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What has happened?

 In a headline seeking announcement on 29 September, 2018 at the Conservative Party Conference, the PM, Theresa May, proposed a 1% or 3% SDLT charge on foreigners purchasing UK property. This would be in addition to the existing 3% higher rates charge which most foreigners already pay because they already own one or more residential properties. Given that SDLT only applies in England and Northern Ireland, the charge could not apply in Scotland and Wales, although those jurisdictions are likely to apply a similar charge if it is adopted in England and Northern Ireland. It is understood that a consultation is under preparation and may be published at or shortly after the next Budget due on 29 October, 2018.

How might it work?

The announcement referred to the new charge applying to “non-UK residents”. As Andrew Hubbard of RSM UK has already pointed out (Tax Journal, 5 October, 2018), this proposal could not apply to residents of the EU until after Brexit on non-discrimination grounds. But the most striking thing about the proposal is that it would introduce the concept of residence into SDLT which hitherto has been levied on the basis of where the property in question is located. (Stamp duty on bearer instruments continues to distinguish between bearer instruments issued by persons not established or formed in the UK and those so established).

It is not clear what the “residence” test would consist of but it is most likely that the test will be the same as, or close to, the tests of individual and company tax residence. However, it is possible that the domicile test may be more appropriate, although harder to operate in practice given the fairly objective nature of the statutory tax residence test.

Would it work?

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. This has been the lesson in British Columbia which in 2016 introduced by a 15% tax on house purchases by non-Canadians in the Vancouver market to combat Chinese driven real estate price increases of 30% a year. This rate is now being increased to 20% along with the addition of other levies targeting people who do not pay provincial income tax. The charge has not worked because, in part, of flippers who buy and sell off plan without completing are not liable for the levy. Hence, the price increases driven by flippers are not affected by the levy.

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.

Patrick Cannon

18 October, 2018

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