Non-resident buyers face SDLT rises in April
While the focus of many UK residential property purchasers has been the Stamp Duty Land Tax rate “holiday” over the course of the pandemic, focus is now shifting to the rate increase that will soon apply for non-resident buyers. The changes were proposed some time ago but will finally take effect from 1 April 2021, following a period of consultation.
The rate hike represents a further UK government policy to put pressure on the influence of overseas purchasers of UK property, in order to stem the rise in UK residential property prices. What impact the changes will have on demand for UK residential property by non-resident investors remains to be seen.
At its height, the surcharge will create a top rate of SDLT of 17%. The new rate will apply to both freehold and certain leasehold property interests, for property that is considered a dwelling (or suitable to be used as such). The 2% surcharge will apply in all instances, for example on top of the additional property rate of 3%.
New residency tests for SDLT may differ from direct tax rules
The new SDLT surcharge creates an interesting situation as regards the definition of residence and we would recommend prospective purchasers to take professional advice at an early stage of the transaction. Indeed conveyancers will find themselves in a position where they are required to state the residence status of the individuals purchasing the property.
The usual test for determining UK residence will not apply, thereby adding complexity to the UK tax issues that a prospective purchaser must consider. We await HMRC’s detailed guidance on the workings of the residence rules. It is possible that an individual who finds themselves UK resident for direct taxes, will be seen to be non-resident for SDLT and subject to the surcharge. Broadly speaking, the purchaser is deemed to be UK resident if they are present in the UK for at least 183 days in a one year “relevant period”. The relevant period begins one year before the property completion date and comes to an end one year after the completion date. The usual midnight rule applies in measuring the number of days of presence in the UK.
SDLT surcharge refunds
As all the relevant information may not be known at the time of completion (and at the date when the SDLT falls due, 30 days later) a refund may be claimed where the surcharge is paid but is not due, with a two year window in place for doing so.
There are additional provisions for property purchased jointly, and for those instances where the property is purchased by trustees. For instance, there is the possibility that the surcharge will not apply to the purchase where one of the spouses is deemed to be UK resident.
Rules for Trusts and Corporates
The rules for trust purchases are complex and it will be necessary to review the trust arrangement to ascertain the rights due to the beneficiaries. Where assets are held in trust on a discretionary basis then the surcharge will apply where at least one of the trustees is non-resident, although rules for corporates (see below) will apply if the trustees are a corporate body. In contrast, where property is held on bare trust, then the trust is disregarded and the status of the beneficiary is considered. The residence of the trustees may also be disregarded where the trust holds the property on life interest for a beneficiary – and thus the beneficiary’s residence is key.
For corporates, the rules remain in line with direct taxes. A company that is incorporated, or managed and controlled, outside the UK will be subject to the additional surcharge; as will UK resident, closely-held companies that are owned by non-resident individuals.
With the rate applying to completion dates that fall on 1 April 2021 onwards, it will be interesting to see the impact of the surcharge over the next few months when coupled with the direction of travel in UK house prices as the long awaited economic recovery begins. Now that it has been confirmed that the SDLT holiday will be extended to 30 June 2021 (and the return of the old thresholds will be staggered until 30 September 2021) this may present a welcome opportunity to limit the effect of the surcharge for impacted buyers.
This article is written by our Associate Tax Director, Helen Cuthbert.
For advice on property transactions please contact Helen:-