1% SDLT surcharge on acquisitions of UK residential property by non-residents

The Government has released a consultation document on the design of the 1% SDLT surcharge on purchases of UK residential property by non-residents first announced in the October 2018 Budget. The consultation document, “Stamp Duty Land Tax: non-UK resident surcharge consultation”, sets out the main design features of the proposed surcharge and is open for responses until 06 May 2019.

Although this is an early stage consultation and no timetable has been set out for the introduction of the surcharge, it is clearly a consultation aimed at the design and detail of the charge rather than whether or not to introduce the surcharge.

Background

The Chancellor announced in the October 2018 Budget that he would consult on the introduction of a 1% SDLT surcharge on non-UK residents purchasing residential property in England and Northern Ireland. The Government is concerned that purchases of property by non-UK residents pushes up house prices for UK residents and is a contributing factor to the difficulty of many people getting onto the housing ladder. The surcharge is intended to work alongside existing initiatives, such as an increase in house building, higher SDLT rates for additional dwellings and the introduction of a first time buyers’ SDLT relief.

The surcharge will apply on top of existing SDLT rates for residential property and rely on the existing SDLT rules. As such, the highest rate of SDLT for certain non-UK corporates acquiring UK residential property will rise to 16% under these proposals.

Residential property

Given the policy aim to apply the surcharge on top of existing SDLT legislation, it would seem that the Government will adopt the existing rules around the identification of a “dwelling” or “residential property”. In particular, a mixed use transaction (involving residential and non-residential property) will be treated as non-residential and therefore outside the scope of the charge. Equally, purchases of six or more separate dwellings will be treated as a non-residential transaction and outside the scope of the surcharge.

Persons subject to the surcharge

The surcharge is intended to apply to non-UK residents, be they individuals, companies or other bodies. The SDLT legislation currently has no concept of non-UK residence and so new rules will be needed to deal with these conditions.

For individuals, the Government intends to apply a new, simpler concept of residence, rather than rely on the existing statutory residence test (SRT). The Government proposes to treat an individual as non-UK resident where they spent fewer than 183 days in the UK in the 12 months ending with the date of the relevant transaction. A person will be deemed to be in the UK on a day if they are in the UK at midnight. Even though the surcharge will only apply to England and Northern Ireland, it will be days spent in the UK as a whole that will be relevant.

Where a person who is non-UK resident pays the surcharge, there will be a mechanism to recover the surcharge where they subsequently spend 183 days or more in the UK in the 12 months following the date of the purchase. In these circumstances, it is proposed that the current time limit of 12 months for amending an SDLT return will be extended by a further 12 months for surcharge reclaims.

Where there are joint purchasers, the surcharge will apply where any one of those purchasers are non-UK resident.

In the case of alternative finance arrangements, the residency status of the person obtaining the finance will determine the application of the surcharge rather than that of the financial institution providing the finance.

In the case of companies, the Government proposes to base the residence test on the existing Corporation Tax Act 2009 provisions, meaning that a company will be UK resident if either incorporated in the UK or the central management and control of the company is in the UK. However, to prevent non-UK residents using a UK company to avoid the imposition of the surcharge, the surcharge will also apply where UK residential property is purchased by a UK resident company which is a “close company” under the control of one or more non-UK resident (direct or indirect) participators.

For unit trusts treated as companies for SDLT purposes (as Jersey property unit trusts would typically be), residence will be based on the residence principles applicable to trusts. For contractual schemes, the scheme will be treated as non-UK resident if it is constituted by arrangements that create rights in the nature of co-ownership where the arrangements take effect as a result of the law of a territory outside the UK.

Partnerships will be subject to the surcharge where any one of the partners is non-UK resident. Where the purchase is by a bare trustee, the surcharge will apply where the beneficial owner (or one of the beneficial owners) is non-UK resident. For other trusts, existing rules which determine the residency status of the trust will generally apply, subject to certain amendments to apply a “look through” test which will result in the surcharge applying where there is a non-UK resident beneficiary entitled to occupy the property or receive the income from the property.

SDLT reliefs etc

Existing SDLT reliefs will, in general, continue to be available. Purchases by a non-UK resident first time buyer will attract a 1% rate on the consideration up to £300,000, for example.

In relation to the application of the “linked transaction” rules (under which the SDLT chargeable on transactions forming part of a single scheme is based on the total consideration), the Government proposes to treat the purchasers as joint purchasers where they are not the same (but connected) such that the surcharge will apply if any one of them is non-UK resident.

The consultation also contains details of the interaction of the surcharge with seeding relief, partial charities relief, exercise of collective rights by tenants and multiple dwellings relief.

Comment

It is perhaps surprising that the Government is pushing ahead with this consultation at a time when current uncertainties are adversely affecting investment in the UK. However, UK residential property is seen by the Government as a special case and the current proposal for an SDLT surcharge is just the latest in a long line of tax changes (both SDLT and direct tax) affecting non-resident purchasers or purchases by entities other than individuals.

In addition, there must be concerns that a surcharge that applies only to non-residents would be contrary to the free movement of capital if applied to EU citizens. It may be that the reason for the lack of any definite date of implementation may be related to this point, which would make it unenforceable in relation to EU residents - for the time being at least.

The fact that the surcharge will not apply to acquisitions of mixed use (commercial/residential) properties or properties comprising at least six residential units should mean that the surcharge will often not be a concern in practice for larger investors in UK residential property.

The consultation is open for responses until 06 May 2019 and these should be sent to: Non-resident SDLT surcharge consultation.