Do overseas buyers pay stamp duty land tax on UK property?
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 for purchases from 1 April 2021.
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.
Who does the non-UK resident charge apply to?
The new SDLT surcharge for overseas buyers is likely to apply as follows:
- individuals with fewer than 183 days in the UK in the 12 months ending with date of purchase will be liable
- a refund claim will be available if they then spend 183 days in the UK in the following 12 months
- there will be separate residence tests for companies, trusts and other buyers
Tax residents of the UK will not therefore pay the stamp duty surcharge.
What is the top rate of the stamp duty 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 government will consult on draft legislation over the summer and introduce the change in the 2020/21 Finance Bill.
Why has the non-UK resident stamp duty surcharge been proposed?
The stated purpose is to deter foreign buyers from driving up UK property prices. 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 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 charge is that it would introduce the concept of residence into SDLT which until now has been levied on the basis of where the property in question is located.
The proposed 183 day “residence” test appears reasonably straightforward. However, it is possible that a domicile test may be more appropriate, although harder to operate in practice given the fairly objective nature of the statutory tax residence test.
What will the non-UK resident stamp duty surcharge achieve?
Assuming that the details of to whom the new charge would apply and what types of property would be affected can be worked out satisfactorily, questions remain.
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, any new charge on non-UK residents is not going to affect flippers and may well encourage flipping.
Another practical problem with any 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.
How can Patrick Cannon Assist?
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. Use the contact form below to get in touch on a no-obligation basis.