Proposals announced by Theresa May could see stamp duty land tax increased for foreign buyers of English residential property. Elizabeth Small examines the detail.
More changes to stamp duty land tax (SDLT) are on the horizon. Theresa May surprised the property development world on 29 September by announcing proposals that a SDLT surcharge of between 1 and 3% on foreign buyers of English residential properties will be introduced.
It is estimated that the additional tax would raise between £40m and £120m a year and that this will be ploughed into schemes to assist with rough sleeping.
The immediate impact has been a fall in the share price of developers such as Berkeley Group, Barratt Developments and Taylor Wimpey.
But the question on everyone’s lips is: when will this new surcharge take effect? One contender is Budget day – 29 October – but the optimists among us hope that it will simply be a consultation issued then, with the surcharge becoming effective from, say, 5 April 2019.
Clearly, if a foreign buyer is part way through negotiations to purchase residential property in England, then it might be advisable to wrap those negotiations up swiftly and exchange contracts by Budget day. But beware of too much haste, as a rushed contract cannot typically be varied after the SDLT rate/regime change and still remain within the old and more benign SDLT regime.
Another critical question is: who is a foreign buyer? Choosing the definition of who is, and who is not, a foreigner will be perhaps the most difficult aspect of these new rules.
Overseas experience
One possibility is anyone who is not UK tax resident is a foreigner. Other countries, such as Canada, subject any individual who is not either a Canadian citizen or a permanent resident of Canada to the Canadian surcharge.
In respect of company purchasers, the Canadian equivalent of the land transaction return (LTR) requires information designed to elicit how many directors the company has and where they are tax resident so that it is possible to determine where the company is centrally managed and controlled.
In Singapore, the test for an individual as to whether they pay additional buyer’s stamp duty (ABSD) is based on the nationality of the buyer unless that person has obtained residency status from the Singaporean Immigration and Checkpoint Authority (ICA).
In New Zealand, which is banning foreigners from buying residential property, the test is broadly one of “ordinarily resident”.
Immediate issues
Whatever definition of “foreigner” is chosen, it will raise interesting questions. Assuming a test of UK tax residency, issues that may arise on a purchase are:
- Two or more persons purchasing where only one is UK tax resident – is the whole transaction tainted?
- One purchaser (who is UK tax resident) in a marriage/civil partnership with a foreigner. Is the whole transaction tainted?
- A person who intends to become UK tax resident but is not resident at the effective date of the transaction. Should he be able to claim relief from the new surcharge subject to a claw back if he fails to become UK resident within three years?
- Would a clawback provision have exceptions for circumstances beyond one’s control?
- The person who is UK tax resident as at the effective date, shortly afterwards becomes non-UK tax resident. Would there be a difference between a premeditated move offshore and one occasioned by circumstances outside one’s control, ie ceasing to be employed in the UK, bereavement, divorce etc.
- A trust – presumably these rules would draw a distinction between a bare/simple trust, a life interest trust and a discretionary trust?
Possible exemptions
In light of the difficulties that HMRC has had with policing the flat-rate 15% regime, and the minimal exceptions to the 3% surcharge regime (higher rates for additional dwellings [HRAD]) the answer is there will probably be few exemptions.
However, it would be hoped that if a developer was buying the whole of a residential development site part way through construction that it might be exempt from this charge. It is suspected that there will be no exemptions (unlike for HRAD) for replacement of main home and lease extensions, as the argument is likely to be that such transactions are not caught in the first place as the transferee is not a foreigner.
Developers of care home, student accommodation and other such properties will be keenly watching this space to ensure that they fall outside the new surcharge.
A trend
This new surcharge is yet another attack on the residential property market, which has borne the brunt of tax changes in the last few years. Such changes have included:
- The ATED regime, its accompanying CGT regime and the flat 15% SDLT rate for non-natural persons who are not in a narrowly defined exemption – the most popular of which being that of carrying on a letting business on a commercial basis (unless connected persons are allowed to occupy).
- The extension of CGT to non-resident owners on the disposal of UK dwellings.
- The substantial reduction of interest relief for income tax for property rental businesses owned by individuals.
- Making more effective the imposition of IHT on residential property.
Given that many states in Australia, as well as Canada, Singapore and New Zealand, are embracing tax charges or purchase restrictions on foreigners, it is unlikely that this additional surcharge will not come into force. Instead non-resident SDLT (NRSDLT) is probably here to stay.
Effect of the changes
The likely impact may be a flurry of exchanges before the new surcharge is imposed and then a slight cooling down of foreign investor interest. But in reality, many investors are not solely tax motivated. So a modest surcharge of between 1 to 3% (not the 7% seen in other jurisdictions) coupled with a tax and regulatory regime that is still more benign towards foreign investors (than say that of New Zealand or Singapore) is likely to be of less significance than macro-economic factors including currency fluctuations.
Current industry predictions are that the long term impact of this change (taken in isolation) on the housing market should be relatively minimal.
Elizabeth Small is a real estate tax partner at Forsters LLP
