In July 2020 the UK government published draft legislation that will see a 2% Stamp Duty Land Tax surcharge (“the surcharge”) being applied to purchases of residential property in England and Northern Ireland from 1 April 2021. Until then stamp duty land tax continues to be levied in relation to the location of the property meaning UK residents and non-residents alike are subjected to the same stamp duty land tax rules. April 2021 will introduce new residency tests linked to the timing of the transaction and dependent upon what type of purchaser is involved. The timing of the announcement well ahead of the 2021 implementation suggests the government is expecting a flurry of activity from foreign investors looking to take advantage of the tax break.
The surcharge will not apply to commercial property.
So, how does it work?
The surcharge will be levied on top of all other Stamp Duty Land Tax (“SDLT”) payable, including the higher levels of SDLT introduced in April 2016 on second homes and buy-to-let purchases. Looking at this in simple terms:
|Property value or lease (with over 21 years left to run) premium or transfer value||Residential property SDLT payable by UK residents||Residential SDLT assuming a second property (or more) surcharge of +3%||Non-resident surcharge of +2%|
|£40,001 to £125,000||zero||3%||5%|
|the next £125,001 – £250,000||2%||5%||7%|
|the next £250,001 – £925,000||5%||8%||10%|
|the next £925,001 – £1.5 million||10%||13%||15%|
|the remaining portion above £1.5 million plus||12%||15%||17%|
To which non-UK residents will the rules apply?
There are a number of exclusions that apply and businesses with complex ownership structures will require careful consideration when assessing whether the surcharge applies. At their simplest, the rules will apply to the following:
- the purchaser (or any one of the purchasers) is an individual outside the UK for at least 183 days out of 365-day period beginning 12 months before the transaction and ending 12 months after (in which case the surcharge is payable at the point of acquisition but a refund can be applied for);
- certain unit trusts and JPUT’s having regard to the status of the trustees;
- a company not resident in the UK for corporation tax purposes;
- a company that is resident in the UK for corporation tax purposes but is a close company and controlled by a non-UK resident individual(s) and is not a UK real estate investment vehicle nor group member of one, nor a Jersey property unit trust;
- a partnership where one of the partners is treated as non-resident; and
- where UK property is to be held in a trust, the status of the residential status of the beneficiary is considered, failing which the residency tests are applied to the trustees themselves.
It is important to note, the surcharge will apply to a transaction where any one of joint purchasers is non-UK resident. This applies to a spouse too. If buying jointly but one spouse works outside of the UK, the surcharge will apply.
Land transactions where contracts are exchanged before the 10March 2020 but not completed or substantially performed until or after 1 April 2021 are likely to be subject to transitional rules
A surcharge has been on the cards for a while. The government announced its plans as far back as the Budget in 2018 and rates between 1% and 3% were considered during a consultation that ran on until May 2019. The government states that the “measure may help to control house price inflation, by leading to a reduction in residential property purchases by non-UK residents, some of which is offset by an increase in purchases by UK residents”. Cooling down the over-heated London house prices in particular could see a rise in uptake by first time buyers and those looking to move up the ladder within the UK. The government plans to use the extra Stamp Duty Land Tax revenues to tackle homelessness and build new homes and considered anything higher than the 2% rate would dissuade inward investment.
What will be the overall impact of the surcharge?
Well, only time will tell. The proposed surcharge has been criticised in its failure to deal with purchasers claiming multiple dwelling relief (requiring the purchase of no less than 6 dwellings) and with overseas buyers buying off-plan who then “flip” the property onto a UK resident who enjoying sub-sale relief from the surcharge. Both these lead to house price inflation.
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