The government recently published a consultation proposing the introduction of a 1% stamp duty land tax (SDLT) surcharge on non-residents acquiring residential property in England and Northern Ireland.
The surcharge was originally announced by Prime Minister Theresa May at the Conservative Party conference in September 2018 and the government's intention to consult on a proposal for a 1% surcharge was confirmed at the UK budget on 29 October 2018.
In broad terms, the consultation's proposals are as follows:
- No date is given for the introduction of the surcharge. Instead, the consultation states that it will be introduced "in a future Finance Bill".
- The principal proposal is for a 1% SDLT surcharge (ie, a zero-rate band might increase to a 1% band) to apply to specified non-UK resident persons that purchase residential property in England and Northern Ireland. Properties in Scotland and Wales are not within the scope of the consultation because SDLT has been replaced in both jurisdictions. Land and buildings transaction tax now applies to property acquisitions in Scotland and land transaction tax in Wales.
- It is proposed that where the surcharge applies, it will be payable in addition to any other SDLT charge calculated under applicable rules, including SDLT payable on rent which is a significant increase. Thus, a non-resident company paying higher rate SDLT at a flat rate of 15% on a property worth more than £500,000 will also pay the surcharge of 1%, resulting in a total SDLT charge of 16%.
- The surcharge will apply to non-resident individuals, companies, partnerships and trusts. It will also apply to unit trusts and co-ownership authorised contractual schemes.
- UK resident close companies will also be within the scope of the surcharge if they are under the direct or indirect control of one or more non-UK resident persons.
- Detailed rules are proposed in the consultation to determine the residence status of persons who are potentially within the scope of the surcharge.
Proposed treatment of individuals and other specified entities
Individuals Individuals will be treated as non-UK residents for the purposes of the surcharge if they spend fewer than 183 days in the United Kingdom in the 12-month period ending with the effective date of the transaction. For this purpose, an individual will be regarded as having spent a day in the United Kingdom if they are there at the end of the day (midnight). Days spent in any part of the United Kingdom will count towards residence, not just those in England and Northern Ireland.
Companies Companies will be resident in the United Kingdom if they are incorporated in the United Kingdom or their central management and control was exercised in the United Kingdom when they acquired residential property.
Partnerships Partnerships will be liable for the surcharge if at least one partner is non-UK resident under the applicable test.
Bare trusts Bare trusts (not involving the grant of a lease) will be liable to the surcharge if the beneficiary is non-UK resident under the applicable test.
Trusts Trusts will be caught if any individual beneficiary with a life interest is non-UK resident or, in the case of discretionary trusts, if the trust is non-UK resident based on the existing tests of residence for income tax and capital gains tax. For this purpose, the residence of individual trustees will be based on the statutory residence test for determining the residence status of an individual for general tax purposes. The statutory residence test rules will be modified for this purpose to consider the position over a 12-month period ending with the date of the transaction, rather than a tax year.
Joint purchasers Joint purchasers of property will be subject to the surcharge if any one of them is non-UK resident. This rule will also apply to married couples and civil partners where they jointly buy a property. However, if only the UK resident spouse or civil partner buys the property the surcharge will not apply.
Collective enfranchisement Tenants in a collective enfranchisement will also be treated as joint purchasers of the freehold where the purchaser is acting as their nominee. If one of the tenants is non-UK resident, it will taint the whole enfranchisement.
Linked transactions It is proposed that a non-UK resident purchaser in one linked transaction would taint all linked transactions.
Entities treated as companies Other rules are proposed for entities treated as companies for SDLT purposes (eg, unit trusts and co-ownership authorised contractual schemes) as they are not incorporated.
Reliefs There are few reliefs from the surcharge proposed, other than group relief and charities relief, where relevant. However, the government is considering relief for non-UK resident individuals who are Crown employees subject to UK income tax at the time of the transaction.
Refunds Refunds will be available in certain circumstances where purchasers who are individuals spend 183 days or more in the United Kingdom in the 12 months following a transaction in respect of which they were originally subject to the surcharge.
The consultation asks a series of questions about the design of the surcharge and the tests for determining non-residence, as well as the proposals for reliefs and refunds. These questions are broad in scope and the consultation asks for views from anyone likely to be affected by the proposed surcharge, professional or otherwise regardless of where they are based.
Unfortunately, but unsurprisingly, the consultation stops short of asking for views on the appropriateness or otherwise of introducing a surcharge on non-resident investors in residential property in England and Northern Ireland, particularly in the current political and economic climate. This omission is unlikely to prevent respondents airing their views on this issue.
In addition to comment on the broad principle of the charge, such views are likely to focus on the level of complexity in some areas of the proposals, while other aspects favour supposed simplicity over fairness.
For example, this is particularly the case in relation to the residence test for individuals and the application of the rules to partners and joint purchasers, collective enfranchisement and linked transactions. It will be interesting to see how the consultation and any subsequent legislative processes progress.
For further information on this topic please contact Elizabeth Small, Daniel Ugur or Chris Meyers at Forsters LLP by telephone (+44 20 7863 833) or email ([email protected], [email protected] or [email protected]). The Forsters LLP website can be accessed at www.forsters.co.uk.
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