A new surcharge for stamp duty land tax (SDLT) will be introduced on 1 April 2021 for buyers of residential property in England and Northern Ireland who are not UK residents. It will add 2 per cent of tax to all rates of SDLT payable on the purchase of residential property.
Foreign buyers are reportedly a cause of property price inflation, particularly in London. The stated aim of the surcharge is to improve the affordability of housing for people living in the UK. The Government has pledged to spend the extra tax yield on alleviating homelessness.
This briefing is a general guide to the surcharge based on the draft legislation published on 21 July 2020. There are areas of complexity in the new law and it may yet be subject to change, prior to implementation. Buyers are recommended to seek specialist SDLT advice before committing to a purchase.
What type of purchases does the surcharge apply to?
The surcharge will apply to a purchase of residential property (freehold or leasehold) situated in England or Northern Ireland, where the purchaser or one of the purchasers is not UK resident.
For joint purchases, with the exception of Crown employees and married or civil partner couples (see below), if any one purchaser is a non-resident the surcharge will apply. The surcharge will apply to the whole purchase price, not merely the proportion attributable to the non-resident's share.
The surcharge extends to buildings which are in the process of being constructed or adapted for use as a residential home and to off-plan purchases.
What is excluded from the surcharge?
Certain types of collective residential property such as schools, purpose-built student accommodation and care homes are excluded from the charge.
In addition, the following transactions are excluded:
- purchases for less than £40,000
- acquisitions of leases with less than 21 years to run; and
- reversionary interests subject to a lease with more than 21 years to run.
When will the surcharge take effect?
In general, the surcharge will apply to purchases which complete on or after 1 April 2021.
However, for existing purchases, there will be no surcharge if on or before 11 March 2020:
- the contract was “substantially performed” (see definition below) but completes on or after 1 April 2021; or
- contracts were exchanged but the transaction completes or is substantially performed on or after 1 April 2021; unless on or after 11 March 2020:
- the contract is varied, or rights are assigned; or
- the property is transferred because an option, right of pre-emption or similar right is exercised; or
- there is an assignment, sub-sale or other transaction which results in another person acquiring the property.
A contract is substantially performed when a key part of the purchase takes place before the date of completion, for example the payment of most of the purchase price, or the buyer taking up occupation of the property. Such events cause the SDLT to become due at that earlier time.
How is the surcharge calculated?
The surcharge operates as an extra 2 per cent of tax added to all residential rates of SDLT. This includes:
- the ordinary residential rates starting at 0 per cent;
- the higher residential rates for additional properties starting at 3 per cent; and
- the flat 15 per cent rate applicable to certain corporate purchases of homes with a value of more than £500,000.
For a lease grant, the surcharge will apply to the relevant SDLT rates charged on the net present value of the rent.
How is residency determined?
Each purchaser type has a set of specific conditions which will determine whether they are UK resident or non-resident for the purposes of the surcharge.
Residence of individuals – test for a purchase by individual(s) only
The residence of an individual is not decided by reference to the normal UK Statutory Residence Test used for income and capital gain tax purposes.
With respect to the surcharge, an individual will be treated as UK resident if they have been in the UK for at least 183 days in any continuous period of 365 days falling within the two-year window beginning 364 days before the purchase and ending 365 days after it. The day count will include any day when the individual is in the UK at midnight.
If the purchase is made jointly with a spouse or civil partner and the couple is living together, only one of the purchasers needs to be a UK resident for the charge not to apply. A couple will be “living together” unless they have either formally, or in practice, separated on a permanent basis.
There is also a specific exemption from the surcharge for employees of the Crown (i.e. public employees working abroad) and their cohabiting spouses if either of the couple makes the purchase.
If, at the point of purchase, an individual is non-resident (i.e. the 183-day test has not yet been met) the surcharge must be paid. If the individual then subsequently satisfies the test to become UK resident, they can amend their tax return to reclaim the surcharge. They must make the claim within two years of the of the purchase.
Residence of individuals – alternative test
An alternative residence test for individuals is used where the purchaser, or one of the purchasers, is:
- a company
- a trustee of a unit trust
- an individual who is a partner who is entering into the purchase on behalf of the partnership, or
- an individual acting as the trustee of a settlement under which no beneficiary is entitled to occupy the property for life or to income earned in respect of the property.
This alternative residence test is backward looking only. An individual will only be treated as UK resident if they have been in the UK for at least 183 days during the 364 days immediately before the purchase.
Residence of companies
In general, a company which is subject to UK corporation tax will be UK resident and will not be subject to the surcharge. However, certain companies which are liable to UK corporation tax but controlled by non-resident individuals or entities are classified as non-resident.
Specifically, there are two types of company that will be deemed non-UK resident and therefore liable to pay the surcharge. These are:
- a company incorporated outside the UK with its centre of management and control outside the UK. This also includes a company that is treated as non-UK resident under the terms of a Double Taxation Treaty.
The concept of central management and control must be considered carefully. It is based on case law which evolves continually. Indicators for determining the location of management and control are discussed in our briefing on this topic here.
- a company which is liable to account for UK corporation tax but is a close company controlled by non-UK residents.
