Do You Pay Stamp Duty on a Commercial Lease?
SDLT on commercial leases can be very complex. Many tenants are unaware that Stamp Duty Land tax is payable on commercial leases – and may be...
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Yes, at the moment Stamp Duty for non-UK residents is paid at the same rates on purchases of UK property as is paid by UK resident buyers. But Chancellor Rishi Sunak announced in the Budget on 11 March 2020, that SDLT for overseas buyers will include a Stamp Duty surcharge of 2% for purchases from 1 April 2021. In July 2020 the government published the draft legislation and will introduce the change in the 2020/21 Finance Bill.
Given that SDLT only applies to residential property in England and Northern Ireland, the charge cannot apply in Scotland and Wales, although those jurisdictions are likely to apply a similar non-UK resident charge if it is adopted in England and Northern Ireland.
The new Stamp Duty surcharge will apply if one or more purchasers is non-resident and for this purpose an individual will be UK resident where they are present in the UK for at least 183 days during any continuous 365-day period in the “relevant period”. The “relevant period” begins 364 days before the effective date of the transaction and ends 365 days after that date (Paragraphs 4(1) and (2) of new Schedule 9A FA 2003). There are special rules for co-purchasing spouses, partnerships etc.
For company purchasers, a company will be non-resident where the company is not UK resident for corporation tax or where the company is resident but is a close company and it meets the non-UK control test under paragraphs 9 and 10 of new Schedule 9A (so that it is a close company controlled by reference to non-resident participators only), and it is not specifically exempted.
The legislation will allow for the repayment of the surcharge to individuals who become UK-resident after submitting their land transaction return. They will have up to two years to amend their land transaction return in order to claim repayment of the non-UK resident SDLT surcharge.
The non-UK resident SDLT surcharge will apply at a rate of 2% above the residential rates (including the higher rates for additional dwellings and companies, the 15% rate and the first-time buyers’ rates) on residential property bought by non-residents.
This would be in addition to the existing 3% higher rates surcharge which most foreigners already pay because they already own one or more residential properties overseas. So, SDLT for overseas buyers will be at a top rate of 17% of the purchase price.
This will be either a flat rate of 17% in the case of the existing 15% higher rate on companies buying a dwelling or in other cases, on the top slice of the purchase price above £1.5m.
The stated purpose is to deter foreign buyers from driving up UK property prices and to provide revenue to combat rough sleeping. But there is a major blind spot because where a non-UK resident off-plan buyer flips the property to a UK resident, no surcharge will be payable because the flipper gets full sub-sale relief from SDLT. This widespread behaviour is a major driver of price increases but is likely to be ignored by the legislation.
But the most striking thing about the non-UK resident surcharge is that it introduces the concept of residence into SDLT which until now has been levied on the basis of where the property in question is located. Moreover the definitions of UK residence for SDLT are hybrids and complicated compared with the standard tax definition.
First, given the depressed state of the London residential market, would it act as a further disincentive to overseas buyers given the existing top rate of 12% above £1.5m (or 15% if the purchase is of an additional residential property).
Second, would it actually achieve much? Non-resident investors have traditionally been very active in the off-plan purchase market. They usually aim to flip their purchase contract at a profit to another buyer after holding the right to purchase for 2 or 3 years while the development is being built.
This market provides developers with valuable pre-completion funding and helps to secure project finance. At the moment, these flippers do not pay any SDLT because they never substantially perform or complete their contracts and it is left to the ultimate purchaser to pay the tax.
Unless the SDLT rules on when SDLT becomes payable are changed, the new charge on non-UK residents is not going to affect flippers and may well encourage flipping and put off genuine investors from owning UK residential property.
Another practical problem with the new levy will be that some non-UK resident investors will be tempted to use UK resident proxy buyers who hold as nominee for the non-resident in order to get around the charge.
While this would amount to tax fraud, it would be difficult to detect and would make the effective operation of the levy difficult to enforce properly and unfair in that it only hit honest foreign investors and not those who hide their ownership.
If you are considering the purchase of a residential property in the UK at a time when you or your company or trustees are likely to be treated as a non-UK resident Patrick can advise you whether the surcharge will apply and if so, what you might do to mitigate the Stamp Duty surcharge on non-residents or to reclaim it if you do become UK resident. Use the contact form below to get in touch on a no-obligation basis.