Properties are often bought by wealthy individuals or companies who are not tax resident in the UK and either kept as investments or rented out. This is adding significant demand to limited supply, inflating house prices and making it harder for people to get onto the property ladder.
In the 2020 Budget the Chancellor announced that a 2 per cent Stamp Duty Land Tax (SDLT) surcharge would apply from 1 April 2021 on purchases of residential property in England and Northern Ireland by non-resident individuals, trusts, companies and partnerships. The measure, which is one of many recent tax changes affecting property investors, is expected to impact 70,000 property purchases per year and raise up to £120m, which will be redirected at programs to help tackle rough sleeping.
The latest SDLT surcharge is in addition to the 3 per cent surcharge that already applies for second homes, increasing the maximum SDLT rate for overseas buyers to 17 per cent.
Draft legislation released on 21 July clarified how this will operate, which has sparked further comment from the professional bodies, largely focused around the impact of the proposed test of residence to be used.
The SDLT definition for ‘non-resident’ is different to the existing definitions of residence for individuals and companies for other tax purposes, resulting in purchasers having different tax status depending upon the type of tax in question.
The measures, originally announced in the 2018 Budget, were the subject of a consultation period, following which the government continued with the plan for the alternative residence rule. Their explanation is that this would simplify things, but the draft legislation as it stands creates more complexity, by introducing yet another set of residency rules for individuals and advisors to familiarise themselves with. In addition to this, they will need to have a deeper understanding of who the purchaser of the residential property will be.
For individuals where the ‘non-resident’ rule conflicts with the rules for statutory residence test (SRT) purposes, mobile workers and globally mobile entrepreneurs may find themselves caught under the SDLT ‘non-resident’ rule, whilst being treated as a UK resident under the SRT, and may consider the UK their home. This is completely at odds with the underlying principle of the charge.
We have already seen a pick-up in the property market since the announcement of the extended zero per cent threshold for SDLT until March 2021. It is likely there will be further activity for residential purchases to take effect before these additional changes come in, similar to that which was experienced prior to the introduction of the second property 3 per cent surcharge in April 2016. Transitional rules may also apply where contracts exchanged before 11 March 2020 are completed after 1 April 2021.
Taxpayers and advisors will be looking for more detailed guidance to be provided by HMRC prior to 1 April 2021 to clarify some of the anomalies that could arise based on the current draft legislation.