15 February 2019

SDLT surcharge for non-residents acquiring residential property in England and Northern Ireland: consultation published

This week the UK Government published a consultation proposing the introduction of a 1% SDLT surcharge on non-residents acquiring residential property in England and Northern Ireland.

The surcharge was originally announced by the Prime Minister, Theresa May, at the Conservative Party conference in September 2018 and the Government's intention to consult on a proposal for a surcharge at a rate of 1% was confirmed at the UK Budget on 29 October 2018.

What is proposed?

In broad terms, the proposals in the consultation are, as follows:

  • No date is given for introduction of the surcharge.  Instead, the consultation states that it will be introduced "in a future Finance Bill".
  • The principal proposal is for a 1% SDLT surcharge  (i.e. a zero rate band might increase to a 1% band) to apply to specified non-UK resident persons that purchase residential property in England and Northern Ireland.    (Properties in Scotland and Wales are not within the scope of the consultation because in both jurisdictions SDLT has been replaced.  Land and Buildings Transaction Tax (LBTT) now applies to property acquisitions in Scotland and Land Transaction Tax (LTT) in Wales.)
  • It is proposed that where the surcharge applies, it will be payable in addition to any other SDLT charge calculated under applicable rules, including SDLT payable on rent which is a very significant increase.  Thus, a non-resident company paying higher rate SDLT at a flat rate of 15% on a property worth over £500,000 will also pay the surcharge of 1%, resulting in a total SDLT charge of 16%.
  • The surcharge will apply to non-resident individuals, companies, partnerships and trusts.  It will also apply to unit trusts and co-ownership authorised contractual schemes.
  • UK resident close companies will also be within the scope of the surcharge if they are under the direct or indirect control of one or more non-UK resident persons.
  • Detailed rules are proposed in the consultation to determine the residence status of persons potentially within the scope of the surcharge.
  • Individuals are to be treated as non-UK resident for the purposes of the surcharge if they spend fewer than 183 days in the UK in the 12 months ending with the effective date of the transaction.  For this purpose, an individual will be regarded as having spent a day in the UK if he or she is here at the end of the day (midnight).  Days spent in any part of the UK will count towards residence, not just those in England and Northern Ireland.
  • Companies will be resident in the UK if they are incorporated in the UK or at the time they acquire residential property, their central management and control is exercised in the UK.
  • Partnerships will be liable for the surcharge if at least one partner is non-UK resident under the applicable test.
  • Bare Trusts (not involving the grant of a lease) will be liable to the surcharge if the beneficiary is non-UK resident under the applicable test.
  • Trusts will be caught if any individual beneficiary with a life interest is non-UK resident or, in the case of discretionary trusts, if the trust is non-UK resident on the basis of the existing tests of residence for income tax and CGT.  For this purpose, the residence of individual trustees will be based on the statutory residence test (SRT) for determining the residence status of an individual for general tax purposes.  The rules of the SRT will be modified for this purpose to consider the position over a period of 12 months ending with the date of the transaction, rather than a tax year.
  • Joint purchasers of property will be subject to the surcharge if any one of them is non-UK resident.  This rule will also apply to married couples and civil partners where they jointly buy a property.  However, if only the UK resident spouse/civil partner buys, then the surcharge will not apply.
  • Collective enfranchisement - tenants in a collective enfranchisement will also be treated as joint purchasers of the freehold where the purchaser is acting as their nominee.  If one of the tenants is non-UK resident, that will taint the whole enfranchisement.
  • Linked transactions - it is proposed that a non-UK resident purchaser in one linked transaction would taint all linked transactions.
  • Other rules are proposed for entities treated as companies for SDLT purposes – unit trusts and co-ownership authorised contractual schemes – as they are not incorporated.
  • There are very few reliefs from the surcharge proposed, other than group relief and charities relief, where relevant.  However, the Government is considering relief for non-UK resident individuals who are Crown employees subject to UK income tax at the time of the transaction.
  • Refunds will be available in certain circumstances where purchasers who are individuals spend 183 days or more in the UK in the 12 months following a transaction in respect of which they were originally subject to the surcharge.

What next?

The consultation asks a series of questions about the design of the surcharge and the tests for determining non-residence, as well as the proposals for reliefs and refunds.  These questions are broad in scope and the consultation asks for views from anyone likely to be affected by the proposed surcharge, professional or otherwise, and wherever based.

Unfortunately, but unsurprisingly, the consultation stops short of asking for views on the appropriateness or otherwise of introducing a surcharge on non-resident investors in residential property in England and Northern Ireland, particularly in the current political and economic climate.  This omission is unlikely to prevent respondents airing their views on this issue.

As a firm, Forsters will respond to the consultation, the deadline for which is 6 May 2019.  We intend to share our views on the broad principle of the surcharge itself.  We will also comment on the details of the proposals, which introduce a large degree of complexity in some areas, while in others favouring supposed simplicity over fairness.  For example, this is particularly the case in relation to the residence test for individuals and the application of the rules to partners and joint purchasers, collective enfranchisement and linked transactions.

If you have any questions about the proposals in the consultation, or would like to share your views on the detail or the general principle of the surcharge, please let us know.  We will provide regular updates as the consultation and subsequent legislative processes progress.

This article was also published at www.internationallawoffice.com.

Click here for a PDF version of this article

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