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UK property investment by non-UK resident investors: Part three – the 3% Stamp Duty Land Tax (SDLT) surcharge

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.

UK property investment by non-UK resident investors – 3% additional SDLT charge

Background

As announced at the Autumn Statement 2015, will be a Stamp Duty Land Tax (SDLT) surcharge will soon apply to purchases of ‘additional’ residential properties. Therefore buy-to-let properties and second home are firmly in the crosshair of this new measure.

For the avoidance of doubt, these provisions will apply to all investors regardless of their residence – albeit there will be some exceptions (see below).

Three is the magic number

The surcharge represents an additional 3% on each of the existing residential rates of SDLT and is positioned as one of five measures aimed at supporting home ownership. So those who are within the new tax – you’re actually just helping someone out, OK?

Consultation

These new rules were subject to a hasty consultation which closed on 1 February 2016.

The remainder of this note summarises the proposals which were set out in that consultation. As such one should bear in mind that these are subject to change.

The consultation proposals in general

As stated above, the 3% surcharge will apply 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 will apply to land and buildings transaction tax (LBTT) in Scotland. A separate consultation exercise is being run in this regard.

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 18 months 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%

 

Married couples, civil partners and joint purchasers

The Government proposes to treat married couples and civil partners as a single purchaser 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.

Where a residential property is purchased by two or more persons the proposal is for the surcharge to apply in full where, at the end of the day of the transaction, any of the purchasers has two or more residential properties and is not replacing their main residence. The liability of the purchasers to pay the SDLT is joint and several.

The Government recognises that this may be unfair and implies that it might consider restricting the surcharge to the proportion of the property purchased by the person for whom the property is an additional residential property.

 

Bank of mum and dad

The proposal is for the surcharge to apply if the purchased property is owned to any extent by the child’s parents if they 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.

Even more reason to use the Bank of Mum and Dad!

 

Main residence test

In determining whether a residential property is a person’s main residence or not, the Government proposes not to use an election-based system. Instead, a factor based system will be used.

 

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

Of course, an individual may replace his or her main residence but there is a 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 buys a new main residence.

In the first example, he will have to pay the surcharge. However, this will be refunded if he sells his old main residence within 18 months.

In the second, he will not have to pay the surcharge if he buys his new main residence within 18 months of the sale of the old main residence.

 

Overseas purchasers

When determining whether, at the end of the day of the purchase of a residential property, the purchaser owns two or more residential properties, a property owned anywhere in the world will count as an additional property.

As such, an overseas purchaser will need to apply the ‘main residence test’ to their overseas property; and, 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

As you will have realised, the new 3% SDLT surcharge only applies to residential property purchases.

The definition of residential property does not appear to be subject to any change. Therefore, the surcharge will not apply to purchases where:

  • There are 6 or more residential properties purchased in a single transaction (“rule of six”);
  • a property is purchased that is to be used for residential and non-residential purposes (“mixed use”);
  • a residential property 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 be in point.

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

It is proposed that this will continue. However, if the surcharge applies and MDR is claimed then the SDLT liability is calculated using the MDR rate plus the surcharge.

 

Large-scale investors

The Government proposes to exclude investment in residential property that increases the overall housing supply.

At the Autumn Statement, it indicated that only corporates and funds would benefit from the exemption and only where they already own 15 or more residential properties.

It is now considering extending the exemption to individuals that already own 15 or more residential properties.

 

Pushing the envelope?

To prevent a potential ‘avoidance’ opportunity, the Government has also proposed that it will apply the 3% surcharge to a company or collective investment scheme acquiring its first residential property.

 

Conclusion

The surcharge will undoubtedly add to the pre-existing web of complex rates and rules for SDLT (not to mention the recent rule changes for residential property purchase.

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 how this will be a profitable area for future HMRC enquiries!

Other articles in the ‘UK property investment by non-UK resident investors’ series:

Part one – Introduction

Part two – Stamp Duty Land Tax (SDLT)

 

If you have any queries over the 3% SDLT surcharge,  UK property investment by non-UK resident persons or property tax in general then please don’t hesitate to get in touch

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