SDLT surcharge: beware the non-resident resident

Every other April seems to bring a potential new tax issue for non-residents owning or considering buying UK residential property. In April 2013 it was the annual tax on enveloped dwellings (or ATED). In April 2015 there was non-resident capital gains tax. April 2017 brought non-UK companies holding UK residential property into the inheritance tax net for non-domiciled owners. From April 2019, indirect disposals of UK property (commercial or residential) have been assessed to capital gains tax.

April 2021 is no exception. The new ‘non-resident’ surcharge for stamp duty land tax (SDLT) is being introduced for residential land transactions completing on or after 1 April 2021. This means that the maximum rate of SDLT, if the additional 3% rate is also chargeable in relation to purchasers of second homes, will be an eye-watering 17%. At this time, of course, the SDLT threshold, which has been generously but temporarily raised to £500,000, is expected to fall to its usual £125,000.

The non-resident SDLT surcharge applies to individuals, companies, trusts and partnerships. The rationale for it is reasonable enough – it is intended to help make housing more affordable for UK residents and raise revenue to tackle rough sleeping. However, the legislation contains a potential trap. The meaning of ‘resident’ for the non-resident SDLT surcharge is not the same as ‘resident’ for general UK tax purposes. It would, in fact, be possible for an individual to be UK resident, and taxed on their worldwide income and gains, but to be non-resident for the purposes of the SDLT surcharge – and therefore to have to pay the additional 2%.

For most UK tax purposes, residence of an individual is determined by the statutory residence test (SRT). This looks at the individual’s links to the UK and days spent in the UK. The number of days individuals can spend in the UK before becoming UK tax resident vary widely from one individual to another – this can be as low as 16 and as high as 182, depending on the individual’s circumstances.

The SRT is not relevant for the new SDLT non-resident surcharge rules. The new surcharge has its own tests of residence. Under the non-resident SDLT surcharge rules, an individual is ‘resident’ in the UK if they are present in the UK on at least 183 days during any continuous 365-day period falling within the ‘relevant period’, which, roughly speaking, is a year either side of the property purchase. In relevant cases, detailed record keeping will be required to demonstrate that it is not payable. If an individual does not meet the test of ‘residence’ for the SDLT surcharge at the time of the purchase they need to pay the surcharge, but if they can later demonstrate that they became ‘SDLT surcharge resident’, they can reclaim the tax.

The non-resident SDLT surcharge also brings in its own test for residence of companies and trusts. The test for company residence is similar, though not identical, to the test for most UK tax purposes. For trusts, if a beneficiary has an interest in possession in the purchased property, the beneficiary is assessed as the purchaser. The situation is the same for a bare trust. For a discretionary trust, the rules are complex but, in summary, the residence status is determined by reference to the trustee.

The new rules have considered joint purchasers. If one purchaser is non-resident, for the purposes of the SDLT surcharge, this generally ‘taints’ the whole transaction, so the surcharge will apply to the whole purchase price. An exception to this is where spouses or civil partners jointly buy a home where one is UK resident and the other non-resident (for the purposes of the surcharge) – in such cases the non-UK resident one is treated as being UK resident as long as they live together.

Potential purchasers of UK property can only wonder what new tax April 2023 will bring…