On 11 March 2020 Chancellor Rishi Sunak delivered his first Budget in the House of Commons, announcing a 2% surcharge for overseas purchasers of residential property England and Northern Ireland. The surcharge will come into effect from 1 April 2021 but there are some complexities attached to this surcharge.
The 2% surcharge is applied on top of the relevant residential rates including; standard rates, rates for rental element of leasehold purchases, 3% surcharge for additional dwellings, first-time buyers relief and other residential reliefs.
Individuals
A residence test will be used for determining an individuals personal tax status in a tax year and the key driver will be the number of days a person has stayed in the UK. It will be a retrospective test from the effective date, which is usually completion.
So a purchaser could be UK resident for income tax purposes in a tax year but be a non-resident under the SDLT rules.
Companies and Trusts
Currently there is no concept of corporate residence within SDLT statue, so the Government will be introducing a new test for the surcharge.
Entities will be treated as UK resident if:
- They are incorporated in the UK; or
- At the date of purchase, their central management and control is exercised in the UK.
Point two will be open to challenge by HMRC and is frequently brought to the courts for Corporation Tax purposes. Case law will be key in determining an entity’s status and there will be a number of situations which are borderline.
The treatment of a Trust will be dependent on the type of Trust and the nature of the property being acquired. Trusts will be subject to complex rules and advice should be sought before purchase.
For entities which are not incorporated, such as Unit Trusts, specific tests will be applied to determine residency.
Partnerships and Joint Purchasers
For SDLT partners are treated as joint purchasers of partnership property. If one purchaser is deemed to be non-UK resident then the whole purchase will be subject to the surcharge.
What we should take away
The residence tests are supposed to be as simple as possible but we cannot see how this will be the case. The tests are applied at the effective date (usually completion), awareness of the rules and careful planning could mitigate the surcharge.
The surcharge will not apply to non-residential and mixed-use properties. It will be extremely important to ensure a property is correctly classified as residential, please see our other publications for uninhabitable and mixed use purchases.
