Non-resident SDLT (NRSDLT)

Non-resident SDLT will apply a 2% SDLT surcharge on English residential property purchased on or after 1 April 2021 by a non-UK resident. In this article, we explain what this surcharge is, when this change will apply, who will be affected and how.

Non-resident SDLT (NRSDLT) – summarised in five Ws and an H

Is any story or report truly complete without knowing:

1. Why has it happened?
2. Who was involved?
3. What is the effect?
4. When did it happen?
5. Where is it happening?
6. How has it happened?

Why NRSDLT?

It is politically expedient to tax those who can't vote but as James Otis stated in the 1760s, “Taxation without representation is tyranny”. On that basis, I've quite admired (at a theoretical level) successive recent governments which have broken the link between taxation and voting by taxing non-residents.

Of course, sometimes breaking that nexus has had a dramatic impact on world history. For example, the nine colonies that went on to be the founding states of the USA broke away from British rule – more specifically the imposition of tax (a Stamp Tax!) – declaring that the English Crown had no right to impose a tax on Americans who lacked representation in the English parliament. Although I’m by no means suggesting that NRSDLT is going to give rise to anything quite so dramatic, its effects on the English residential property market remain to be seen.

What is it and where is the territorial scope?

Both questions can, in my view, be answered concisely: NRSDLT raises taxes by imposing a 2% SDLT surcharge on residential property in England. (The devolved governments in Wales and Scotland have their own separate rules which are akin to SDLT).

An extra 2% surcharge on normal (i.e. non-COVID relief rates of SDLT) residential rates will be rather dramatic for any affected purchaser, although admittedly, at the moment, a weakened pound may well provide some insulating effect for both the taxpayer and the English residential property market.

The following table assumes that the purchaser is:

1. An individual who already owns residential property (either in the UK or elsewhere).
2. Unable to claim replacement of main dwelling relief.
3. (In summary) is liable to the 3% surcharge higher rates for additional dwellings (HRAD):

Different rates apply to rent. NRSDLT applies to rent from the first pound as there is no nil rate band for NRSDLT.

One of the points I personally find quite startling is how close this is to the standard rate of VAT (20%), although, I hasten to add, this observation is by no means an invitation to increase the SDLT rates to that level! However, a point to note is that there will be the Autumn Budget Statement on 27 October 2021 and Rishi Sunak may need to find some actual money rather than yet another money tree. Do also remember that the Welsh Revenue Authority raised their equivalent of HRAD by 1%, effective from 22 December 2020.

When is this effective?

The simple rule is that NRSDLT will apply to all transactions that have an effective date on or after 1 April 2021.

The “effective date” is the earlier of completion of the contract (by way of formal conveyance) or "substantial performance" of the contract. Substantial performance may (for example) be triggered by the payment of substantially the whole of the purchase price (typically 90% or more of the chargeable consideration) or going into occupation (as HMRC explain, having "the keys to the door").

NRSDLT will not apply to a transaction, despite it having an effective date on or after 1 April 2021 where it:

• Was entered into before 11 March 2020 (i.e. dated on or before 10 March 2020).
• Is not caught by specific anti-avoidance rules, which I often summarise by the non-technical phrase "Don't mess in any way whatsoever with your existing contract!"

An old contract may be drawn into NRSDLT where, for example, it is varied because a car parking or storage space is added to the demise.

Who is affected?

NRSDLT is obviously designed to apply to non-UK residents.

In respect of individual purchasers, it was deemed to be unfair to ask conveyancers to become familiar with the nuances of the statutory residence test and so instead a special SDLT test applies. This requires an individual to ask himself a basic question – how many days has he been present in the UK in the “Relevant Period”. The Relevant Period looks to both the 364 days before the relevant date of his purchase and how many days will he be present in the year following his purchase. The magic number is 183.

In respect of companies, the NRSDLT basic rule for tax residency follows general tax law, i.e. is the company incorporated in the UK or centrally managed and controlled in the UK?

The important takeaway points include:

1. NRSDLT tax residency is different from other UK tax residency – don’t assume they are the same.
2. NRSDLT tax residency looks forwards and backwards – so if an individual becomes UK tax resident in the Relevant Period following purchase then they may be able to obtain a reclaim. I envisage COVID-19 restrictions playing havoc with this rule in 2021.
3. Buying with a joint purchaser who is your spouse/civil partner means that a UK tax resident wife living in the UK for schooling reasons with children will not pay NRSDLT even if her husband is resident in France and only spends weekends with the family.
4. Non-resident parents having a minority interest in their child’s apartment in England is likely to bring the transaction within NRSDLT and outside first time buyer’s (FTB) relief.
5. 3% surcharge HRAD principles do not necessarily translate across to NRSDLT, i.e. for NRSDLT, the non-resident spouse needs to buy with his UK resident spouse who has or will have a beneficial interest in the property to ensure that the transaction is not tainted; whereas with HRAD a purchase by one spouse alone is deemed to be a purchase by both of them (in judging whether HRAD applies or not).
6. Buying with anyone (including a company or trustees) requires careful consideration and specialist advice.
7. If acting as a trustee it is critical to understand exactly what type of trust is involved, following which, the appropriate rules need to be carefully worked through.

If the buyer is a company, HMRC are live to the obvious planning technique of incorporating a company in the UK and claiming it is UK tax resident and thus outside the scope of NRSDLT. There are three further important tests that need to be considered when considering whether an ordinary limited company (there are special rules for co-ownership authorised contractual schemes, unit trust schemes and other more esoteric entities) is UK tax resident or not:

1. Is the company a close company? Designed to catch sole ownership, husband and wife ownership or ownership by a family (although the precise definitions are wider than that).
2. If yes, then who are the decision makers in relation to the relevant property purchase and where are they resident? Once these have been ascertained, apply the detailed definitions to establish whether the company satisfies the "non-UK control test".
3. Would the company be excluded because it is an OEIC, a REIT or a similar entity?

An important point to remember is that if a company is closely held by immediate family members, then a minority shareholding by a non-UK resident may mean that the company as a whole pays NRSDLT.

How is NRSDLT notified?

On 6 January 2021, the UK Government made regulations updating form SDLT1, which includes new questions and purchasers will need to self-identify if they are non-UK tax resident or UK tax resident companies that fail the "non-UK control" test.

If the transaction is pursuant to an “old” contract, i.e. pre-11 March 2020, and you are a non-resident but nevertheless outside NRSDLT, writing a supplemental simultaneous letter to HMRC explaining this may be helpful.

Summary

It will be interesting to see the statistics as to how much extra SDLT (if any) this generates and what the rate of NRSDLT is in, say, five years' time? Could this be a case of shutting the stable door after the Brexit horse has bolted?

Elizabeth Small is a Partner in the Tax team.

Disclaimer

This note reflects our opinion and views as of 22 September 2021 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.

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