No holiday for overseas buyers as stamp duty tightens

The government’s extension of the stamp duty holiday made headlines earlier in the spring, but it isn’t the only change making waves in the residential property sector. A new surcharge on the stamp duty land tax owed by non-resident buyers of property in England and Northern Ireland is already having an effect on the overseas investment market. The new measures, which came into force from 1 April, mean that overseas buyers and investors will pay a 2% surcharge on top of the usual rates for purchases of residential property. While most of the direct impact will be on foreign individuals who buy homes in England and Northern Ireland, overseas corporates will also be caught. That includes developers and investment funds, which often bulk-buy residential property, and will no longer be eligible for domestic rates of SDLT, unless their purchase can be treated as non-residential (for example, on the basis they will purchase six or more dwellings in one transaction or a mixed site containing commercial and residential property). The rules apply to most kinds of residential investment, with only a few exceptions. Playing politics The stated intention of the move is to limit property price inflation, which the government believes is influenced by overseas property buyers. A policy paper published last year also states that introducing the surcharge will help people get on to and move up the housing ladder, something which is consistent with this government’s wider objectives around homeownership. The revenue raised will be used to tackle rough sleeping, meaning this is an inherently political tax. And it might well be successful. The rules are strict for companies, partnerships, and trusts, where the bar is generally high to qualify as a resident and be eligible for the domestic rate. Caution is needed, however. Regulation is important but the government must be careful that its measures do not disincentivise overseas investment altogether – particularly in the context of Brexit and the current objective to “build back better”. That is not to mention that the scheme will likely also catch many overseas investors who bring diversity to the UK residential sector – for example PRS schemes like build-to-rent and co-living, and who may need to revisit their tax planning if they were taking advantage of the relief for purchases of multiple dwellings at the residential rate. Who might be caught out ? The non-residency test for this charge is different from that commonly used for other tax purposes. Instead of the typical statutory criteria, buyers are treated as UK residents if they are present in the UK for at least half (183 days) of the year. For individuals, the surcharge can be reclaimed if they become a UK resident within a year after the purchase, meaning that those making the move from overseas can buy their new home without being charged extra. Couples which include one UK national will be equally exempt in most circumstances. Those basic principles will apply to most individual buyers, but the application of the rules to companies is where many are at risk of being caught short. As a general rule, a business will be treated as non-resident if (a) it is treated that way for the purposes of corporation tax, or (b) it is a small business controlled by a non-resident individual or company. The long and short of that is, for the purposes of SDLT, many UK subsidiaries of overseas parent companies will be treated as non-resident for the purposes of the surcharge. Crucially, where a purchaser is a partnership, SDLT treats the partners themselves as the purchaser. That means that if any of the partners in the business are non-resident (whether they are individuals or companies) then the non-resident surcharge will apply to the whole transaction. On top of that, the ability to reclaim payments after becoming a resident following the purchase is lost. The test for individuals as part of companies and partnerships looks backwards, not forwards, and it will not be good enough for a buyer to be resident in the UK for half of the year after they buy – they must be domestically based in the year preceding the purchase. If just one individual partner is non-resident, then the surcharge will bite and apply the 2% increase to the whole transaction.  Trusts of various structures are often investors in UK residential real estate and the rules for them will vary depending on the type of set up with which they operate. Whether or not the trustee or the beneficiary is the relevant resident or non-resident party depends on the circumstances, and different rules apply to trustees of settlement, unit trusts, and bare trusts. That will no doubt leave some unsure of whether the surcharge will apply, and whether or not non-resident trusts have individual rights to claim back the surcharge if they gain resident status after the purchase is equally dependent on the detail. Finding your way For most overseas property investors, a 2% surcharge on SDLT will not be enough to turn them off the UK residential market, which remains attractive for a number of cultural and macro-economic reasons. However, added complexity does slow down deals, and there is no doubt that many without expertise in the field of UK tax will be surprised to find themselves caught by a surcharge which they may not have expected. Help is out there for investors and buyers who need to know where they stand under the new regime. Sophie Pandit is an associate in the tax team at Winckworth Sherwood