From 8 July 2020 the Stamp Duty Land Tax (SDLT) zero rate band for residential properties, at which a purchaser does not pay any SDLT, was temporarily increased until 31 March 2021. On 1 April 2021, SDLT rates will revert to their previous state, and with it new rates of SDLT for non-UK residents from 1 April, 2021.
This last measure introduces new rates of SDLT for purchasers of residential property in England and Northern Ireland who are not resident in the United Kingdom. The new rates will be 2 percentage points higher than those that apply to purchases made by UK residents, and will apply to purchases of both freehold and leasehold property as well as increasing SDLT payable on rents on the grant of a new lease.
The intention of introducing the surcharge is to help make house prices more affordable to UK nationals, helping people get onto and move up the housing ladder in line with wider objectives on homeownership. The Government has pledged that the revenue raised will be used to tackle rough sleeping.
This measure may help to control house price inflation, by leading to a reduction in residential property purchases by non-UK residents, some of which is offset by an increase in purchases by UK residents.
Where contracts are exchanged prior to 11 March 2020 but complete or are substantially performed on or after 1 April 2021, transitional rules may apply. Transitional rules may also apply where a contract is substantially performed on or before 31 March 2021 but does not complete until 1 April 2021 or later.
Implications for Non-UK nationals and High Net Worth Individuals
This measure will affect individuals who will be required to consider their residence status when purchasing a residential property. An individual would be defined as a UK resident if they have been in the UK for at least 183 days in any continuous period of 365 days falling within the two-year window beginning 364 days before the purchase and ending 365 days after it.
Most individuals will be clear as to their residence status for the purposes of SDLT but some individuals with more complex affairs or who have regular periods in and out of the UK may require additional advice and incur additional costs in determining their tax liability. Where individuals pay the surcharge but then satisfy the residence conditions in the 12 months following the transaction, they may be entitled to a refund.
Within the context of a lease extension, a surcharge of 2% will be triggered where the premium is greater than £40,000, irrespective whether the flat, that is subject to the lease extension, is their main residence.
HNWIs could be negatively impacted as this measure may create complexity for individuals in establishing the rate at which SDLT is payable on their property purchase. The same may be true also for businesses with complex ownership structures as it may be more difficult for them to establish the rate at which SDLT is payable on their property purchase.
Guidance is still awaited setting out how individuals can determine their residence status and whether they are entitled to claim a refund.
This measure will also impact Family law where issues of separation and Maintenance are involved by increasing upfront costs for some non-UK residents purchasing a home in England or Northern Ireland. It could affect couples’ decisions around the type and location of property purchased. Where our client is a couple (married or in a civil partnership), to the extent that one partner is UK-resident, the surcharge would not apply.
The impact on businesses
This measure is expected to have a negligible impact on businesses who will be required to consider their residence status when purchasing a residential property in England or Northern Ireland. It is expected that this will be a straightforward task. For businesses with complex ownership structures, more time and extra costs may be involved in assessing their residence status. One-off costs include familiarisation with this change and will include businesses identifying their residence status in order to self-assess their SDLT liability. There are not expected to be any continuing costs.
However the government is now expected to consider representations by the legal profession about some of the unintended consequences of this measure. Where the leaseholders of an apartment block form a company with the intention of purchasing the freehold from the freeholder (enfranchisement) if any of the leaseholders are a non-UK national the 2% SDLT would apply to the whole purchase price of that freehold, payable by each of the leaseholders..
Current law
Part 4 of the Finance Act (FA) 2003 contains the main charging provisions relating to SDLT.
Section 55 FA 2003 sets out the amount of tax chargeable on a transaction.
Section 74(1A) FA 2003 sets out the amount of tax chargeable where there is an exercise of collective rights by tenants of flats.
Schedule 4ZA FA 2003 provides for a higher rate of SDLT to be charged on dwellings purchased by companies and on additional dwellings purchased by individuals, partnerships or trusts.
Schedule 4A FA 2003 provides for a 15% higher rate of SDLT to be charged on dwellings worth more than £500,000 that are acquired by companies.
Schedule 5 FA 2003 sets out the amount of tax chargeable on the rental element of a newly granted lease.
Schedule 6ZA FA 2003 provides for special rates of tax to be charged in respect of purchases of dwellings made by first time buyers.
Proposed revisions
FA 2003 will be amended to introduce new section 75ZA which will provide for a 2% surcharge to be added to the rates of SDLT due on a residential property transaction, including those rates applied under:
- Section 55 FA 2003
- Section 74(1A) FA 2003
- Schedule 4ZA FA 2003
- Schedule 4A FA 2003
- Schedule 5 FA 2003
- Schedule 6ZA FA 2003
The requirements for the additional 2% charge to apply will be set out in new Schedule 9A of FA 2003.
Part 1 of Schedule 9A sets out the arrangement of the Schedule
Part 2 of Schedule 9A sets out the conditions for a transaction to be considered a non-resident transaction and so liable to the 2% surcharge
Part 3 of Schedule 9A sets out the residence test for individuals, and special rules for crown employees
Part 4 sets out the residence test for companies, including special rules which apply to certain UK resident companies under the direct or indirect control of non-UK resident persons
Part 5 provides for special rules relating to particular purchasers and transactions. This includes rules relating to:
- the residence status of spouses and civil partners
- purchases of property made by certain bare trusts and by certain settlements
- the residence status of co-ownership authorised contractual schemes and certain equivalent collective investment schemes
- purchases as part of alternative property finance arrangements
- the completion of contracts which have been previously substantially performed
Part 6 contains provisions which:
- set out the requirement to complete a land transaction return where the purchaser is, or includes an individual
- permit individual purchases to amend their land transaction return where they become UK resident after the effective date of transaction
- describes the type of property which will be subject to the surcharge.
As ever, if you would like to discuss any of the points raised in this article, please do get in contact by emailing leasehold@bishopandsewell.co.uk.
Mark Chick and Laurent Vaughan
At Bishop & Sewell, we have more than 40 years’ experience in property with a particular focus on Landlord & Tenant matters. If you are thinking of buying a flat in London or already own a flat and wish to extend the lease or purchase the freehold, please call us on 020 7631 4141 and ask for either Mark Chick or Laurent Vaughan.
The above is accurate as at 21 December 2020. The information above may be subject to change during these ever-changing times.
The content of this note should not be considered legal advice and each matter should be considered on a case by case basis.
