Increased costs due to the new 2% surcharge could affect some UK resident buyers

New Stamp Duty Land Tax (SDLT) rates for non-UK resident purchases of residential property will come into effect for both freehold and leasehold transactions completing in England and Northern Ireland on or after 1 April 2021. Transitional rules may apply where contracts have been exchanged before 1 April, but are not substantially performed until later.

The surcharge will apply to buyers who are non-UK resident individuals, non-UK companies and certain UK resident "close companies" that meet a non-UK control test. There will, however, be some exemptions from the surcharge, including where the residential purchase is for less than £40,000 or, for leasehold transactions, where the lease has 21 years or less to run or the purchased interest is reversionary on a lease that has more than 21 years to run.

The surcharge rate will be 2% higher than current SDLT residential rates and will apply on top of first-time buyer rates, the 3% additional dwellings charge and the flat 15% Annual Tax on Enveloped Dwellings, or ATED, rate that applies to companies acquiring residential properties over £500,000.

The government claims that introducing the surcharge will help to make house prices more affordable and assist people with getting onto and up the housing ladder in line with their wider objectives on homeownership. The revenue raised via the surcharge is expected to be used to tackle rough sleeping.

What is meant by 'non-UK resident'?

The Statutory Residence Test (SRT), which is typically used to determine an individual's UK tax residence, will not apply to determine residence for the purpose of the surcharge. A new test on residence has been introduced specifically for this purpose.

Under the new test, individual purchasers will be UK resident if they are present in the UK (at the end of the day) on at least 183 days during any continuous 365 days. These 365 days must fall within the two-year period beginning a year prior to completion and ending a year afterwards. Any individual who does not meet this test will be treated as non-UK resident. Consequently, an individual could have permanently left the UK before completion, or arrive for the first time five months after completion and still qualify as UK resident.

An individual who has not met the residency test by the date of completion must pay the surcharge, but may reclaim it if they subsequently meet the criteria to be UK resident as a result of days spent in the UK during the following year. Reclaims must be made by an amended return submitted within two years of completion of the property purchase.

In general, joint purchasers will be subject to the charge if just one of them is non-resident but spouses benefit from a special exception so that they will both be deemed UK resident provided at least one of them meets the residency criteria.

Corporate purchases will be non-UK resident if the company involved is not UK resident for corporation tax purposes at the date of purchase. Special rules will apply for UK resident close companies that are under the control of non-UK resident persons, with the effect that non-UK residents purchasing residential property via a UK company are still caught.

Trusts will be treated as non-UK resident if any trustee is non-UK resident, except where the trust is a bare trust, or where a beneficiary will be entitled to a life interest in (or income arising from) the purchased residential property. In those cases, the residence of the beneficiary will be of relevance to determine whether or not the surcharge applies.

For residential property purchased by partners of a partnership, the surcharge will apply if at least one of the partners is treated as non-UK resident in accordance with the residency rules.

Osborne Clarke comment

The introduction of the 2% surcharge remains subject to parliamentary approval but we expect to see the final legislation in the Finance Bill when it is published around the 10 March (draft legislation having been published last July).

Under the new rules most individuals should be clear as to their residence status for the purpose of the new SDLT surcharge, although there will be some individuals with more complex affairs, or who are internationally mobile, who may require additional advice in determining their tax liability. It is possible for an individual to be resident for UK income tax and capital gains tax purposes in a UK tax year under the SRT, but to remain non-UK resident under the residence test for SDLT (and vice versa).

The effect of these new rules is also wide reaching. A non-resident individual cannot escape the 2% surcharge by purchasing residential property via a UK incorporated company and UK resident trustees and partners will need to check that they are not within the remit of the new rules where there are other non-UK resident trustees or partners.

If non-UK resident buyers wish to avoid the surcharge, then they may wish to complete on their transactions sooner, rather than later (and perhaps even take advantage of the current SDLT holiday on residential property).