Non UK property investors 3% SDLT additional rate (residential property)

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

Non UK property investors 3% SDLT additional rate

Background – Non UK property investors 3% SDLT additional rate

As announced at the Autumn Statement 2015, a Stamp Duty Land Tax (SDLT) surcharge was introduced with effect from 1 April 2016. This SDLT surcharge applies to the purchase of ‘additional’ residential properties. The relevant test being, on the date of completion, whether one owns two or more properties at midnight.

The rule is designed to discourage (or should that be milk?) B2L landlords from hoovering up properties that could be used by those getting on the housing ladder. Indeed, at the 2015 Autumn Statement this was positioned as one of five measures aimed at supporting home ownership.

So those who are within the new tax and feeling a bit miffed you are actually just helping your fellow man or woman, OK?

For the avoidance of doubt, these provisions do not relate to residence and will apply to all investors regardless of their tax residence. That said, there might be some exceptions – see below.

Three is the magic number

The surcharge represents an additional 3% on each of the existing residential tax rates for SDLT purposes.

The 3% SDLT surcharge rules – a preamble

These new rules were subject to a hasty consultation which closed on 1 February 2016. Bearing in mind the rules came in to effect on 1 April 2016 this measure was introduced at breakneck speed.

Despite the short timeframe, the Government was still capable of creating many pages of new legislation and over 60 new provisions. Perhaps unsurprisingly, the swift pace of the consultation and drafting has lead to law that is neither clear, sensible nor logical.

The 3% SDLT surcharge rules – In general

As stated above, the 3% surcharge applies to purchases of ‘additional residential properties’ in England, Wales and Northern Ireland.

For those entering into premature jubilation north of the border, it is worth pointing out that equivalent measures apply to land and buildings transaction tax (LBTT) in Scotland.

A property is an ‘additional’ residential property where, a purchaser owns 2 or more residential properties and he has not replaced his previous main residence.

If the new 3% surcharge applies, but the purchaser intends to use the new property as his new main residence and he sells his previous main residence within 3 years then any tax paid under the new rules will be refunded.

Below, we show how the new 3% SDLT surcharge will apply when set against the current rates for an individual acquiring a property:

Consideration paidCurrent residential SDLT ratesProposed rate when including surcharge
Below £40k0%0%
40k – £125k0%3%
£125k to £250k2%5%
£250k to £925k5%8%
£925k to £1.5m10%13%
Excess12%15%

 

It should be noted that the £40k does not act as an exempt amount. So if the property is sold at £1 over the £40k threshold then the full amount is subject to 3% rather than just the excess. For whatever reason, the draughtsman seems to have missed the fact that the rest of the SDLT system has abandoned the slab system.

So much for consistency.

Married couples, civil partners and joint purchasers

The rules treat married couples and civil partners as a single unit unless they are separated under a court order or by a formal Deed of Separation. So they may own one main residence between them at any one time for the purposes of the surcharge.

Residential property owned by either partner will be relevant when determining if an additional residential property is being purchased or not.

Bank of mum and dad

The surcharge would also apply where parents purchase a property for the children and it is owned to any extent by the child’s parents (assuming the parents already own a property).

However, this will not apply if it is owned by the child even though the purchase was funded by his parents. So, where a child makes use of the Bank of Mum and Dad then they should properly advise their parents that, quite selflessly, that the property should be in their name and not their parents’!

[For my picky friends, I am aware that there are reasons other than tax that might render putting the property in to the names of the kids a bad idea!]

Delay between selling a main residence and purchasing a new main residence

Of course, an individual may choose to replace his or her main residence but experience some delay.

For example, this might occur where:

  1. A new main residence is purchased prior to the sale of a previous main residence; or
  2. The main residence is sold, a buy-to-let property is retained, and then they buy a new main residence.

In the first example, he will have to pay the surcharge. However, this will be refunded if he or she sells their old main residence within 3 years.

This mechanism, where the taxpayer stomachs the cashflow impact, has come under criticism.

In the second, he will not have to pay the surcharge if he buys his new main residence within 3 years of the sale of the old main residence.

Overseas purchasers

When determining whether the purchaser owns two or more residential properties one must include a property owned anywhere in the world. As such, someone who has a main residence in the middle east and buys a summer home in London will be caught by the new rules.

An overseas purchaser will need to consider whether their overseas property is their main residence; if applicable, they will need to replace their overseas main residence with a UK main residence to avoid the surcharge.

Purchase of mixed-use property

To reiterate, the new 3% SDLT surcharge only applies to residential property purchases.

It only applies to properties that are solely residential property so a property that is purchased that to be used for residential and non-residential purposes (“mixed use”) will not be caught be the surcharge.

There are other circumstances where the additional charge should not arise:

  • where there are 6 or more residential properties being purchased in a single transaction (“rule of six”);
  • the purchase involves an acquisition of residential property that is purchased with a non-residential property; or
  • a residential property if its purchase is ‘linked’ to the purchase of a non-residential property.

Purchase of multiple residential properties

Where the transaction includes the purchase of more than one residential property an SDLT relief – multiple dwellings relief (MDR) – may also be in point.

Under MDR, the residential rates are applied to the average property price and then multiplied by the number of properties purchased.

This can be helpful, however, a minimum of 1% must be applied where the relief is claimed.

Where the transaction involves the purchase of 6 or more properties then the purchaser is afforded a choice as to whether he or she applies the non-residential rates of SDLT or the residential rates of SDLT with MDR applied.

If the surcharge applies and MDR is claimed then the SDLT liability is calculated using the MDR rate plus the surcharge.

Companies and discretionary trusts

It should be noted that both Companies and discretionary trusts are classed as non-individual purchasers.

This means that they are subject to the 3% additional charge on the acquisition of their first property. This defeats an easy SDLT avoidance route.

It should be noted that for an interest in possession trust (sometimes known as a life interest trust) the beneficiaries are deemed to be the purposes for the purpose of this tax charge. As such, it will depend on whether the beneficiaries already own properties.

Conclusion – Non UK property investors 3% SDLT additional rate

In order to be able to determine the correct amount of SDLT under the rules for the purchase of a residential property transaction one must consider the following:

  • is a property used as a dwelling, or is it suitable for use as a dwelling or is it in the process of being constructed or adapted as use as a dwelling?
  • is this communal accommodation?
  • is this a mixed-use property?
  • Does Multiple Dwellings Relief (MDR) apply to the transaction?
  • Does the ‘rule of six’ apply to the property purchase?
  • is the purchaser is a company, a collective investment scheme or partnership, and does the 15% super rate apply? Do any of the reliefs apply? and
  • is the proposed transaction linked to any others?

One can see why this is already, and will remain a profitable area for future HMRC enquiries.

 

Non UK property investors 3% SDLT additional rate is the third article in a collection on the taxation of non UK resident property investors in relation to residential property.

The other articles are:

  1. Non UK resident property investor tax: An introduction;
  2. Non UK resident investor tax: SDLT;
  3. Non UK property investors 3% SDLT additional rate;
  4. Non UK resident investor tax: ATED;
  5. Non UK resident investor tax: Capital Gains Tax;
  6. Non UK resident investor tax: IHT

For changes announced in the Autumn Budget 2017 regarding commercial property and shares in property rich companies then please see here.

 

If you have any queries about Non UK property investors 3% SDLT additional rate or property tax in general then please get in touch.

 

 

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