Non-resident buyers and 1% extra SDLT

At the end of September 2018, just ahead of the Conservative Party Conference, Theresa May announced she was discussing with colleagues changes to increase stamp duty land tax for buyers who do not pay UK tax.  There was talk of it being an extra 1 to 3% of the purchase price and the money being used to help the homeless.

The proposals became clearer in the Budget on 29 October 2018 when it was announced that the Government would publish a Consultation Paper in January 2019 on an SDLT surcharge of 1% for non-resident buyers of residential properties in England and Northern Ireland.  At that point it became evident that expatriates (UK domiciled non-residents) who return and buy a property in England could be hit.

The Consultation Paper, a joint effort by HMRC and the Treasury is expected any day now.  There is to be a 12 week period for consultation.  When the paper comes out we might know the answers to some of these questions:

1.  Will the extra 1% only ever apply if the purchase is already liable for the 3% SDLT surcharge for additional properties?  

• If so, an expat couple returning to England might escape if neither own any other properties.
• Would such an expat couple escape the extra 1% as well as the 3% surcharge if they are buying a home to live in and have sold a property they lived in?
• Or might we have situations where the extra 1% applies without the 3% surcharge applying?

2.  How do the options in the Consultation Paper propose to judge whether a person is “non-resident” for UK purposes? 

• Will they use the existing complex rules applicable for income tax, capital gains tax and inheritance tax for individuals, known as the “Statutory Residence Test”, as set out in the Finance Act 2013?
• Tax residence is determined for a tax year. For a purchase in the first six months of the tax year an individual’s residence status may not be known.  The Consultation Paper would have to deal with this, as liability to SDLT needs to be established on the “effective date” of the transaction; usually the completion date of the purchase.
• For companies buying property, will the Consultation Paper suggest the use of the corporate resident rules?  Or will it propose to “cut the Gordian knot” and say all companies have to pay the extra 1%?  That would be simpler; it would increase the existing 3% surcharge to 4% for all companies buying.

3.  How does the Consultation Paper propose to deal with people (such as expats) who have been non-resident, but will become UK resident as a consequence of moving back to the UK? 

• Although tax residence is determined for a tax year as a whole, the Finance Act 2013 provisions allow for split tax year treatment in a number of cases.  Typically a returning expat will often qualify for split tax year treatment.
• The purchase of a property in England would not normally of itself make a person tax resident.  Someone returning could end up buying whilst having non-resident status, even though physically present in the UK.
• Will the Consultation Paper say that the split year rules will not apply for the purposes of the 1% surcharge?
• Good planning for a returning expat might be to obtain UK residence first and then to complete a purchase.
• Perhaps the Consultation Paper will provide for an expat to be exempt from the 1% charge, if for example, they were non-resident for five years or less.
• A person’s tax residency status may not be known until later in the tax year, but not at the time of the property purchase.  Perhaps the 1% extra will have to be paid “on account” and then recovered if it turns out that the person was resident at the time of the purchase.

4.  How much extra complexity to an already complicated SDLT system would be added by the proposals in the Consultation Paper? 

• Will there be an option in the Consultation Paper to use this opportunity to simplify the existing rates of SDLT?  I had written to the Chancellor suggesting that changes be made so that those who buy a property to live in as their main home would pay at the standard rates and others pay at higher rates.
• Are the rules going to be capable of being understood and applied by buyers and their conveyancers?  HMRC’s “Guidance note for Statutory Residence Test (SRT): RDR3” is 105 pages long!
• The Statutory Residence Test has many complexities and a person may be resident under the Finance Act 2013 provisions but be treaty non-resident pursuant to the terms of a double tax treaty.  For example an individual might be resident in Spain under Spanish domestic law and also UK resident under UK domestic law but treaty non-resident under the tie-breaker test. To have to give consideration to treaty provisions for an SDLT determination would be strange. It may therefore be that if an individual is non-resident under the Statutory Residence Test then the 1% charge applies (irrespective of any treaty aspects).

5.  When is it likely that the changes will apply?  

• Will they only take effect once European Union rules cease to apply to the UK; after 29 March 2019 if the UK leaves with “no deal” or otherwise at the end of a transitional period?
• The Consultation Paper might need to address the EU requirements for the equal treatment of EU nationals in tax matters, sometimes referred to as the principle of non-discrimination.  It arises from the rules on freedom of movement within the EU.
• While the UK remains bound by these EU rules, the UK might not be able to tax those EU nationals (including UK nationals) who are resident elsewhere in the EU differently from those EU nationals (including UK nationals) resident in the UK.

(i)  So the UK could choose now to impose the extra 1% on a non-EU national who is non-resident, for example, a national of the USA, Russia or China who is buying in England.

(ii)  The UK might be unable to charge it on EU nationals who are resident elsewhere in the EU without also charging it on UK residents who are in similar circumstances.

• If the UK remains liable to EU rules on the freedom of movement the choice might be between:

(i)  Bringing in the 1% extra only when the UK ceases to be bound by those rules.

(ii) Bringing it in so that as well as UK residents escaping, EU nationals who are resident in the EU should also escape until the UK ceases to be bound by EU rules.

• What transitional provisions will apply for those exchanging contracts to buy a property?  What of a buyer negotiating to buy a new build flat where the building work might be completed in two years’ time?  Will the contract have to be exchanged on or before the date of the Consultation Paper to benefit from the transitional provisions (as was the case for the introduction of the 3% SDLT surcharge for additional properties)?

I am grateful to Malcolm Finney, author of “Residence and Domicile for Individuals” published by Sweet & Maxwell, 2018 for his comments on the residence issues.