The UK has published draft legislation to introduce a new 2% stamp duty land tax ("SDLT") surcharge on acquisitions of residential property by non-UK residents
The SDLT landscape for residential property has been in flux for a number of years now, with the top rate increasing from 4% in 2010 to a proposed 17% in 2021. The stated aim of this latest policy is to make houses more affordable.
Currently there are broadly three different sets of rates that could apply to an acquisition of a dwelling:
- Rates of between 0% and 12% for individuals acquiring a dwelling where the individual owns no other dwelling or is replacing their main dwelling;
- Rates of between 3% and 15% for an acquisition of a dwelling by a someone who is not an individual or by an individual who owns (or will as a result of the acquisition own) more than one dwelling; and
- A flat rate of 15% for acquisitions by companies, funds and certain other entities of dwellings for private use.
The proposal adds a 2% surcharge to each of the rates in each category where a non-UK resident acquires the relevant dwelling on or after 1 April 2021. It also adds a 2% surcharge to the SDLT charged on rent on the grant of a lease to a non-UK resident over a dwelling.
Proposed meaning of non-UK resident
The test for determining whether an individual is non-UK resident for these purposes is based on the length of time they have been physically present in the UK, both before and after the date of the acquisition of the dwelling. So, for example, a non-UK resident moving to the UK may have to pay the 2% surcharge initially but, if they subsequently spend sufficient time in the UK over the next year, they could become UK resident and be entitled to a refund of the 2% surcharge. The test is not the same as the test of residence for income tax purposes and in principle a UK tax resident who acquires a dwelling during an extended period of absence from the UK could be subject to the surcharge.
For companies, the test of non-UK residence has a number of complexities. A non-UK incorporated company which is not managed and controlled from the UK will generally be a non-UK resident for the purposes of the surcharge. However, in certain cases a company that is UK resident for corporation tax purposes (e.g. a UK incorporated company managed in the UK) can also be deemed for the purposes of the 2% surcharge to be non-UK resident if it is controlled by non-UK residents. Under the control test, a non-UK resident may be deemed to hold control rights that are actually held by a UK resident relative or other connected person, which may lead to a company being treated as controlled by non-residents when in fact it is not.
There are similar rules for determining the residence of partnerships, settlements and other types of trusts, which can require a look-through to the partners or beneficiaries. This can mean that for acquisitions through quite common types of structures a detailed analysis of some very complex rules may be required, including an assessment of ultimate voting and economic control of the structure.
Other important points to note
- Where there are multiple purchasers the 2% surcharge will apply if any one of them is non-UK resident (subject to certain exceptions for jointly purchasing spouses/civil partners where only one of them is non-UK resident).
- In relation to partnerships, where a partnership acquires a dwelling the 2% surcharge will apply if any of the partners are non-UK resident.
- Although a JPUT is usually deemed for SDLT purposes to be company, it is not a company for the purposes of the surcharge rules. This means that in determining the residence of a JPUT arrangement for these purposes it may be necessary to consider the status of the unitholders.
- In the case of certain non-bare trusts, having a non-UK resident trustee may bring an acquisition of a dwelling within the 2% surcharge where a direct acquisition by the beneficiaries would not be.
- Certain acquisitions of residential property will not come within these rules e.g. properties held for ground rent income, or the acquisition of six or more dwellings as part of one transaction.
The proposals outlined above are based on the draft legislation published by HMRC on 21 July 2020. The legislation may be enacted with amendments. Advice should be taken on the application or potential application of these rules.