From 1 April 2021, a stamp duty land tax (SDLT) surcharge of 2% will be imposed on non-residents buying dwellings in England or Northern Ireland. It will apply in addition to the existing surcharge of 3% for purchases of ‘additional’ dwellings by individuals and purchases of dwellings by companies, and to the flat ‘super rate’ of 15% for purchases of dwellings worth more than £500,000 by companies unless for qualifying business purposes. The test for determining whether an individual is non-resident is specific to SDLT. An individual may be resident for income tax but not resident for SDLT. The rest of this article summarises the conditions that must be met before the non-resident surcharge is payable and comments on the likely impact the surcharge will have.

Background

The non-resident surcharge is aimed to dampen house prices by reducing the number of purchases made by non-residents, partially offset by an increase in the number of purchases made by residents. The revenue, estimated at £105m per annum, is intended to be used to tackle rough sleeping. The rules can be found in the draft Finance Bill 2020-21.

The conditions

There are three sets of conditions that must be met before the surcharge is imposed. The first set of conditions looks at the timing of the transaction (the ‘timing conditions’), the second set looks at the purchased property (the ‘property conditions’), the final set looks at the buyer(s) (the ‘buyer conditions’).

The timing conditions are as follows:

1. Completion or substantial performance (eg, taking possession) must fall on or after 1 April 2021.
2. Exchange must take place on or after 11 March 2020.

If contracts were exchanged before 11 March 2020, to remain excluded from the scope of the surcharge the contract must not be varied or assigned on or after 11 March 2020, the purchased property must not be sub-sold on or after 11 March 2020 and the purchase must not be consequential on the exercise of an option or right of pre-emption on or after 11 March 2020.

The property conditions are as follows:

1. The purchased property must consist of a freehold or leasehold in one or more dwellings.
2. The freehold or leasehold must not be reversionary on a lease that has more than 21 years to run, and for leaseholds only the term of the lease must have more than 21 years to run.
3. The price must exceed £40,000.
4. The purchased property must not include any non-residential property or be linked to another SDLT transaction that consists of or includes any non-residential property.
5. The purchased property must not consist of more than five dwellings.
6. The purchased property must be in England or Northern Ireland only.

The buyer condition is that the buyer (or where there is more than one buyer, a buyer) must fail to pass the relevant SDLT residence test depending on whether or not the buyer is an individual or a company.

An individual would be non-resident if they had spent fewer than 183 days in the UK (determined by their location at midnight) during the year before completion (or substantial performance). That they might pass the statutory residence test for income tax is irrelevant. However, they can generally reclaim the surcharge if they subsequently spend more than 183 days in any 365-day period in a two-year window spanning completion (or substantial performance).

For the purposes of these rules, a non-resident individual making a joint purchase of residential property with their UK resident spouse or civil partner is treated as UK resident. 

Crown employees or their spouse or civil partner that they are living with are treated as being present in the UK on a day where they are in Crown employment and are situated outside of the UK for the purposes of that employment. 

Special rules apply, in broad terms, where the individual acts as a partner or trustee or buys jointly with such a person or a company.

Example:

In April 2021, Mr A, who is resident for income tax purposes, buys a dwelling in England as a buy-to-let for £1m. He owns a home in the UK. He spent a total of 160 days in the UK in the year preceding completion. He must pay £93,750 of SDLT, which includes the 2% non-resident surcharge, as well the 3% surcharge for ‘additional’ dwellings. In July 2021, the total number of days spent in the UK by Mr A in any 365-day period in the two-year period spanning completion tips over 183 days, meaning that he can now apply to reclaim the 2% non-resident surcharge (£20,000).

A company would be non-resident if it is incorporated overseas or its central management and control is exercised overseas, or it is a close company and controlled by one or more non- residents subject to exceptions (eg, for REITs).

Example:

Mr B and Miss C, who are siblings, are not resident. They wish to buy a Mayfair flat and use a UK-incorporated company, D Ltd, which they jointly control, to do so. The flat is to be used by them for occasional visits to London. In April 2021, D Ltd buys the flat for £5m. It must pay £850,000 of SDLT, which includes the 2% non-resident surcharge, as well as the flat 15% ‘super rate’ for purchases of dwellings by companies. D Ltd must also pay the annual tax on enveloped dwellings (approximately £25,000 per year in the first two years and more than double that amount from 1 April 2023 if the flat is worth more than £5m on the next valuation date of 1 April 2022).

The residency of a unit trust scheme is judged by the residence of its trustees. The residency of all other types of trusts is judged by the residence of the beneficiary, provided that the trust is a bare trust or the beneficiary has a life interest. Where the trust is a settlement and the beneficiary does not have a life interest, its residency is judged by the residence of its trustees.

What does this mean?

The non-resident surcharge may have consequences. These include:

1. More pressure on residential property lawyers to get it right, and to do so within budget, possibly causing an increase in the amount of conveyancing fees (where specialist advice is taken) or in the number of professional negligence claims (where specialist advice is not taken). Note that although it is reasonable to assume that the surcharge would not apply to an individual resident for income tax purposes, this is unlikely to be considered a ‘reasonable excuse’ for the purpose of determining whether a penalty for error is due.
2. Difficult analysis where the buyer is a UK-incorporated company that is ‘close’. The corporation tax tests that attribute control are complex and are modified for these purposes.
3. Market distortion, especially in prime Central London. Note that the start date will coincide with the end of the ‘stamp duty holiday’, as well as with a likely drop in consumer confidence due to the economic effect of the COVID-19 pandemic.
4. The requirement to check residence after completion to determine if an application for a reclaim may be made.
5. The possibility of lost reclaims due to late applications and more unsolicited letters sent by reclaim firms to buyers.
6. Elephant traps for joint buyers (eg, collective enfranchisement transactions) where the participation of a non-resident ‘infects’ the whole transaction and causes all the buyers to suffer the surcharge.

About the author

Sean Randall, CTA (Fellow), partner at Blick Rothenberg Limited, editor and author of Sergeant and Sims on Stamp Taxes (LexisNexis), author of the Stamp Duty Land Tax Handbook: A Guide for Residential Conveyancers (The Law Society), chair of the Stamp Taxes Practitioners Group