Residential and rural property update - December 2020 – 1 / 4 观点
Enquiries from overseas buyers have been picking up pace in the last quarter of 2020 despite the challenges of travel restrictions. With the right buying agent on board and the wide availability of quality virtual viewings, those determined to invest in the UK property market aren't being deterred by the practical hurdles presented by the pandemic.
There are various reasons for the ongoing influx of overseas buyers, among them the continued weakness of sterling and London's enduring appeal as a destination for international families. Many are also seeking to beat the arrival of the additional 2% surcharge for overseas buyers that applies to purchases completing on or after 1 April 2021.
Here, we answer your burning questions on the practical implications of the new surcharge and how it will impact you.
The new surcharge has been in the pipeline for well over two years, having been first announced in the 2018 Budget. The draft legislation was finally published in July this year.
Currently buyers pay SDLT at specified rates irrespective of where they live or their residence status. The effect of the new legislation is to increase the rate of SDLT payable on relevant transactions by 2%. This will be in addition to the 3% higher rates introduced in 2016 for "additional" properties and will result in a potential top rate of SDLT of 17% for purchases by overseas corporates.
These new rules will apply to non-UK resident individuals, non-UK companies and UK resident close companies that meet the proposed non-UK control test.
Guidance will be issued by HMRC in advance of 1 April. This will set out the practicalities of the residence test and provide a template of the updated SDLT return that will be needed to accommodate the new surcharge.
Individuals will generally not be subject to the 2% surcharge if they spend at least 183 days in the UK during the 12 months before the "effective date" of the transaction (usually the completion date) and ending 365 days after it. This produces the slightly odd result that an individual may be treated as UK resident for the purposes of UK income and capital gains tax but still be subject to the SDLT non resident surcharge.
Purchases by corporates will be subject to this 2% surcharge if, on the effective date of the transaction, the company is not UK resident for the purposes of UK corporation tax. A UK tax resident company can also be liable for the 2% surcharge if it is a close company and is controlled by non resident participators. Further details of the practicalities of the non UK control test are expected in the HMRC guidance that is awaited.
Where the 2% surcharge is paid but within two years of the effective date of the transaction the purchaser becomes UK resident, a claim for relief and refund of the surcharge element can be made.
Does the 2% surcharge still apply if I am buying a property for my main residence?
Yes – provided that you are non UK resident at the time the purchase is completed. You may be eligible for a refund of the surcharge element if you subsequently become UK resident (as specified above).
If there are joint purchasers who are all individuals, if any one of them is non UK resident then the transaction will be subject to the 2% surcharge even if all other purchasers are UK resident. An exception to this for married couples or civil partners who are living together at the date of completion. If one spouse is non UK resident and one spouse is UK resident then the surcharge is not applied.
Transactions where contracts exchanged before 1 April 2021 and completed after that date are only outside the scope of this charge if they were exchanged before 11 March 2020. Buyers who are exchanging contracts with a completion date that is near to 1 April 2021 may want to consider a provision in the contract that requires their seller to cover the surcharge element in the event that completion is delayed by the seller beyond 31 March 2021.
The draft legislation sets out complex rules in relation to trustee purchases.
For bare trusts, it is the beneficiary's residence status that is relevant, not that of the trustees. The SDLT return will continue to be completed by the beneficiaries rather than the trustees.
Where trustees purchase a property for a beneficiary who is entitled to occupy (or receive income from) the property under the terms of the settlement, it will be the beneficiary's residence status rather than the status of the trustees that is used to determine the rate of SDLT payable.
An individual trustee (or trustees) of a discretionary trust will be subject to the same residence test as an individual buyer and so will be liable for the 2% surcharge if he or she has spent fewer than 183 days in the UK in the 12 months prior to completion of the purchase
Non-resident buyers have responded pragmatically when faced with hikes to SDLT rates over recent years, so it's questionable whether this new surcharge will have a significant impact on the overseas buying market in London.
What does seem likely is that there will be a degree of distortion in the market next spring with a surge in transactions leading to 1 April 2021 and then a dip, not least as the implementation date coincides with the end of the temporary stamp duty nil rate band.
In the longer term, it's difficult to see the introduction of this new surcharge changing the behaviours and priorities of overseas buyers in the prime markets.
To discuss the issues raised in this article in more detail, please reach out to a member of our Residential & Rural group.