SDLT: Surcharge for non-residents proposed
From 1 April 2021 the government is planning to impose a 2% SDLT surcharge on the purchase of UK residential properties by non-resident individuals, trusts, companies, and partnerships.
HMRC has published draft legislation for the Stamp Duty Land Tax (SDLT) surcharge to apply from 1 April 2021. These measures were announced at Budget 2018 and were the subject of a consultation that ran from 11 February 2019 to 6 May 2019.
Purchasers who are defined as non-resident will be required to pay the 2% surcharge on top of the existing SDLT applicable rates for UK residential properties.
What is a residential property?
For the 2% SDLT surcharge, a residential dwelling includes a building that is used, or is suitable for use as a dwelling, or is in the process of being constructed or adapted for such use. Land, buildings or other structures enjoyed with a dwelling will also form part of the definition of a dwelling and so the definition will need to be closely observed. In addition, a building or part of a building listed under s 116 (2) or (3) FA 2003 will not be treated as a dwelling for the purpose of this surcharge.
The following will not trigger the 2% surcharge:
- A lease with less than 21 years to run
- A lease which is subject to a sub-lease which has 21 years or less to run
- Where the property purchase price is less than £40,000
Does the 2% surcharge apply?
The purchaser (or any of the joint purchasers) will need to establish whether they are resident in the UK in the year to the date of purchase, and the year following the purchase of the property. Note “a year” for this purpose is 365 days, not a tax year.
The definition of UK residence hangs on the number of days spent in the UK (which includes Scotland, Wales, England and Northern Ireland). Unlike other residence tests, the draft legislation does not consider any exceptional circumstances.
The surcharge will not apply where an individual is not resident in the UK because they are working as an employee overseas for the Crown. In this situation, the individual will be treated as present in the UK at the end of each day in employment overseas for the Crown.
The draft legislation provides different residence tests for different types of purchasers (individuals, companies, trusts, partnerships) to determine whether the purchaser is regarded as non-resident in respect of the timing of the transaction.
An individual will not be a UK resident for the purposes of this surcharge if in the year ending with the purchase date, the individual has spent fewer than 183 days in the UK and fewer than 183 days in the UK in the year immediately after the purchase. See below where one of the joint purchasers is the individual’s spouse or civil partner. See Paragraph 4 of the draft legislation.
A day is counted where an individual is treated as present in the UK at the end of the day.
To determine whether any of the following purchasers are non-resident refer to paragraph 5 of new Schedule 9A:
- Company (resident conditions set out in Part 4 of Schedule 9A). The rules are complex and have a number of exceptions.
- trustee of a unit trust scheme,
- a trust which under the terms of the settlement the beneficiary is not entitled to occupy the dwelling or dwellings for life or income earned from the dwelling or dwellings.
Then for the purpose of the 2% surcharge an individual as would be non-UK resident if they have spent less than 183 days in the year before the purchase date.
Trusts can also be liable to the 2% surcharge which will be determined by either reviewing the residence of the trustees or the beneficiaries. The trustee’s residence position will apply to all trusts where there is no life interest.
Spouse or civil partner
Where a UK residential property is purchased jointly with a spouse or civil partner (as a couple or with someone else), the 2% surcharge will not apply where one of the spouse or civil partners is resident in the UK and the couple are not separated. In this case, the non-resident spouse or civil partner will also be treated as a UK resident.
The surcharge will also not apply where one of the spouse or civil partners is not resident in the UK as they are working as an employee overseas for The Crown. In this situation, the non-resident spouse or civil partner will be treated as resident in the UK.
Becoming UK resident
In the case of an individual purchaser (or any of the joint purchasers), the residence test is applied by looking back one year before the purchase and one year following the purchase. At the date of purchase, if the purchaser (or any of the joint purchasers) are non-UK resident, the 2% SDLT surcharge would need to be paid, even if the intention is to become a UK resident immediately following the purchase.
A refund of the SDLT surcharge can be claimed within two years of the purchase date if the individual spends at least 183 days in the UK, in the year immediately after the purchase. This refund will be achieved by amending the land transaction return.
The draft legislation increases the administrative burden as an understanding of the residence position of the purchaser will be required for all purchases of residential property.
In particular, where a company purchases a UK residential property, it will be necessary to understand the ownership structure of the company as these rules can apply to a UK resident company.
Finally, there are transitional rules which can apply depending on when the contract is exchanged and substantially performed.
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Reshma Johar is a Tax Consultant at Carter Backer Winter. She is both ATT and CTA qualified with experience gained from practice and her involvement with the CIOT. She has a particular interest in OMB and private client taxes.