Stamp Duty Land Tax - new surcharge for non-UK residents

In this insight we also cover important updates about the Stamp Duty Land Tax (SDLT) holiday that all buyers need to consider.

SDLT surcharge for non-UK residents

From 1 April 2021, a 2% Stamp Duty Land Tax (SDTL) surcharge will apply to non-UK residents buying residential property in England and Northern Ireland. The Finance Act 2003 will be amended to incorporate the new rules, which will apply to purchases of both freehold properties (excluding those that have leases valid for more than 21 years) and leasehold properties (provided the lease has at least 21 valid years and the property is not under a long-term lease). This new charge will also increase how much SDLT is paid on rents once a new lease is granted.

The surcharge will apply across all rates of SDLT. It’s separate from the 3% SDLT surcharge that already applies to second home and additional residential property purchases. As a result, the top rate of SDLT will increase to a maximum of 17% for some non-UK resident companies, individuals and trustees.

These measures have been introduced to help control house price inflation by making residential property purchases less attractive to non-UK residents. However, co-habiting married couples and civil partnerships who live together,made up of at least one UK resident will both be treated as resident in the UK as long as they own the property in question jointly.

Another important point to consider is that the SDLT test for individual non-residence is different from the UK Statutory Residence Test (SRT). If you’ve been in the UK for 183 or more days, the SRT considers you a UK resident. By contrast, the new SLDT test introduces a 2-year window in which the 183 day counting test must apply. It asks that an individual needs to have been present in the UK for at least 183 days during any continuous period that:

• begins with the day 364 days before the effective date i.e. the date of completion; and
• ends with the day 365 days after the effective date.

The surcharge will not apply if the individual becomes a UK resident in the year following the date of completion. If this is the case, the 2% surcharge must be paid and a refund can be claimed once the individual becomes a UK resident.

In practice, having a separate test could cause confusion over the rules and introduce new stumbling blocks into an already complex tax system.

Companies

Non-UK resident companies will also have to pay the 2% surcharge if on the date of completion:

• the company is not UK resident (for example, is not incorporated in the UK and its central management and control takes place outside of the UK; or
• the company pays UK corporation tax, but is a close, non-excluded company and is controlled by one or more individuals or entities who are non-UK resident.

For example, the 2% surcharge will apply if a residential property is purchased by a UK company that’s wholly owned by a non-UK resident individual.

Trusts

The surcharge may also apply to trusts. Here are a few important points to consider:

• If more than one trustee (either corporate or individual) is making the purchase, the surcharge will apply if any one of them is non-UK resident.
• If a trustee (or trustees) of a discretionary trust has spent fewer than 183 days in the UK in the 12 months prior to the property purchase, the surcharge will apply.
• If a bare trust purchaser (or purchasers) acquires a new lease while acting in their capacity as a trustee of a bare trust, the beneficiary’s residence position will determine the SDLT surcharge requirements.
• For trustees of an interest in possession trust, where the life tenant is entitled to occupy or receive income from the property, the beneficiary’s residence position will determine whether the surcharge applies.

Overview

The new rules further erode the tax efficiency of buying UK residential property for non-UK residents. They follow previous changes to legislation which target company ownership, aiming to make sure capital gains tax and inheritance tax is paid by non-UK resident individuals.

These changes could open up the market for UK residents looking to purchase property in London or elsewhere. The new surcharge, however, also has potential disadvantages. It could discourage foreign investors from investing in the UK and have a detrimental impact on the UK property market – particularly in international cities like London. This is largely because non-UK resident buyer are usually subject to an extra 3% SDLT charge for second property purchases.

Currently, it’s not clear if the changes will have a tangible impact on non-UK residents’ buying behaviour and we are uncertain if tax policy is, or would be, effective in reducing non-UK residents buying UK property and can see the argument from both sides. The real concern is that they may make the already complex UK tax system even harder to navigate.

Stamp duty land tax holiday

There is another important update relating to the SDLT holiday, which was introduced last year in response to a sharp decline in property transactions due to the pandemic. This measure aimed to encourage and support house buyers to carry on with both ongoing and new transactions despite economic uncertainty.

The ‘holiday’ rules stated that SDLT will only apply to residential properties purchased between 8 July 2020 and 31 March 2021, regardless of whether it’s your main residence or an investment, that were purchased for more than £500,000. This threshold for SDLT has risen from £125,000 and the new rules apply regardless of whether you’re a first-time buyer. The scheme also applies to companies that purchase residential property.

Here is a summary of how the SDLT holiday rates work:

The initial proposals suggested that from 1 April 2021, SDLT would revert back to the rates that were in place before 8 July 2020. But as the deadline approaches, there has been some debate on whether the holiday should be extended. The Government issued a statement advising the scheme would not be extended beyond 31 March 2021. In response, an online parliamentary petition garnered 150,000+ signatures requesting for the possible extension of the SDLT holiday to be reviewed.

Following the Spring Budget announcement on 3 March, Rishi Sunak confirmed that the SDLT holiday will be extended for a further 3 months until the end of June. This decision was taken to prevent the collapse of deals on the brink of completion and to mitigate the impact of the most recent lockdown.

From 1 July, the SDLT threshold will be reduced in stages to make the transition back to pre-pandemic rates smoother. As a result, the threshold will be reduced to £250,000 between July 2021 and the end of September 2021, before returning to £125,000 from 1 October 2021.

If you’re looking for guidance about anything SDLT related, don’t hesitate to get in touch. Speak to Rebecca Dorrington up-to-date advice.