Buyers beware: even higher stamp duty land tax on purchases of UK residential property

On 11 February 2019, the government published a consultation proposing yet another increase in the amounts of stamp duty land tax (SDLT) payable on the purchase of English and Northern Irish residential property.

In the firing line are purchases by non-UK residents.  The SDLT system currently does not discriminate between UK residents and non-UK residents, but according to the consultation paper “there is evidence that purchases of property by non-UK residents is pushing up house prices for UK residents”.

This measure is therefore aimed at deterring the purchase of UK residential property by non-UK residents.  As a reminder, the table below shows the current rates of SDLT – astronomical in the case of residential property – and the rates once the 1% surcharge is introduced:

Who is non-UK resident for these purposes?

The proposal is that any individual who spends fewer than 183 days in the UK in the 12 months prior to the “effective date” of the transaction (usually the date of completion) will be treated as non-resident for the purposes of the 1% surcharge.  A day in the UK will only be counted as such if the individual is present in any part of the UK at midnight.

An individual who spends 183 days (meaning midnights) or more in the UK in a tax year is automatically UK resident under the UK's statutory residence test, which applies to determine an individual's status for the purposes of income tax and capital gains tax.  However, there are a number of scenarios in which an individual could be UK resident under the statutory residence test but would be treated as non-resident for the purposes of the surcharge.  There will therefore be scope for mismatches.  This point is recognised; but, perhaps rather ironically, the Government considers that using the statutory residence test to determine residence for the purposes of the surcharge would create too much complexity.

It is proposed that for companies and unit trusts, the existing residence tests used in other tax contexts will apply.

Joint purchases (including under “linked” transactions) will be caught in their entirety where any of the purchasers is non-UK resident.

Can I just use a purchasing vehicle instead?

That won’t work.  Purchases by the following vehicles will also be caught:

• non-UK resident companies, unit trusts and authorised contractual schemes;
• UK resident closely held companies (broadly, those controlled by 5 or fewer unconnected participators) which are controlled by non-UK residents;
• partnerships where any one of the partners is non-UK resident;
• discretionary trusts which are non-UK resident (the test for which looks principally at the residence of the trustee(s)); and
• interest in possession trusts where the individual life tenant is non-UK resident.

Will there be any reliefs?

The government does not intend to introduce any reliefs other than a narrow relief for Crown employees.  Therefore, individuals and companies purchasing UK residential property to use in rental businesses or other trades will face the 1% surcharge.  Consultation responses are likely to focus on purchasers for whom reliefs are necessary, particularly individual purchasers.

Those moving to the UK

If an individual suffers the surcharge on a purchase and then spends 183 days or more in the UK in the following 12 months they will be eligible for a refund.  This could be tricky for joint purchasers or those who are unsure of exactly when they will relocate to the UK.

The flat 15% rate and the 3% surcharge

Purchases of dwellings worth in excess of £500,000 by non-natural persons (such as companies and unit trusts) are subject to a flat 15% rate of SDLT unless relief can be claimed by the buyer.  This 1% surcharge will sit on top of the 15%, meaning that the flat rate increases to 16%.

The 1% surcharge also sits on top of the existing 3% surcharge.

When will this take effect?

The consultation runs until 6 May and declines to give a date for implementation, stating merely that this will be legislated for in a future Finance Bill – so perhaps 1 April 2020.

Please contact us if you may be affected by these changes and require advice tailored to your circumstances.