New Stamp Duty Land Tax Surcharge for Overseas Buyers of Residential Property

In a political move designed to address concerns that overseas buyers are pushing house prices beyond the means of UK residents, the Government has introduced new legislation that will add an extra 2% to the tax payable on such purchases. The Government have previously suggested that the funds raised will be used to help alleviate homelessness whilst also directly contributing to UK residents getting onto the property ladder. The new charge will apply from 1 April 2021 and affect residential purchases in England and Northern Ireland.

The legislation introduces new rates of Stamp Duty Land Tax (SDLT) for purchasers of residential properties in England and Northern Ireland who are not resident in the United Kingdom. The new rates will be 2% higher than those that apply to equivalent purchases made by UK residents.

The surcharge will apply to freehold property and leasehold property (where the remaining term is more than 7 years).

The Government confirmed in the recent March 2021 Budget that the introduction of the surcharge will go ahead, despite the temporary “SDLT holiday”. It will also be added to the existing 3% surcharge which applies to purchases of second homes. This means that if, for example, an overseas individual (or certain UK-resident companies controlled by non-residents) buys a second home, they could have to pay SDLT at a top rate of 17%.

Acquiring a property within a trust can be a little more complicated and the SDLT position will usually depend on the type of trust. Beneficiaries under life-interest and bare trusts and trustees of other types of trust could also be caught by the surcharge.

We set out below some key considerations for overseas purchasers of residential property in light of these imminent changes.

UK residence test

The residence of an individual for the purposes of the surcharge is not determined by the “statutory residence test” that is commonly used for other UK tax purposes. Under the draft legislation, an individual is deemed to be a “UK resident” if they have been in the UK for at least 183 days during any continuous period of 365 days within the “relevant period”. The “relevant period” begins 364 days before the effective date of the transaction and ends with the day falling 365 days after it.

What if there are joint purchasers?

If the purchase is made jointly with a spouse or civil partner (and the purchasers are co-habiting on the date of the purchase), only one of the purchasers needs to satisfy the “UK resident” test for the surcharge not to apply. The “non-resident purchaser” of the two is then deemed to be UK resident in relation to that purchase only. For all other joint purchases, for example, between business partners, family or friends, each purchaser must be UK resident in order for the charge not to apply.

When is a company UK resident?

A company is treated as UK resident if it is resident for corporation tax purposes on the date of the purchase. However, a separate test for “close companies” applies.

When must purchasers meet the residence test?

If the UK residence test has not been met at the “effective date” of the purchase, the surcharge must be paid. However, where the residence test is subsequently met at any time during the relevant period, then an individual will have two years from the effective date of the purchase to reclaim the surcharge.

The draft legislation does not currently provide an equivalent process for companies.

What if the purchase exchanged before 1 April 2021?

The surcharge will not apply in two “transitional” situations:

• Situation 1: if a contract is exchanged and substantially performed before 1 April 2021 but completes on or after 1 April 2021; or
• Situation 2: if a contract was exchanged prior to 11 March 2020 (and is not subsequently varied or assigned) but is substantially performed or completed on or after 1 April 2021.

Assuming most buyers were not in a position to exchange sale contracts prior to 11 March 2020, in order to avoid the surcharge completely they will need to fall within Situation 1. This will require the exchange and substantial performance of binding sale contracts before 1 April 2021.

Further advice

The application of SDLT rates and reliefs remains a complex area. Please contact Ray Smith in the Tax team for specialist advice.