A close company is either:
- a company controlled by five or fewer participators or by participators who are also directors; or
- a company with five or fewer participators (or directors who are participators) who possess or are entitled to acquire a greater part of the company's assets in a distribution on a winding up, disregarding any loan creditor rights.
A “participator” is a person with a share or interest in the capital or income of the company.
A close company will be controlled by non-UK residents if any number of non-resident participators have (or would be entitled to acquire) a greater part of the company's assets in a distribution on a winding up, disregarding any loan creditor rights.
When assessing whether the company is a close company, reference must be made to the detailed close company rules. These rules have been adapted for the purpose of the non-residents surcharge. Some of the adaptions are explained below.
UK real estate investment trusts (REITs), members of a group UK REIT and open-ended investment companies (OEICs) resident for corporation tax purposes are automatically treated as UK resident, even if they would otherwise qualify as non-resident under the adapted close company test.
Adaptions to the close company rules
Under the close company rules, a participator can have other people’s rights attributed to them which can have the effect of amplifying their level of control. When applying the non-UK control test for the purposes of the surcharge, in certain circumstances these attribution rules are altered so that:
- the rights of one partner of a partnership are not attributed to another partner;
- the rights of a UK-resident spouse or civil partner are not attributed to their non-resident spouse or civil partner if they are living together, (although the rights of other close relatives e.g. siblings continue to be attributed); and
- the rights of a person with a de minimis interest (broadly, less than 5 per cent) are not attributed to their associates.
A further adaption to the close company rules has the effect of including the UK subsidiary of a non-close foreign company. This is because the exclusion (from the close company definition) for companies which are only close because one participator is a non-close company is removed from the surcharge provisions.
Purchase by a trust
If a trustee holds on bare trust, for example as a nominee for the purchaser(s), the surcharge will apply if the beneficiary or one of the beneficiaries is non-resident under the test for individuals only. This will include where a new lease is granted to a bare trustee.
Where the trust is a settlement (in other words, not a bare trust), it is first necessary to determine whether under the terms of the trust a beneficiary is entitled to occupy the property for life, or to receive income from it. If this is the case, then there will be no surcharge provided the beneficiary meets the UK residency test for individuals only.
If the beneficiary has no such rights then it will be the residency of the trustees (in accordance with the alternative residency test for individuals or the test for companies) that will determine whether the surcharge applies.
Purchase by a partnership
The residency of a partnership will be determined by the residence of each of its members whether individuals (as per the alternative test for individuals) or corporates (as per the test for companies). If one partner is non-resident, the purchase by the partnership will be subject to the surcharge.
Purchase by a fund
The residency of a fund will be determined by reference to the residence of the individuals, trustees or entities which constitute the fund.
Co-authorised contractual schemes authorised by the Financial Conduct Authority are treated as UK-resident, but European Economic Area equivalent schemes are not. See also special rules for REITs and OIECs mentioned above.
A unit trust is not treated as a company for the purposes of the surcharge.
How does the surcharge interact with SDLT reliefs?
Where the commercial rates of SDLT rates apply as a result of six or more separate residential properties being acquired in one transaction, the surcharge will not apply.
However, where Multiple Dwellings Relief applies, the surcharge will increase the relevant residential rates of SDLT which are applied to the average purchase price of the properties and this relief is now likely to be less useful to overseas corporates.
Company group relief, charities relief and first-time buyers relief will continue to apply where relevant.
What impact will the surcharge have?
In addition to the extra tax, the surcharge will increase the complexity of purchases of English (and Northern Irish) residential property where there may be a foreign connection. With complexity comes more cost and more opportunities for errors to be made.
Furthermore, some types of purchase will be disproportionately affected by the surcharge. Some examples of these are:
- collective enfranchisements
Where the tenants of a block of flats come together to jointly purchase the freehold of their building, they often do so using a company which acts as their nominee. In such a case, should a single tenant be non-UK resident, the whole enfranchisement purchase will be subject to the surcharge impacting all of the participating tenants.
- family owned companies
Where a close UK company is owned by a number of siblings in equal shares, if one of them is resident abroad, the UK siblings rights can be attributed to one living abroad with the result that the company will be deemed to be controlled by non-UK residents and therefore subject to the surcharge.
- partnerships and trusts
The non-UK residence of one partner or trustee will mean the surcharge applies to the purchases by the partnership or trust with no apportionment or de minimis.
- UK investment funds established as limited partnerships
The general partner (GP) of a limited partnership will always be a non-resident where the GP is either a non-UK company or a close company that is deemed non-resident because of the control that the GP has over the fund vehicle. This is regardless of the composition of the investor base (UK vs non-UK) and whether the GP has any economic entitlement as regards the underlying vehicle.
Professional bodies have made representations to HM Revenue & Customs regarding these (and other) adverse consequences of the surcharge rules. It has also been recommended that the complex rules to determine corporate residence be replaced with a much simpler foreign beneficial ownership test which could have reference to the UK’s beneficial ownership register. It is possible that the government will act on these representations and make changes to the surcharge rules prior to April 2021.
If you require further information about anything covered in this blog, please contact Charlotte Black, or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, October 2020