Tax Lawyers At Irwin Mitchell Urge Non-Residents To Look At Claiming SDLT Reliefs If They Can

Following the Chancellor’s announcement last March that a 2% surcharge will be added to the SDLT rates applied to non-UK residents purchasing residential property in England and Northern Ireland, property tax lawyers at Irwin Mitchell have been advising clients to consider all possible reliefs - particularly Multiple Dwellings Relief, and whether the property they are buying can be legitimately classified as mixed use.

The surcharge will apply to qualifying Non-Resident Transactions where the effective date of the transaction (usually the completion date) occurs on or after 1 April 2021. 

According to Sarah Cardew, Tax Partner at Irwin Mitchell, “ As a result of this change, the distinction between residential and mixed use (or commercial) property will become ever more important since the SDLT rates for commercial property (or mixed use property) are significantly lower than the residential rates with the surcharges.” 

A property is considered mixed use if it has both a residential and commercial element - so for example buying a property with fields which are let out for grazing under a formal licence.

For commercial property, SDLT rates range from 0% to 5%, applied progressively. By way of example, if  the  purchase of a property for £1.7m was deemed to be a commercial/mixed use purchase, the SDLT due would be £74,500 which is £128,250 less than the amount that would be due if the property was deemed to be purely residential and subject to both surcharges. 

Sarah Cardew believes the use of Multiple Dwellings Relief (“MDR”) will also become more prevalent.  MDR applies where the Buyer is purchasing multiple dwellings in one transaction or in linked transactions. Doing so can also substantially reduce the SDLT liability. 

Cardew also notes that the current “SDLT Holiday” introduced by the Government increases the threshold for the 0% rate of SDLT from £125,000 to £500,000 until 31 March 2021. Therefore, the increase of SDLT due will be even larger for a transaction that completes before 1 April 2021 compared to one that completes on or after 1 April 2021 as there is no nil rate band for non-resident transactions.  For UK purchasers, the SDLT holiday can currently save up to a further £15,000 of SDLT on a transaction.

The Tax team at Irwin Mitchell has put together the following Q and A for its clients:

What is a Non-Resident Transaction?

The surcharge applies to the purchase of  property with a purchase price of £40,000 or more when at least one of the purchasers is non-resident and the property is not a leasehold property with only 21 years or less to run on the lease, or it is not itself subject to a lease with more than 21 years to run.

Who is a Non-Resident?

Generally, UK residents are individuals who have been present in the UK on at least 183 days during any continuous period of 365 days that falls within the period beginning with the day 364 days before the effective date of the transaction, and ending with the day 365 days after the effective date of the transaction. To be present in the UK the individual must be there at the end of the day.

If the individual has not met the conditions to be UK resident at the time the land transaction return is submitted, even if they might turn out to do so, the land transaction return needs to be submitted on the basis that the individual is non-resident.

If the individual then does meet the conditions specified above, the land transaction return can be amended within two years of the effective date of the transaction and a refund of the additional SDLT paid claimed. 

Specific Purchasers under the Draft Legislation

Spouses/Civil Partners

Where there are two or more purchasers who will be jointly entitled to the property acquired, and, on the effective date of the transaction, they are spouses or civil partners who are living together and one of them is UK resident and the other is not, the one that is not UK resident will be treated as though they are for the purposes of the surcharge (as long as neither of them are acting as a trustee of a settlement).

Companies

There are specific rules in relation to when a company will be non-resident for these purposes. Broadly a company will be non-resident where it is not resident under the Corporation Tax Acts. Where it is a UK close company it may still be non-resident for the purposes of the surcharge where it is controlled by one or more non-resident participators (residency to be established as per the draft legislation), as long as it is not an excluded company (i.e. an Open Ended Investment Company, a company UK REIT or a company that is a member of a group UK REIT). 

Generally, a close company is a limited company with either five or fewer 'participators'; or where all of ’participators are also directors (a participator generally is a person who has a share or interest in the capital or income of the company). 
This area of the legislation is highly complex so we would advise clients to seek specific advice.

Trusts

-        Bare trust:

Where the purchaser includes a bare trustee, the residence position of the beneficiaries is considered (rather than the trustee) when determining whether it is a non-resident transaction. (A bare trust is an arrangement where the legal title of the property is held by someone different to the person beneficially entitled to it. The legal title is held by the bare trustee, and they conduct the management of the property, but the beneficiary has absolute rights to both capital and income).

Special rules also apply to a bare trust acquiring a newly granted lease.

-        Trustees of settlements:

Where the purchaser includes a trustee of a settlement, and under the terms of the settlement one or more of the beneficiaries have either a life interest in the property or an entitlement to income from the property, the residence position of the beneficiaries is considered (rather than the trustees) to determine whether the transaction is a non-resident transaction. 
This does not include a settlement under a unit trust scheme.

Special rules also apply to purchasers who are/include, for example:

-        a company or person acting as the trustee of a unit trust scheme;
-        a partner who enters into a transaction on behalf of their partnership;
-        the trustee of a settlement where the beneficiaries have neither a life interest in the dwelling or an entitlement to income from it;
-        an individual in Crown employment;
-        a financial institution as part of an alternative property finance arrangement; and
-        a co-ownership authorised contractual scheme.

What is the Additional Property Surcharge?

This additional 2% surcharge is on top of the normal and additional residential SDLT rates.

The additional property surcharge generally applies when individual purchasers (whether UK resident or not) own two or more residential properties at the end of the day of the transaction and are not replacing their main residence.

The application of both the surcharges can result in a rate of 17% applying to the portion of the consideration over £1.5m, if applicable. 

By way of example if a property was purchased by an individual for £1.7m the amount of SDLT due (not considering any reliefs or exemptions) would be a further £34,000 if the purchaser was a non-UK resident.

It should be noted that the current “SDLT Holiday” introduced by the Government increases the threshold for the 0% rate of SDLT from £125,000 to £500,000 until 31 March 2021. Therefore, the increase of SDLT due will be even larger for a transaction that completes before 1 April 2021 compared to one that completes on or after 1 April 2021. The SDLT Holiday can currently save up to a further £15,000 of SDLT on a transaction.

What Impact will Commercial/Mixed Use Property and Multiple Dwellings Relief Provide?

As a result of this change, the distinction between residential and mixed use (or commercial) property will become ever more important. This is because the rates for commercial property (or mixed-use property) are significantly lower than the residential rates with the surcharges. 

For commercial property, SDLT rates range from 0% to 5%, applied progressively. By way of example, if the purchase of the above property for £1.7m was deemed to be a commercial/mixed use property, the SDLT due would be £74,500 which is £128,250 less than the amount that would be due if the property was deemed to be residential and subject to both surcharges. 

The use of Multiple Dwellings Relief (“MDR”) will also become more prevalent. MDR applies where the Buyer is purchasing multiple dwellings in one transaction or in linked transactions and this can reduce the SDLT liability. It is the Buyer’s choice whether to elect to use MDR and as it is not always the most tax efficient option- so it will be important to assess to see if this is appropriate first.