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Further to our last article, the UK government has now published the draft legislation setting out the operation of the additional SDLT surcharge for non-residents. The new 2% surcharge requires individuals, companies and trustees to assess their UK residency status prior to purchasing residential property in England and Northern Ireland. This will determine whether the additional 2% will apply on top of the current SDLT rates.
The SDLT UK resident test
A new residency test has been introduced specifically for the 2% surcharge. Importantly, the government has decided against adopting the Statutory Residency Test (SRT) on the basis that the new test will be simpler to self-assess. In some cases a person will be UK resident pursuant to the SRT but not pursuant to the SDLT UK resident test.
We have set out the basic tests below.
1. Individuals
In order for an individual purchaser to be UK resident, they must live in the UK for at least 183 days in any 365-day period during a two year window.
Those two 2 years start 12 months prior to completion of the residential property purchase (and end 12 months following completion).
The UK resident test creates a cliff edge situation: a day short means that the purchaser has failed the test.
If there is more than one purchaser, all individuals must meet the UK resident test to avoid the surcharge (although there is an exception for spouses and civil partners where one is treated as UK resident and the other is non-UK resident under this test).
The refund
As the two year test window straddles a period after the residential property is acquired, an individual purchaser may meet the UK resident test after the acquisition.
The SDLT return must be filed within 14 days of the effective date of the transaction (usually completion), therefore the residency status of the purchaser on the date of completion of the purchase is important.
- If the purchaser fails the UK resident test at that date (i.e. they have not spent sufficient days in the UK in the year up to completion) they will be required to pay the additional 2% surcharge.
- If the purchaser meets the UK resident test at the end of the two year window (i.e. they spend sufficient days in the UK in the year after completion) a refund can be claimed within 2 years after the date of the transaction by amending the SDLT return.
2. Companies
As with individuals, if a company is acquiring a residential property, that company must determine whether it is UK resident or not for the purposes of the 2% surcharge. A company is UK resident if it is either
- a "non-close" offshore company whose central management and control is in the UK; or.
- a "non-close" UK incorporated company; or
- either a UK or offshore "close company" if all individual participators (e.g. the shareholders) are present in the UK for at least 183 days in a 365 day period ending with the date of the transaction.
The SDLT residency test for participators of "close companies" is stricter than for individuals in that the window for meeting the test is only the year before completion (rather than the two year window spanning completion for individuals). Some commentators had assumed that if the company was incorporated in the UK with UK resident directors it would meet the UK residency test. Unfortunately, this will not be the case for the vast majority of overseas private investors using company structures.
3. Trusts
The type of trust will determine which UK resident test applies to the trust.
Bare trusts – there will be no surcharge if the beneficiary meets the UK residency test for individuals.
If there is more than one beneficiary, all of them must meet the UK resident test.
Other trusts (such as life interest trusts) – where a beneficiary has a right:
- to occupy the underlying residential property; or
- to the income generated by that residential property
There will be no surcharge if the beneficiary meets the UK residency test for individuals.
If there is more than one beneficiary, all of them must meet the test.
Other trusts (such as discretionary trusts) – where no beneficiary has a right:
- to occupy the underlying residential property; or
- to the income generated by that residential property
There will be no surcharge if the trustee meets the restricted UK resident test for companies (i.e. the 1 year window).
If there is more than one trustee, all of them must pass the test.
Transitional rules
The new rules protect contracts exchanged before 11 March 2020 but which complete after 1 April 2021 provided the contract is not varied or assigned on or after 11 March 2020. If you have entered into such a contract and wish to make any changes (including nominating a different purchaser) before completion, we advise you to take SDLT advice before doing so.
SDLT advice
If it is likely the 2% surcharge applies to your transaction, we recommend seeking advice to determine if the effective rate of SDLT can be mitigated by way of utilising any available reliefs. The SDLT provisions and reliefs apply to this new rate in the same way as the current rates.
The right team
We regularly advise clients on the best ownership structuring option for them from both asset protection and tax planning perspectives. We are often engaged to provide advice in the form of a stand-alone exercise or as part of a wider estate planning mandate. Either way, it is fundamental that you seek legal and tax advice well ahead of purchasing any UK property.
Please contact any member of the Private wealth team should you wish to discuss this.