Introduction
The 2% SDLT surcharge for non-residents came into effect on 1 April 2021. It applies to purchases of residential property in England and Northern Ireland. It does not apply to land transaction tax in Wales or land and buildings transaction tax in Scotland.
The surcharge is not necessarily the largest SDLT charge on a residential purchase. It sits on top of the ordinary residential SDLT rates and, where relevant, the higher rates for additional dwellings. Those higher rates were increased from 3% to 5% from 31 October 2024, which makes it even more important to identify the correct status of the purchaser before completion.
The difficulty is that SDLT does not simply borrow the residence rules used elsewhere in the tax code. The surcharge has its own tests, and in some cases looks through companies, trusts, partnerships, and funds in ways that are easy to miss.
For most private client and owner managed business cases, the main risk areas are purchases by internationally mobile individuals, joint purchases by married couples or civil partners, UK companies controlled from abroad, and trusts or partnerships with mixed-residence participants.
Individuals
An individual is UK resident for SDLT purposes if they have been present in the UK for 183 days or more in any continuous period of 365 days falling within the two-year period beginning 364 days before the purchase and ending 365 days after it. For the purposes of the day count, an individual is present in the UK if they are in the UK at midnight.
If a couple who live together and are either married or civil partners makes a purchase jointly, they will pay the surcharge if one of them is non-UK resident. A couple will be treated as living together unless they are separated, either formally or informally, on a permanent basis.
There is also a specific exemption from the surcharge for employees of the Crown, and their cohabiting spouses or civil partners, if either of the couple makes the purchase.
The effect of the two-year window for measuring non-residence means that a purchase may be subject to the surcharge because, at the time of purchase, the individual, or their spouse or civil partner, did not meet the 183-day test. If the individual, or partner, subsequently meets the test for the two-year window, the SDLT surcharge can be reclaimed. The return can generally be amended at any time before the end of the period of two years beginning with the day after the effective date of the transaction. If purchasers wish to do this, they will need to retain, and if necessary, show evidence of days spent in the UK.
Buyers will need to evidence their presence in the UK. HMRC has said that a pragmatic approach will be taken. Evidence can include a person’s digital footprint, credit card and bank statements, work diaries, planners, timesheets or rosters, mobile phone usage and bills, utility bills, and membership and usage of clubs.
There are special rules where an individual is a joint purchaser, but not with another individual. These apply where the joint purchaser is either a company, a trustee, or a partnership. For these purposes, an individual will be treated as UK resident if they have been present in the UK at midnight for 183 days or more in the 364 days prior to the purchase.
Companies
Companies that are not UK resident for corporation tax purposes will be treated, unsurprisingly, as non-UK resident for SDLT purposes. This includes dual resident companies treated as non-UK resident under the terms of a double tax treaty.
However, some companies that are UK resident for the purposes of corporation tax will nevertheless be treated as non-UK resident for the purposes of the SDLT surcharge. Broadly, this applies where the company is a close company controlled by non-UK resident participators at the time of purchase. The ordinary close company attribution rules are modified for these purposes, so the analysis is not always the same as it would be for corporation tax. Particular care is needed where there are overseas shareholders, family interests, partnership structures, or a UK company sitting under an overseas parent.
UK real estate investment trusts, members of a group UK REIT, and property authorised investment funds which are resident for corporation tax purposes are automatically treated as UK resident, even if they would otherwise qualify as non-resident under the adapted close company test. Further, a general partner of a limited partnership is ignored when assessing control, provided it is not entitled to more than 1% of the company’s assets.
Adaptations to the close company rules
Under the close company rules, a participator can have other people’s rights attributed to them, which can have the effect of amplifying their level of control. When applying the non-UK control test for the purposes of the surcharge, those attribution rules are altered in certain respects.
In particular, the rights of one partner of a partnership are not attributed to another partner; the rights of a UK resident spouse or civil partner are not attributed to their non-resident spouse or civil partner if they are living together, although the rights of other close relatives, for example siblings, continue to be attributed; and, where a person holds a de minimis interest, broadly less than 5%, their rights are not attributed to other shareholders who are their associates or companies they control.
The last point can produce odd results. Arguably the non-attribution should also go the other way so that the de minimis shareholder does not have the interests of their associates attributed to them, but this is not how the rule is currently drafted. The result is that a small holding in a UK close company by a non-resident person who has UK resident associates can cause the surcharge to apply.
A further adaptation to the close company rules has the effect of including the UK subsidiary of a non-close foreign company. This is because the exclusion from the close company definition for companies which are only close because one participator is a non-close company is removed from the surcharge provisions.
Purchase by a trust
If a trustee holds on bare trust, for example as a nominee for the purchaser, the surcharge will apply if the beneficiary, or one of the beneficiaries, is non-resident under the test for individuals. This will include where a new lease is granted to a bare trustee.
Where the trust is a settlement, in other words not a bare trust, it is first necessary to determine whether under the terms of the trust a beneficiary is entitled to occupy the property for life, or to receive income from it. If this is the case, then there will be no surcharge provided the beneficiary meets the UK residency test for individuals.
If the beneficiary has no such rights, then it will be the residence of the trustees, in accordance with the alternative residence test for individuals or the test for companies, that will determine whether the surcharge applies.
Purchase by a partnership
The residence of a partnership will be determined by the residence of each of its members, whether individuals, under the alternative test for individuals, or corporates, under the test for companies. If one partner is non-resident, the purchase by the partnership will be subject to the surcharge.
Purchase by a fund
There are also special rules for funds. These are unlikely to matter in most private client transactions, but they can be relevant where residential property is acquired through a collective investment structure. The residence position will depend on the nature of the fund and, in some cases, the residence of the persons or entities making up the fund.
Co-ownership authorised contractual schemes authorised by the Financial Conduct Authority are treated as UK resident, but overseas equivalent schemes are not. A unit trust is not treated as a company for the purposes of the surcharge.
Conclusion
The rules are therefore still worth revisiting before any purchase by a non-UK individual, an internationally mobile individual, a mixed-residence couple, a trust, a partnership, or a company with overseas ownership.
The surcharge is easy to overlook because the residence test is not the familiar statutory residence test and, for companies and other entities, the analysis may require a degree of look-through that is not obvious from the SDLT return. Advisers should therefore identify the residence position before completion, not after the SDLT return has been filed.