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  • Katherine Bullock

Thinking Big – Offshore Tax 2021 – SDLT and the non-resident surcharge

Impending changes to the SDLT regime mean that for the first time, non-UK-residents must beware of a higher-than-expected burden on purchases of residential UK property as a result of the new non-resident surcharge.

So what is it; what purchases are going to be affected; and when does it apply? The surcharge itself is fairly straightforward in concept: a 2% higher rate of SDLT than would normally be paid by those affected. This includes rental payments on the grant of a new lease. It brings the top rate of SDLT to an eye watering 17%.

"...prior to this surcharge, residency played no role in SDLT..."

Next, what purchases are affected, what purchases are not. The rules are complex and reward careful consideration. In outline, any purchase of residential property in England or Northern Ireland by a non-UK-resident will be potentially affected. Joint purchasers are affected if any one purchaser is non-UK-resident. Furthermore, the surcharge applies to the whole price of the purchase, not just the non-resident’s share of the price. It extends to residential buildings in-progress or non-residential properties which are in the process of being converted to residential use, but the usual exclusions for properties such as schools, purpose-built student housing and care homes apply. Leases worth less than £40,000, and with less than 21 years to run; and reversionary interests subject to a greater than 21-year lease are also excluded.

The new surcharge will apply to purchases that complete on or after 1 April 2021. There are transitional provisions. If completion is on or after 1 April 2021, but substantial performance (perhaps payment changing hands or occupation of the property) happens on or before 11 March 2020, there will be no surcharge. One point to watch is that if the contract is varied or a sub-sale or similar event occurs on or after 11 March 2020, regardless of substantial performance, the new surcharge will apply.

These changes raise an interesting new topic of discussion for SDLT: prior to this surcharge, residency played no role in SDLT. What is more the new legislation uses a different definition to the now familiar statutory residence test used for other taxes and is more complicated to boot. In essence, a non-UK-resident for SDLT purposes may include:

  • An individual who is outside the UK for 183 of the last 365 days;

  • A certain kind of trustee;

  • A non-resident company (although note that this is determined using the normal tax residence rules); or

  • A UK resident close company controlled by non-residents.

However, there are certain persons who are excluded from these rules:

  • UK Real Estate Investment Trusts, since members of a group UK Real Estate Investment Trust and open-ended investment companies count as UK-resident even if they would normally count as non-excluded close companies.

  • UK co-ownership authorised contractual schemes always qualify as UK-resident, regardless of non-resident investors.

  • Transactions involving six or more residential dwellings can be counted as commercial purchases and pay the non-residential SDLT rate without the surcharge.

So who benefits under the new system, and who will bear the burden?

  • Collective enfranchisements will suffer under the new rules, because if any one tenant is non-resident, all tenants must pay the surcharge on their flats regardless of their own residential status.

  • Family-owned companies may be penalised, especially in large, international families: if any one sibling is non-resident the whole company becomes subject to the surcharge on any UK residential property purchases it makes.

  • Partnerships and trusts will have to be especially careful since it only takes one partner or trustee being non-resident to cause the whole trust or partnership to pay the SDLT surcharge as if they were non-resident.

  • However, there will be refunds within two years if the purchaser pays the surcharge but then subsequently becomes UK-resident. The window lasts for two years, starting 364 days before the date of completion, in which the purchaser must spend the requisite 183 out of 365 days in the UK. Provided that they qualify at some point within that window, they will be refunded the surcharge.

  • Also, married couples and civil partners who are living together can qualify as UK-resident and avoid the surcharge provided that at least one of them is UK-resident at the time of the purchase.

  • Oddly enough, the news is also good for “house flippers”! Since they do not bring any purchase through to completion themselves, they avoid SDLT entirely, and sub-sale relief avoids the 2% surcharge if the person completing is UK-resident. This flies somewhat in the face of the stated policy goals of the surcharge but there it is.

These new rules may be expensive in terms of compliance for the foreign investor with complicated residency status. The legislation appears to have a number of blind spots and it remains to be seen whether or not we will see last minute changes in the March Budget. Careful consideration of the SDLT consequences of property transactions after 1 April 2021 could pay even greater dividends but add an additional layer of complexity and enquiry for practitioners who are asked to advise.


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