The budget on 3rd March created further differences in tax charges when acquiring land and property, widening the very clear gap between rates of Stamp Duty Land Tax (SDLT) applying in England, compared with Land and Buildings Transaction Tax (LBTT) applying in Scotland.
This included the Government choosing to extend the available SDLT nil rate band of £500,000, to 30 June 2021. The Scottish Government meanwhile, decided not to extend their previous £250,000 LBTT nil rate band holiday post 31 March 2021.
Non Resident UK Property Investors
Successive UK Governments have introduced various UK tax obligations for overseas UK property investors. This has largely been in reaction to public pressure, to ensure that overseas investors are taxed on UK property in much the same way as UK investors. However, when it comes to SDLT charges, there is effectively no longer a level tax playing field and if non UK residents acquire property in England or Northern Ireland (NI), they will pay more than their UK resident counterparts. With effect from 1 April 2021, there is now an additional two per-centage point SDLT surcharge for any “Non Resident Transaction”
What is a Non Resident Transaction?
The additional 2% SDLT rate will apply to purchasers of residential property in England and NI, who are not resident in the UK. This will be relevant for acquisition of both freehold and leasehold property and will apply to individuals, partnerships, trusts and certain UK resident companies controlled by non UK residents.
SDLT Residence Tests
The SDLT test for non UK residence should not be mistaken for the HMRC statutory residence test which applies to capital gains and income taxes. It is completely different and must be applied separately.
An individual will be a non-resident for SDLT, if he or she has not been present in the UK for at least 183 days during the 12 months before acquisition. If, after the purchase, they are present in the UK for more than 183 days during any continuous 365 day period in a 2 year period which straddles the transaction date, buyers are then able to claim a refund of any surcharge paid.
Whilst the 2% SDLT surcharge only applies to acquisitions in England and NI, days spent in the whole of the UK, count for the purposes of this test. Presence in the UK means being in the UK at the end of the relevant day.
In the case of spouses and civil partners acquiring a property together, if one is resident and the other would be SDLT non-resident, both will be deemed resident for the purpose of the transaction and will not be liable to a surcharge.
The same position does not apply to a business partnership. Where one partner is UK resident and the other is SDLT non UK resident, HMRC will treat both partners as non UK resident and apply the surcharge.
In the case of companies, the non residence test is that standard test applying for corporation tax. That is, a company is considered non UK resident if it is neither incorporated nor centrally managed and controlled in the UK. However, the surcharge will apply to a UK resident close company meeting the non-UK control test. This circumstance will be met if a number of non-resident participators control the company (under the SDLT non residence test rules).
Trusts are treated as non UK resident if any trustee is a non UK resident under the SDLT residence tests. There are certain exclusions but the trust should be carefully reviewed to clarify the position.
How is the non-resident surcharge calculated?
The surcharge is calculated using the existing rates of SDLT applying to a transaction in property, plus two percent. So every rate from 0% band up to the 15% higher rate for purchases by companies and other non- individuals, is increased by the 2% supplement.
We can see the effect of this in the table below which is based on acquisition of a second investment property (ie not main home replacement). The calculations are based on a purchase by an individual prior 1 July, so the SDLT UK resident calculations benefit from the £500,000 0% rate. There is also a comparison to the Scottish LBTT rates currently applying to a similar property transaction of the same value in Scotland. It’s worth pointing out that despite the overall SDLT surcharge being 5% for non UK residents, which compares to the Scottish Additional Dwellings Supplement charge of 4%, the overall Scottish charges are still much higher as the property value increases due to the difference in bands and LBTT general rates.
SDLT cost comparison (relating to a second property, not replacing PPR)
|Purchase Price (£)||SDLT UK Resident (£)||SDLT Non Resident (£)||LBTT including ADS (£)|
This blog is a very broad overview of how the non resident SDLT surcharge could apply, but bespoke professional advice should be taken in every case.
If you would like to discuss any aspect of this matter, please get in touch with Lynn Gracie, Head of International Private Client Tax at AAB, or your usual AAB contact.
To find out more about our International Private Client Tax service, click here