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The SDLT surcharge: residence issues

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It seems clear that there is going to be another SDLT surcharge from 1 April 2021. Draft legislation has been published and there is no reason to suppose that this proposal will be withdrawn. There is to be an extra 2% on non-resident purchasers of UK residential property across the whole range of values, taking the top rate of SDLT up to an eye-watering 17% on properties over £1.5m.

This will apply to individuals, companies and trusts, generally in the manner you would expect – except there are a few surprises.

For a start, there is a special definition of residence for this purpose. Why on earth do we need another definition of residence? HMRC is famous for saying (with no apparent irony) that the statutory residence test is straightforward and easy to understand, so you would have thought they would have wanted to use that. But no, oh dear me no.

The surcharge will apply to non-residents, but there is no specific definition of non-resident for this purpose. An individual will be non-resident unless he is UK resident. And that is where the new definition of UK residence comes in. An individual will be UK resident if he is present in the UK (at midnight) on at least 183 days for any continuous period of 365 days during the period starting 364 days before and ending 365 days after the transaction. For joint purchasers (other than spouses), the residence test has to be satisfied by both purchasers (just like the rule for the 3% surcharge).

So, it is no good just assuming that somebody is resident because he satisfies the statutory residence test. He could quite easily be resident for all other tax purposes but be non-resident for the 2% surcharge. Talk about a trap for the unwary!

Where the purchaser is a trustee, and a beneficiary has a life interest (or it is a bare trust), it is the non-residence of the beneficiary which will apply to determine the liability to the additional surcharge. For an individual who is the trustee of a discretionary trust there is a different test of residence, this time by reference to whether he has been in the UK for 183 days in the 364 day period up to the date of the transaction.

The position for companies looks much simpler, but you will have grasped by now that this would be a dangerous assumption. A company’s residence will generally be determined by the normal rules under the Corporation Tax Acts. However, there are some special rules to catch you out. For example, a UK resident close company controlled by non-residents will be treated as non-resident and subject to the surcharge.

The period for the determination of these tests is not the two-year period which applies generally to individuals, but a one-year period ending with the date of the transaction.

There is some relief if the residence test is satisfied by the purchaser within the 365 day period following the relevant transaction. In that case, they can apply for a refund. This will obviously be helpful for somebody who buys a UK dwelling in anticipation of moving to the UK.

This 2% is in addition to all the other rates and surcharges. This would make it applicable to the first £500,000 (just like the 3% surcharge), despite the SDLT holiday for properties of up to £500,000 – although that is supposed to be coming to an end on 31 March 2021. 

Issue: 1508
Categories: In brief