incur higher stamp duty costs, calculated on the combined property value rather than the average, adding thousands to their expenses. This decision has been criticised for potentially devaluing properties and affecting the viability of homes with annexes, which will now attract double the stamp duty. Furthermore, property investors now have to purchase six or more units in order to reap the benefits of SDLT relief.

The decision by the Chancellor to increase the tax that developers are forced to pay from 1-2% to 5% will have a seismic shift across Britain’s construction sector, leading to project abandonment and further increases to asking prices as supply continues to lag behind an overwhelming demand for affordable housing.

Currently, a property buyer purchasing three apartments from a developer at £350,000 each, would have to pay £46,500. However, with the abolishment on MDR, that same investor will have to pay £77,750. Property buyers in the UK who are eager to buy six units and pay the 5% rate of SDLT, will in effect have to pay £47,250 each which is less than the £77,750 they were being asked for, only slightly more than the £46,500 that they would have paid for under MDR. In reality, had the price been £400,000 each, the six units would have been cheaper than MDR.

The chart below shows the benefit that can be obtained by applying the rule of six on multiple purchases, as well as how the effect increases dramatically as the average price per dwelling increases.

As a result of this, purchasers of multiple units will either have to increase their minimum purchase quantity to six or, conceivably team up with other multiple purchasers into buying groups. This will enable them to buy six units collectively and to ensure that they receive the benefits of the non-residential rate and pay no surcharges whatsoever. By abolishing MDR, the Chancellor has therefore restored a historical injustice in Stamp Duty Land Tax. The UK’s Treasury and HMRC may well not see an increase in tax take but in fact a decrease, once these perfectly valid commercial arrangements become mainstream.

Multiple Dwellings Relief was first implemented as means to incentivise bulk purchases and provided developers with a suitable avenue for delivering low-cost homes. At a time when demand for affordable housing has skyrocketed, the government should look to create fresh incentives for developers, instead of abolishing old ones.

The decision by the Chancellor to increase the tax that developers are forced to pay from 1-2% to 5% will have a seismic shift across Britain’s construction sector, leading to project abandonment and further increases to asking prices as supply continues to lag behind an overwhelming demand for affordable housing. Don’t be fooled, this is a stealth tax increase with a paper-thin justification laced over the top of it.

Jeremy Hunt could have used this opportunity to reform the private rental sector, measures including the abolition of the second home surcharge from rental sector investors and reinstating full relief on mortgage interest payments would have both reduced the costs of purchase, whilst also allowing landlords to freeze, or potentially cut, rents.