Charles Miéville and Emma Gillies write for Bloomberg Tax on SDLT for international buyers

Residential Property Partner, Charles Miéville, and Private Client Partner, Emma Gilles (née White), have authored an article for Bloomberg Tax entitled 'U.K. Property Market—Tax Considerations for International Buyers'.

The article, published on 20 August 2021, has been reproduced with permission from Copyright 2021 The Bureau of National Affairs, Inc. (800-372-1033) www.bna.com.

The Covid-19 pandemic has led to 18 months of changes from a U.K. Stamp Duty Land Tax (SDLT) perspective with mixed (and conflicting) objectives, from kick-starting the property market to improving affordability for the average buyer. On July 8, 2020 an SDLT “holiday” was introduced which is still ongoing, albeit in a reduced way. In April 2021 a 2% non-resident (NRSDLT) charge commenced.

As the tax holiday winds down, we consider what each of these measures was introduced to achieve, what the result was, and how international buyers should now approach any new purchase in light of the current SDLT legislation.

Stamp Duty Land Tax Holiday

The pandemic led to a great deal of uncertainty in the U.K. property market as the government initially advised against moving home; people were also naturally cautious about this in a time of great unpredictability. The U.K. chancellor’s introduction of an SDLT holiday on the first 500,000 pounds ($687,800) of the purchase price aimed at re-opening the market, encouraging buyers to put their SDLT saving into a deposit, and kick-starting the buying process for many would-be buyers.

The SDLT holiday benefits all buyers, whether purchasing a main or additional residence, and whether domestic or international investors. It also had the effect of pushing up prices, as supply dwindled and demand increased, so much so that any SDLT saving may easily have been lost to the significant increase in asking prices, pushing many homes well beyond the affordability of the intended buyers.

In March 2021, the SDLT holiday was extended, so that the market did not fall off a cliff face at a time of great economic uncertainty, and the staggered reduction of the saving, which had been as much as 15,000 pounds, has, from June 30, 2021, been reduced to a maximum saving of 2,500 pounds until September 30, 2021.

Given the high average price of a property in London and the south of England, it is unlikely that many people in this region will be purchasing at under 250,000 pounds and therefore benefiting from the full current exemption. First-time buyer relief on properties up to 500,000 pounds is however still available.

The result of the reduction of the SDLT saving was a flurry of transaction completions before the deadline; our office saw over 200 completions in the final weeks of June. Interestingly, the SDLT holiday was a key factor for clients in all price brackets, rather than just those up to 500,000 pounds who would pay no SDLT at all. The impetus to complete the purchase before September 30, 2021 is now far smaller given the reduced saving.

Non-resident Stamp Duty Land Tax

Against this backdrop, a 2% NRSDLT charge was introduced in April 2021. The aim of the tax, which applies to “non-resident” purchasers only, was to improve affordability of housing against large price increases over the last few years; any funds raised would be used to tackle homelessness.

In order to avoid a NRSDLT charge, a buyer must have been living in the
U.K. for 183 continuous days in the calendar year prior to completion of
the transaction, otherwise the buyer will be liable to pay the tax. If the
buyer can then show a period of 183 continuous days living in the U.K.
during a combination of the years immediately prior and post the
transaction completion, they will be able to claw back the 2%.

It is important to note that the test for the application of the NRSDLT
charge is entirely separate and distinct from the statutory residence test
(SRT) that applies when determining tax residence for all other U.K. tax
purposes. It is possible for an individual to be tax resident in the U.K.
under the SRT while being non-resident for the purposes of NRSDLT, and vice versa.

Unlike the previously introduced 3% surcharge that applies on the acquisition of an “additional residential property”—where a transaction was automatically liable to this charge where one half of a married couple owned another property, even if they were not involved in the purchase—the 2% NRSDLT charge can be avoided where a married couple or couple in a civil partnership buy a property, and only one of them is non-resident for the purposes of the tax; so there is no need to structure to avoid the NRSDLT if one half of a married couple only meets the requirements.

It may therefore be helpful if an international buyer who is considering buying in the U.K. is able to spend the requisite six-month period in the U.K. prior to completion of the property purchase (or immediately afterwards) to avoid the NRSDLT charge. However, such international buyer should not spend this amount of time in the U.K. without seeking advice on the broader U.K. tax consequences of doing so.

This SDLT charge has seen far less interest from international buyers to date, particularly given the majority of sales during lockdown have been to a domestic market, with very few international buyers committing to purchases sight unseen. It will be interesting to observe the impact of the 2% NRSDLT once travel corridors fully reopen. It is questionable whether it will achieve its desired outcome, given the affordability of U.K. property for foreign buyers due to favourable exchange rates, low interest rates for borrowing, and the high holding costs of property in some overseas locations, notably New York and California, where there are significant annual property taxes.

Interpretation can be Complex

A more complex example of the current SDLT position can be seen in the following recent transaction this firm handled which brings into play both the 3% SDLT charge, the 2% NRSDLT charge and the SDLT holiday.

A couple who lived abroad sold their main residence abroad and moved into a U.K. pied-a-terre they owned. They aimed to replace their main residence with a London house purchase, but having just moved to the U.K. are living in their pied-a-terre. They entered into a conditional purchase contract to buy a house. If the contract completion date is prior to September 30, 2021, they will benefit from the 2,500-pound SDLT holiday saving, but due to not having been in the U.K. for 183 continuous days in the year to completion, they would be charged the 2% NRSDLT. They would be able to reclaim this after November 2021, by which point they would have been here for the requisite 183 continuous days.

Alternatively, if the conditions to the contract are not satisfied until after September 30, 2021, they would lose the 2,500-pound SDLT holiday but potentially still be liable for the 2% NRSDLT if completion is any time before November 2021. If completion is in November 2021, they do not benefit from the SDLT holiday, but equally they do not pay the NRSDLT. The position has been further complicated by entry into an option agreement to buy the house, the grant of which triggered an SDLT charge, which is initially based on the NRSDLT calculated charge, but which needs to be revisited once the sale itself completes or at a later date when NRSDLT is not chargeable, which could lead to a refund for the initial option grant.

Planning Points

As is demonstrated by the above example, the SDLT legislation is constantly shifting, and its interpretation can be complex. By moving quickly prior to September 30, 2021 buyers will achieve a small saving in many price brackets, and by structuring their purchase around a six-month U.K. stay may be able to avoid the 2% NRSDLT—although they should be aware of the broader U.K. tax consequences of doing so.

Further planning would be needed to avoid the 3% surcharge on SDLT for additional dwellings, such as selling your former main residence and replacing it with your U.K. main residence, selling or gifting any additional properties prior to purchase of your main residence (but beware any capital gains tax or inheritance tax or foreign tax consequences).

As ever, early structuring advice and legal involvement will be key to minimizing stress and unintended tax consequences.

Meanwhile, the government’s plans to boost the property market on the one hand, and to make it affordable on the other, will continue to have a very mixed effect on market conditions, though it appears our international client base is keen to revisit U.K. acquisitions as soon as travel is easier, and seems undeterred by the myriad possible pitfalls.