Tax: SDLT non-UK resident surcharge
By Donald Drysdale for ICAS
25 February 2019
As the UK government plans to increase SDLT on non-residents acquiring dwellings in England and Northern Ireland, Donald Drysdale studies the consultation document.
The non-UK resident surcharge
In its latest Budget, the UK government announced plans for a 1% stamp duty land tax (SDLT) surcharge on non-UK residents purchasing residential property (i.e. dwellings) in England and Northern Ireland.
The government believes that purchases by non-UK residents are pushing up prices for UK residents. It hopes the surcharge will help control house price inflation, thus helping UK residents onto the housing ladder.
Remedial action was already taken in 2016 when higher rates of SDLT were introduced, charging an extra 3% on acquisitions of second homes and buy-to-let dwellings, but the government feels it has not had the desired effect.
The surcharge now proposed will apply to freehold and leasehold purchases of dwellings by non-UK residents – both individuals and certain non-natural persons. It will add 1% to existing SDLT rates, including those on the rental element of leasehold property.
The 1% surcharge will be added to all rates, including the nil rate, so it will apply to the entire purchase price of properties affected.
The proposed implementation date has not been announced. Perhaps this is because a surcharge on non-UK residents might be challenged as contravening the EU rules on free movement of capital – at least for the time being.
The proposal does not extend to Scotland or Wales, where SDLT does not apply.
Consultation
The government has now launched its consultation on the proposal, inviting input by 6 May. If you wish to share your views on this, please email the ICAS tax team.
The surcharge on individuals
Individuals will be treated as non-UK resident, and thus liable to the surcharge, if they have spent fewer than 183 days in the UK in the 12 months ending with the date of their property purchase. A day spent in the UK is one on which they are anywhere in the UK (including Scotland or Wales) at midnight at the end of that day.
This residence test is meant to be as simple as possible for taxpayers and conveyancing solicitors, since most purchasers won’t have tax advisers. The statutory residence test (SRT) is thought unsuitable, because it applies to fiscal years and uses complex tests which consider closeness of connection to the UK as well as periods of time spent in and out of the UK.
It is hard to object to steps designed to simplify taxes. But the use of a simplified definition of non-resident may result in traps for the unwary. For example, the non-resident surcharge might catch some taxpayers who are UK resident under the SRT.
Companies
The surcharge will apply to acquisitions of dwellings in England and Northern Ireland by non-UK resident companies, and by UK resident close companies controlled by one or more non-UK resident persons. It won’t apply to UK-resident non-close companies.
A company will be regarded as UK-resident if incorporated in the UK or, when it acquires the property, its central management and control is exercised in the UK.
Special rules will apply to determine the residence status of acquirers who are unit trusts or other unincorporated entities treated as companies for SDLT purposes.
Partnerships
For SDLT purposes, partners are treated as joint purchasers of partnership property. As with joint purchasers generally, the surcharge will apply if any one of the partners is non-UK resident as defined by the relevant residence test for individuals or non-natural persons, as applicable.
Special rules apply to partnership transactions involving transfers of property. Where these result in the partnership being treated as the purchaser, the partners will be treated as joint purchasers. Where a partner, former partner or other person is treated as the purchaser, their residence status alone will determine whether the surcharge applies.
Trusts
The pre-existing SDLT rules for acquisitions by trusts depend on the type of trust and the nature of the property-interest being acquired.
Where the purchaser is a bare trustee, the surcharge will apply if the beneficial owner (or one of the beneficial owners) is non-UK resident.
For other trusts, the existing rules on residence will generally apply – subject to a ‘look-through’ test to apply the surcharge where there is a non-UK resident beneficiary entitled to occupy the property or receive the income from the property.
Reliefs and refunds
Where an individual who has paid the surcharge spends 183 days or more in the UK in the 12 months following the transaction date, they will be eligible for a refund of the surcharge. This will typically help immigrants to the UK.
Relief from the surcharge is likely to apply where an individual acquiring a dwelling in England or Northern Ireland is on an overseas posting from the UK as a member of the armed forces, a diplomat or a civil servant.
The surcharge will apply on top of pre-existing SDLT legislation and rates. Where a non-UK resident purchaser would currently be eligible for a specific SDLT relief, in most cases that relief will continue to be available.
Mixed-use transactions and purchases of six or more dwellings are already treated as non-residential, so the surcharge will not apply to them. These let-outs are likely to help large overseas investors avoid the surcharge.
Scotland
In 2016 the Scottish government introduced a 3% ‘additional dwelling supplement’ (ADS), which kept land and buildings transaction tax (LBTT) broadly in line with the higher rates of SDLT.
From 25 January 2019, ADS has been increased from 3% to 4%. In the Scottish Budget in December, this was described as an important element of the Scottish government’s drive to protect opportunities for first-time buyers in Scotland, reinforcing the progressive nature of LBTT.
Wales
In Wales, higher rates of land transaction tax (LTT) already apply to second homes and buy-to-let dwellings, in line with the extra 3% that applies for SDLT.
At the time of writing, the Welsh government has not announced any intention to follow England and Northern Ireland by introducing a new surcharge on non-UK residents purchasing dwellings in Wales, nor to follow Scotland by increasing the surcharge for additional dwellings.
Conclusions
As the consultation document acknowledges, the primary way to stabilise home ownership and improve affordability in the long term is to build more homes in the right places.
Arguably, the new SDLT surcharge is unlikely to have a significant impact in reducing house price inflation or increasing the supply of affordable homes for UK residents.
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