The substance of the surcharge

The broad outline of the surcharge is that an additional 2% rate of tax is to be applied when computing the SDLT liability on certain acquisitions of residential properties located in England or Northern Ireland by persons who are not (or are treated as not being) resident in the UK for these purposes. The surcharge will not apply to properties located in Scotland or Wales.

Type of property

The surcharge will only apply to acquisitions of residential properties and not commercial properties.  As such, that raises the questions of whether the property is a “dwelling” or “suitable for use as a “dwelling”. Whilst the answer will be obvious in many instances, in practice there is a great deal of uncertainty in borderline cases due to a vague statutory definition (e.g. in circumstances where the residential dwelling has not yet been constructed and where the property may or may not constitute “mixed” property – both hot topics amongst tax practitioners in recent years).

Type of purchaser

For the surcharge to apply, the purchaser would need to be “non-resident” specifically for the purposes of the SDLT rules (the rules will not borrow the well-established concept of residency from other parts of the UK’s tax code). The rules are complex and should be considered in detail. The test applied will depend on the type of purchaser and, broadly, the surcharge will apply in the following circumstances:

• An individual purchaser will be liable to the 2% surcharge if they have spent fewer than 183 days in the UK in the 12 months ending with the date that the property is considered to be acquired. If the purchaser is acquiring the property at a time when they are moving to the UK, the individual will initially have to pay the 2% surcharge but may claim it back if they spend 183 or more days in the UK in any 365 day period in the window beginning12 months before and ending 12 months after the acquisition. There are exceptions to these rules where the individual is an employee of the Crown living overseas as part of that employment.
• Broadly, a company purchaser will be treated as a non-resident purchaser and liable to pay the extra 2% unless it is both UK incorporated or has its central management and control exercised in the UK at the time of the transaction and is either non “close” (i.e. not under the control of five or fewer participants) or is a “close” company which is not under the direct or indirect control of one or more non-UK residents.
  
  

There are certain exceptions to this rule, such as for open-ended investment companies (OEICs) and real estate investment trusts (REITs).

• A partnership will pay the surcharge if any one of its partners is non-UK resident, no matter how small that partner’s interest.
• A bare trust is normally transparent for SDLT purposes so the surcharge will apply if the beneficiary of the bare trust is non-UK resident (although the position may be different on the grant of a lease). The treatment for other settlements (broadly trusts other than bare trusts) will depend on whether the beneficiary is either entitled to live in the property for life or to receive rental income arising from the property. If so, and that beneficiary is non-UK resident, the surcharge will apply. If not, the surcharge will apply if the trustee is non-UK resident.
• For joint purchasers, the surcharge will apply if any one of the purchasers is non-UK resident. So, for instance, if two friends were to jointly acquire a dwelling, if either of the friends is non-UK resident the surcharge will apply. This rule is varied for married couples and those in a civil partnership. In those circumstances, if one of the partners to the marriage or the civil partnership is UK resident and the other is non-UK resident, the surcharge will not apply provided they jointly acquire the property, they are “living together” (broadly they are not separated) and neither is acting as a trustee of a settlement in relation to the purchase.
  
  

Administration

• The SDLT return (the tax return filed on the acquisition of a property) has been amended to reflect the additional surcharge with a question requiring confirmation of whether the purchaser is non-UK resident for these purposes.
• In circumstances where the purchaser becomes entitled to a refund of the surcharge (i.e. where an individual has become UK resident in the 12 months following the acquisition) a refund can be claimed by way of an amendment to the SDLT return within 24 months of the transaction.
  
  

Yet more complexity?

Conveyancers will not welcome the further difficulties presented by these new rules. The SDLT legislation in relation to residential purchases is already complex, with advisers grappling with whether the basic rates, the higher rates for second/additional dwellings, the lower rates for first time buyers, the rate of acquisitions by companies or even the commercial rates of SDLT should apply. Add to this the fact that certain reliefs and exemptions can apply and ensuring that the correct amount of tax is paid will be a considerable challenge.

Now, the further question needs to be asked as to whether the 2% surcharge will apply. In many instances, the answer may be straightforward, but in others the answer will require a detailed understanding of the person or entity purchasing the property (and possibly a forensic analysis of the ownership structure for that entity).

Buyers, their agents and solicitors alike should be aware of these new rules in order that the position can be established at the earliest possible time and to ensure that no nasty surprises are uncovered when it comes time to file the SDLT return following the acquisition of a UK residential property.