New Stamp Duty Land Tax surcharge - Q&A for non-resident purchasers

This article summarises the headline points of the Draft Legislation and seeks to explain how the Surcharge would work in practice.

What is the rate of the Surcharge?

In our previous article, we discussed the 2019 consultation on the Surcharge, which proposed to set the rate at 1% (in addition to the relevant rate of SDLT). In March 2020, the Chancellor, Rishi Sunak, announced in his first budget that the Surcharge would instead be doubled to 2% – the Draft Legislation confirms this to be the position. This results in an eye-watering top rate of 17%.

On what transactions will the Surcharge be applicable?

The Surcharge will be chargeable on “non-resident transactions”. Broadly speaking, a transaction will be a “non-resident transaction” if:

1. the purchaser, or one of the purchasers, is non-resident in the UK (although this is subject to the special rule for married couples and civil partners, which is explained below);
2. the main subject matter of the transaction consists of a major interest in one or more dwellings [the major interest is not within the Surcharge if it is (i) a lease that has a term of 21 years or less to run; or (ii) subject to a lease with a remaining term of more than 21 years]; and
3. the chargeable consideration for the transaction is £40,000 or more.

Who will be a non-resident for the purposes of the Surcharge?

As noted in our previous article, the residence test for SDLT purposes is different from the Statutory Residence Test for other UK tax purposes, meaning that it is possible for an individual who is UK tax resident to be non-resident for SDLT purposes.

For the purposes of the Surcharge, an individual will be non-UK resident under the Draft Legislation if they have spent fewer than 183 days in the UK in the 12 months prior to the property purchase. As with the Statutory Residence Test, days are only counted if the individual is present in the UK at the end of the day (i.e. days of departure from the UK will not count).

Helpfully, for buyers who are non-UK resident at the effective date of the transaction, the Draft Legislation confirms that they would have a two year window to claim a refund if they spend at least 183 days in any continuous 365 day period, starting from 364 days before the effective date of the transaction and ending on 365 days after the effective date of the transaction (Relevant Period). This will allow individuals who are moving to the UK to reclaim the extra SDLT even though they may not be UK resident when the purchase takes place.

For married couples and civil partners living together at the effective date of the transaction where one of the spouses is UK resident and the other is non-UK resident for the purposes of the Surcharge, the non-UK resident spouse would be deemed to be UK resident under the Draft Legislation.

With regards to corporate purchasers, the Draft Legislation confirms that the normal tax residence rules apply to determine the residence of a corporate purchaser, so the Surcharge will catch companies and unit trusts established and managed outside the UK. A UK tax-resident company used to acquire UK residential property will also be caught by the Surcharge if the company is controlled by a small number of non-UK resident participators.

How will this affect trustees?

There are complex rules under the Draft Legislation in relation to purchases by trustees. In summary:

• an individual trustee (or trustees) of a discretionary trust who has spent fewer than 183 days in the UK in the 12 months prior to the property purchase will be liable to the Surcharge;
• for corporate trustees of a discretionary trust, the normal rules governing the residence of corporate purchasers (as explained above) would apply and the Surcharge would be payable by a non-UK resident corporate trustee making the acquisition;
• if there is more than one trustee (corporate or individual) making the acquisition, the Surcharge would apply if any of them is non-UK resident;
• for bare trustees acquiring a new lease, the Surcharge would only apply if the beneficiaries of the bare trust have spent fewer than 183 days in the UK in the 12 months prior to the property purchase (and the residence of the bare trustees would be disregarded); and
• for trustees of an interest in possession trust where the beneficiary is entitled to occupy or receive income from the relevant dwelling, the Surcharge would apply if the beneficiary has spent fewer than 183 days in the UK in the 12 months prior to the property purchase. Again, the residence of the trustees would be disregarded.

It should be noted that a refund of the Surcharge may be claimed if beneficiaries of a bare or interest in possession trust subsequently spend 183 days or more in the UK during the Relevant Period.

What counts as a dwelling?

The definition of what counts as a dwelling in the Draft Legislation is broadly similar to the existing definition of a dwelling for SDLT purposes and will capture all private residential properties. Subject to certain exclusions (e.g. buildings used as hotels, hospitals and student accommodation), a building or part of a building would be considered as a dwelling if it is used or suitable for use as a dwelling, or is being constructed or adapted as such.

Is the Surcharge in addition to the higher rates for additional residential properties?

The Surcharge is separate from and additional to the 3% SDLT surcharge on acquisitions of second homes and additional residential properties. So, a top rate of 17% will potentially apply to acquisitions of UK residential property by non-UK resident companies, individuals and trustees (but in the case of individuals and life interest trusts, only where the property being acquired is an additional home).

When will the Surcharge come into force?

The Surcharge will be payable on qualifying non-resident transactions where the effective date of the transaction (in most cases this will be completion) occurs on or after 1 April 2021.

Impact

As discussed in our previous article, many non-UK resident buyers have accepted the rates of SDLT that apply to UK residential property, and may not be put off by a further 2%. However, given the recent SDLT holiday and the imminent introduction of the Surcharge in April 2021, non-UK resident buyers interested in buying UK residential property may want to consider accelerating purchases to avoid the additional tax liability.