The new 2% surcharge for non-resident transactions came into effect on 1 April 2021. The surcharge is payable on purchases of dwellings (that cost £40,000 or more) in England and Northern Ireland by non-resident individuals, partnerships, companies and trusts.
The surcharge will not impact on transactions that are deemed to be non-residential or mixed-use, unless a claim is made for multiple dwellings relief. However, it will be payable where the transaction is taxed at the residential rates and is in addition to the 3% surcharge for additional dwellings and the 15% flat rate payable by companies purchasing high value dwellings.
Existing reliefs and exemptions continue to apply.
Scope
The surcharge is relevant to freehold transactions and to the grant or assignment of a lease with more than 7 years to run. Where a new lease is granted, the 2% surcharge will also apply to the SDLT payable on the rent.
For the purposes of the surcharge, a ‘dwelling’ includes a building that is in the process of being constructed or adapted for use as a dwelling. Off-plan purchases are also within the definition. Conversely, purpose-built student accommodation and institutional accommodation are not within the scope of the surcharge.
The surcharge is payable when one or more of the purchasers is non-UK resident for the purposes of these rules. The residency test for SDLT is different from those for other taxes and may not give the same result.
Individuals
An individual will be treated as UK resident if they have spent 183 days in the UK during a continuous period of 365 days starting 364 days before the purchase and ending 365 days after. It is the individual’s location at the end of the day that is important.
If one or more individual purchasers does not meet the residency test at the time the SDLT return is filed, the surcharge is payable. It does not matter whether the purchasers will be joint tenants or tenants in common, or how small the interest of any particular purchaser will be.
The surcharge may subsequently be reclaimed if all purchasers have met the residency test by the end of the 365 day period following the transaction. The refund is claimed by writing to the Stamp Office to amend the SDLT return. This must be done within two years of the transaction date. Note, it is only possible to claim a refund if all the purchasers are individuals, although the rules allow for a refund where the property has been purchased using alternative property financing (such as Shari’a law compliant mortgages) if the person who enters into the arrangements with the financial institution subsequently meets the residency tests.
HMRC acknowledges that individuals may not retain contemporaneous evidence of their daily location. It therefore promises a pragmatic approach to establishing an individual’s presence within the UK. Acceptable evidence could include: bank statements, phone usage, work diaries and the membership and usage of clubs.
Companies
A company will be non-UK resident if:
- it is not within the scope of UK Corporation tax at the effective date of the transaction, or
- it is a close company that is controlled by one or more non-UK resident individuals.
Generally a company is within the scope of UK Corporation tax if it is incorporated in the UK or the central management and control of its business is in the UK.
There are specific rules for certain investment vehicles such as CoACS, REITS and Unit Trust schemes.
Trusts
As with existing SDLT provisions, the rules will depend on the type of trust involved in the purchase:
- The residency of a bare trust will be determined by the beneficiary.
- The residency of a life interest trust is determined by the life tenant.
- The residency of all other trusts is determined by the trustees. The trust will only be UK resident if all trustees are UK-resident under the appropriate SDLT tests.
Partnerships
A purchase of a dwelling by, or on behalf of, a partnership will be treated as a joint purchase by all the partners.
If any of the partners do not meet the relevant SDLT residency tests, the surcharge will apply.
Reliefs from the surcharge
Crown employees
Where a Crown employee is subject to UK Income Tax, they will be able to claim relief from the surcharge if they do not meet the residency tests due to their employment.
This relief will extend to spouses and civil partners who are living overseas with the Crown employee.
Spouses
A relief from the surcharge is similarly available where spouses are jointly purchasing a dwelling and only one spouse meets the UK residency test.
If you would like to know more about any of the points raised in this article or have another issue you would like to discuss, please contact us or speak to your usual PEM adviser.
