SDLT 1% surcharge on overseas investors

7th March, 2019 by Stuart Maggs

Announced in last year’s Autumn’s budget, HMRC and HM Treasury are now seeking views on the introduction of a stamp duty land tax (“SDLT”) surcharge on overseas investors buying UK residential property – SDLT surcharge on non-UK residents.

At a rate of 1% on top of all existing SDLT rates, the surcharge will apply to non-UK individuals and ‘non-natural persons’ (broadly, companies, partnerships and trusts) buying residential property in England and Northern Ireland (Scotland and Wales have their own property transaction taxes).

At a time when the UK should be looking to strengthen its relationships outside of the EU, you might be wondering -

Why do we want to deter overseas buyers?

The government believes that purchases of property by non-UK residents have pushed up house prices for UK residents, particularly in London. A study by York University found that 13% of new London homes were bought by non-residents between 2014 and 2016, and the London School of Economics (“LSE”) put the figure higher still. Outside of London, the numbers drop significantly although cities such as Manchester and Birmingham are increasingly attracting inward investment.

When first mooted, and originally at 3%, the surcharge was sharply criticised by developers, agents and financial analysts who argued that the evidence was overstated and out-of-date, whilst the concept of a foreign buyer tax will send out the wrong message to a post-Brexit world (although the low value of the pound since the Brexit vote has in fact fuelled overseas demand).

Global giants Google and Apple have invested in new office headquarters currently under construction in London which will bring in thousands of overseas employees in the next few years.

Meanwhile, since the global financial crisis, developers seeking funding have increasingly relied on selling apartments off-plan to overseas investors, to meet funders’ pre-sales percentage conditions (40-60%). And developers who do not borrow also count on overseas pre-sales to reduce their risk exposure on large block developments. Overseas investors are not constrained by the UK mortgage market and are perceived as having a better appetite for risk. Without this investment, the LSE concluded, fewer homes would have been built in London, including affordable homes.

The government has partially listened to its critics, reducing the proposed tax to 1% but is still pursuing the principle, perhaps for no other reason than to counter public perception that overseas buyers are to blame for our housing crisis.

Residency tests

There will be different rules for individuals and non-natural persons.

Individuals

Individuals will be deemed non-UK resident if they spent less than 183 days in the UK in the 12 months preceding the date of purchase. It will be days spent in the whole of the UK that will be relevant, not just those spent in England or Northern Ireland where the surcharge will apply.
To avoid discouraging non-UK residents from moving to the UK, the surcharge will be refundable if an individual spends 183 days or more in the UK in the 12 months following the purchase.

Non-natural persons

Companies will be deemed resident in the UK for the purpose of the surcharge if they are incorporated in the UK, or at the time they acquire residential property, they are centrally managed and controlled in the UK. Recent tax decisions have shown that corporate residence can easily move to the UK inadvertently, e.g. by UK resident directors making decisions in the UK.
There will be an additional test for UK-resident close companies which takes into account their underlying ownership.

Comment

Whilst the proposed residency test for individuals has the apparent advantage of simplicity, HMRC already has a Standard Residency Test (“SRT”) for establishing residency status in relation to other taxes. Introducing a different, albeit simplified, test would mean that an individual could be a UK resident for income tax, capital gains tax and inheritance tax but not for the surcharge, and therefore be unaware of its liability to pay the extra 1%. We would prefer to see a single composite test.

The consultation lasts until 6 May and poses a series of questions, including -

Would you prefer to see a different residence test applied? If so, what test and why?
Do you agree that a rate of 1% is set at the right level to balance between the government’s objectives on home ownership and the UK remaining an open and dynamic economy?

Interaction with other taxes

Taxation of UK residential property has become increasingly complex in recent years and overseas buyers will soon be hit by another property tax: non-residents capital gains tax from April 2019. For more information about these and other tax matters, please contact Stuart Maggs or James Mee.

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