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Following confirmation from the government in the Spring Budget that it would go ahead with a 2% SDLT surcharge on non-UK residents purchasing residential property in England and Northern Ireland from 1 April 2021, the draft legislation in respect of the surcharge has now been published.

The proposal was first announced by Theresa May at the Conservative Party Conference in September 2018, and in February 2019 HMRC and the Treasury issued a consultation document in respect of a 1% SDLT surcharge for non-UK resident purchasers of residential land. There followed a further announcement in November 2019 that the surcharge rate would be 3%. However the surcharge rate finally landed on is 2%.

Apart from the 2% rate, the legislation appears to be broadly in line with the proposal outlined by the Treasury in the February 2019 consultation document.

The additional 2% SDLT will apply, from 1 April 2021, to both non-resident individuals and non-natural persons (e.g. companies, trusts, partnerships) in addition to the existing residential SDLT rates of up to 15%. In other words, the top SDLT rate for non-residents could be 17%.

It will apply to residential properties such as apartments or houses, but not student accommodation.

It will not apply to non-residential or mixed use land. It will not therefore apply where six or more dwellings are acquired and the purchaser elects to treat the acquisition as non-residential and so apply the 5% SDLT rate.

A residential land transaction will be a ‘non-resident transaction’ and so subject to the surcharge where:

- One or more of the purchasers is non-resident,

- The property or land being acquired is a major interest in one or more dwellings,

- The major interest is not a lease with 21 years or less to run or is itself subject to a lease that has more than 21 years to run, and

- The chargeable consideration for the transaction is £40,000 or more.

It is worth noting that where there is more than one purchaser, the surcharge will apply where only one of them is non-UK resident. For example, if couples jointly acquire land or a partnership acquires land, if any one person or partner were non-resident, regardless of their share in the property, the entire acquisition would be subject to an additional 2% SDLT.

The basic rule is that an individual will be UK resident if they are present in the UK for at least 183 days during the period beginning 364 days before the date of transaction and ending 365 days after the date of the transaction. This ‘rolling’ concept of 183 days in a 365 day period is less restrictive than the proposal in the consultation, which was that an individual would only be non-resident if they spent fewer than 183 days in the UK in the 12 months before the transaction.

However, there are certain special cases where it is an individual purchaser’s residence in the 12 months before the transaction which determines their residence, including where the purchasers also include a partnership, a company, or a unit trust.

Company residence is broadly determined according to existing direct tax rules, with some exceptions. A company will be non-UK resident if either:

- It is not UK resident for the purposes of UK corporation tax (broadly UK incorporated or centrally managed and controlled in the UK and not resident outside of the UK as a result of double tax treaty); or
- It is a UK tax resident close company (other than an OEIC or a UK REIT) which is controlled by non-residents (or UK residents treated as non-resident under these rules).

A company does not include a partnership or, for this purpose, a unit trust. Consequently it is the residence position of the partners and the trustees of the unit trust schemes that will be relevant for this purpose.

Although the draft legislation appears to be largely as expected, it does result in some unexpected outcomes. For example, the surcharge would appear to apply to the acquisition of a relevant property by a JPUT wholly owned by ultimately UK resident pension scheme investors.

Following on from the introduction of UK tax on capital gains of non-UK residents in April 2019, and corporation tax on their rental profits from April 2020, the use of non-UK resident structures to acquire UK property is becoming increasingly less attractive for many investors.

If you would like to discuss any of these issues further, please contact Jamie Ward or your usual PwC tax contact.