The new 2 per cent SDLT surcharge for non-residents

The Stamp Duty Land Tax (SDLT) surcharge on overseas buyers of UK residential property was announced in the 2018 Budget. The consultation process for the proposed surcharge ran from 11 February 2019 to 5 May 2019 with confirmation of the 2 per cent surcharge being announced in the Spring 2020 Budget and the draft legislation being published on 21 July 2020.

Why the surcharge?

The surcharge is intended to deal with the issue of rough sleeping although there is no clarity as how the Government will deploy the money raised through this measure on projects or provision of accommodation. In addition, the surcharge is expected to make house prices more affordable and implicitly should help people get onto and move up the housing ladder by making UK residential properties more expensive for non-resident buyers to purchase.

Application of the surcharge

The surcharge only applies in England and Northern Ireland; however, it is expected that both Scotland and Wales will follow suit and introduce similar measures for non-resident buyers.

SDLT is chargeable on the amount of consideration paid for acquisition of real estate in England and Northern Ireland. Different rates apply to acquisition of residential and non-residential real estate.

The 2 per cent surcharge only applies to acquisition of residential properties by non-resident buyers with effect from 1 April 2021 and is payable in addition to the SDLT liability including the 3 per cent surcharge for additional homes. This means the top end SDLT rate could be as high as 17 per cent (i.e. purchase of second home by a non-resident for value in excess of £1.5m – 12 per cent plus 3 per cent second home surcharge and 2 per cent non-resident surcharge). 

Essentially, a non-UK resident includes:

  •  an individual who is outside the UK for 183 out of the last 365 days;
  • certain trustees;
  • a company not resident in the UK; and
  • UK resident close companies which are not controlled in the UK, for example they are owned by non-residents.

Certain exclusions apply to treat UK real estate investment trusts (REITs), members of a group UK REIT and open-ended investment companies (OEICs) as UK tax resident even though these would otherwise qualify as close companies under the modified close company test for the purposes of the 2 per cent surcharge. UK co-ownership authorised contractual schemes will be as treated as UK tax resident irrespective of the residence status of the investors.

Note that where six or more separate residential properties are acquired under a single transaction, the buyer could either claim the Multiple Dwellings Relief (‘MDR’) or treat the transaction as non-residential with the commercial or mixed use SDLT rates applying to manage the SDLT liability. The measure will bring an end to MDR claims for bulk purchase of residential properties by non-residents as it would be more cost efficient to pay the SDLT charge at the lower commercial rate, ie 5 per cent.

For properties exchanged prior to 11 March 2020 but will complete on or after 1 April 2021 transitional rules will apply.

Effect

The 2 per cent surcharge will certainly bite non-residents and most likely push the SDLT cost. The increased cost may well be absorbed within pricing over a period of time and may drive the prices down to make it more affordable for UK first time buyers to purchase their first home or move up the property ladder. However, the 2 per cent surcharge does not go far enough to tax non-residents who purchase properties off plan and will never be subject to the surcharge as they do not tend to complete the transaction and the sub-sale relief claim will side step the 2 per cent surcharge for the non-resident if the person completing the transaction is UK resident.

Please contact your local RSM advisor if you want further information or a member of the real estate team