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Non-UK resident SDLT surcharge: adding 1% and more complexity: Part II

In February we discussed the government’s intention to increase stamp duty land tax for non-UK residents (that post can be accessed here). The proposal is to add 1% to the SDLT charge for non-UK resident buyers of UK residential property. The policy is to ease pressure on UK residents seeking home ownership. HMRC’s public consultation on the new rules remains open until 6 May.

As discussion of the proposed increase has developed in the real estate sector, and with government, it’s apparent that a few key aspects of the regime require particular attention.

Who is caught?

The consultation proposes that the additional charge will fall on purchasers of residential property which are non-UK resident individuals, non-UK companies, and closely-held UK companies if they are controlled by non-UK residents. Partnerships and trusts can also be caught depending on their participants.

It’s difficult to see why as a matter of policy all corporate buyers have been treated in this way, and in particular why a widely-held non-UK company is assumed to be ‘bad’ for the purposes of the rules.

Clearly no one except a natural person uses a home as such. So the residence status of a corporate buyer, of itself, doesn’t reveal whether the home is for the use of a UK resident individual. Moreover, as the CGT treatment for a non-UK resident company investing in UK property is, since 6 April 2019, similar to that for a UK resident company, it would be odd for SDLT policy to be apparently discriminating against the non-UK corporate investor.

Build to rent

One consequence of the proposal is that it will naturally catch many non-UK resident collective investment vehicles acquiring finished or partly-constructed build-to-rent residential units. Some such buyers will not be paying residential rates of SDLT because they will instead be treating the purchase of 6 or more residential units in a single transaction as an acquisition of ‘commercial’ property for SDLT purposes. But for those buyers who claim the residential rate benefit of ‘multiple dwellings relief’ (MDR), their acquisition cost will go up by 1% under the current proposals. No reliefs for non-UK funds from the additional 1% charge have been suggested in the consultation, although the government has apparently been surprised by how many such purchasers do claim MDR (and so would therefore be affected by the additional charge).

A new residence test

Motivated by a desire for simplicity, the consultation envisages that an individual will be ‘non-UK resident’ if not present in the UK for 183 days during the 12 months ending with the purchase, albeit with the ability to reclaim the 1% if they are present here for 183 days during the 12 months after the purchase. This is odd, given one would assume that the policy is to charge those who don’t pay UK direct taxes, and so are not “contributors” to the UK exchequer.

With that in mind, the obvious approach would be to align the concept of residence with the existing statutory test for income tax purposes. Otherwise situations could arise in which a buyer is a UK tax payer, but nonetheless happens to be ‘non-resident’ for the 1% charge, at the time of purchase. Moreover, the consultation does contemplate a relief for military personnel and other Crown servants abroad, precisely because it would be unfair to charge them if they are still paying UK tax.

A particularly harsh feature of the proposed regime is that, in the case of joint purchasers, the charge will apply if any of them is non-resident. So spouses will be disadvantaged by their choice of a non-UK resident partner. A more sensible approach would seem to be to reverse this rule, for those joint purchasers with ‘ties of affection’. For others, such as business partnerships, why not allow the charge to apply, or not, according to the circumstances of each joint owner/partner?

What next?

The government has not committed to when it intends to introduce the new charge, other than to say it will be in a future Finance Bill. Hopefully this open-ended approach presages a will to consider carefully the results of the consultation and whether, as currently proposed, the regime will truly (and fairly) further its policy ambitions.