2% Non Resident Surcharge 

(SDLT Rates and Calculations)

Introduction to the Surcharge

(SDLT Rates and Calculations>2% Non Resident Surcharge)

➤ Starting from April 1, 2021, non-UK residents buying residential properties in England or Northern Ireland must pay an additional 2% Stamp Duty Land Tax (SDLT) surcharge on top of existing rates to ensure fairness in the housing market.

Starting from April 1, 2021, the UK government introduced a new rule where non-UK residents buying residential properties in England or Northern Ireland have to pay an additional 2% Stamp Duty Land Tax (SDLT) surcharge. This surcharge applies on top of the existing SDLT rates.

Who is Affected?

The 2% surcharge affects:

• Non-UK resident individuals
• Non-UK resident companies
• Some UK-resident companies controlled by non-UK residents
• Partnerships with at least one non-UK resident partner
• Certain trusts with non-UK resident beneficiaries

How the Surcharge Works

The 2% surcharge is added to the existing SDLT rates, including:

• Standard residential property rates
• Higher rates for additional properties
• The 15% rate for properties bought through a company (enveloped dwellings)
• Rates based on the net present value of rent
• Rates with first-time buyers relief
• The 15% rate when tenants of flats exercise collective rights

For non-UK residents, this means the highest possible SDLT rate could reach 17%.

Determining the Surcharge

Deciding whether the surcharge applies can get complicated, especially for UK companies owned by non-UK residents. Understanding the detailed rules around ‘close companies’ and their control might require seeking expert advice.

When Does it Apply?

The surcharge applies to transactions with an effective date on or after April 1, 2021. There are specific rules and transitional provisions for determining if a transaction qualifies as a ‘non-resident transaction’ and thus is subject to the surcharge.

Example to Explain the Idea

Let’s say “Emma,” who lives outside the UK, decides to buy a holiday home in England. Under the new rules, Emma will pay the standard SDLT rates for her property purchase plus an additional 2% surcharge because she is a non-UK resident. If a UK-based company controlled by Emma (or other non-UK residents) buys the property, the same surcharge would apply unless specific exemptions are met.

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What is a Non-Resident Transaction?

(SDLT Rates and Calculations>2% Non Resident Surcharge)

➤ A non-resident transaction occurs when non-UK residents buy residential properties in the UK valued over £40,000, not on short-term leases, potentially incurring an additional 2% SDLT surcharge unless exceptions apply.

A transaction is considered a non-resident transaction if it meets all of the following criteria:

• Non-UK Resident Buyers: If you, or any co-purchaser, are not UK residents at the time of the transaction.
• Type of Property: The property involved is residential, meaning you’re either buying a freehold, leasehold, or a share in such properties. This includes both single dwellings or multiple properties in one transaction.
• Lease Length: The property is not a short-term lease. Specifically, it’s not a lease that has seven years or less remaining from the start date of the transaction.
• Transaction Value: The purchase price is £40,000 or more. If the transaction involves rent, then either the non-rent consideration is £40,000 or more, or the annual rent is £1,000 or more.

Exceptions to Non-Resident Transactions

Certain types of property purchases are not considered non-resident transactions, meaning they won’t attract the additional 2% surcharge that typically applies to non-resident transactions:

• Non-Residential Properties: Buying commercial or non-residential properties.
• Mixed-Use Properties: Purchasing properties that have both residential and commercial use, with some specific conditions.
• Bulk Purchases: Buying six or more dwellings in a single transaction without claiming multiple dwellings relief.

Impact on Partnerships

For partnerships, a property transaction is considered on behalf of the partners, not the partnership entity itself. This means if any partner is a non-UK resident and the transaction meets the other criteria, it’s treated as a non-resident transaction.

Examples to Illustrate Ideas

• Example for Individual Investors: Emily, living outside the UK, buys a house in London for £500,000 as a vacation home. This transaction meets all criteria for a non-resident transaction, so it would likely incur the additional 2% surcharge.
• Example for Partnerships: A partnership where one of the partners, Jacob, lives in Canada, buys a residential property in the UK. If the property’s value is over £40,000 and it’s not a short-term lease, this transaction is considered a non-resident transaction due to Jacob’s status, even if the other partners are UK residents.

Understanding the specifics of non-resident transactions is crucial for property investors, especially those living abroad or investing in the UK property market through partnerships. It helps in planning for the additional costs and navigating the investment process more effectively.

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Transactions Exempt from the 2% Surcharge

(SDLT Rates and Calculations>2% Non Resident Surcharge)

➤ When non-UK residents buy mixed-use properties, bulk residential properties, or certain high-value dwellings, they may avoid the 2% SDLT surcharge, depending on specific transaction conditions and exemptions.

When you buy property, if the purchase includes both residential and non-residential properties (like a shop with a flat above it), the lower non-residential stamp duty rates apply to the entire transaction. This means the additional 2% surcharge for non-UK residents does not apply.

Example: Mixed-Use Purchases

Imagine Sarah buys a building that includes both a retail store (non-residential property) and a residential flat. The whole purchase is taxed under non-residential rates, avoiding the 2% surcharge even if Sarah is not a UK resident.

However, if Sarah decides to claim multiple dwellings relief (which is possible until June 1, 2024), the 2% surcharge would apply if she meets the criteria for non-resident transactions.

Special Case: Single Dwelling Acquisition at 15% Rate

If you’re buying a single dwelling and the 15% stamp duty rate applies (usually for certain corporate entities or trusts), and this purchase is considered a transaction by a non-UK resident, the surcharge will increase the stamp duty rate to 17%.

Example: High-Value Residential Purchase

John, who lives abroad, buys a luxury apartment through his company, which triggers the 15% stamp duty rate. Because John is a non-UK resident, his purchase also attracts the 2% surcharge, raising his stamp duty rate to 17%.

Bulk Purchases of Six or More Dwellings

When buying six or more dwellings in a single transaction, the purchase is treated as non-residential, and the non-residential stamp duty rates apply. This means the 2% surcharge for non-UK residents does not apply to these transactions.

Example: Large-Scale Residential Investment

Emma, a non-UK resident investor, purchases a block of ten apartments. Despite her non-resident status, the transaction is taxed under non-residential rates, avoiding the 2% surcharge.

However, if Emma were to claim multiple dwellings relief (valid until June 1, 2024), and the purchase is considered a non-resident transaction, the 2% surcharge could apply, depending on the specifics of the transaction.

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What Makes a Company Non-UK Resident?

(SDLT Rates and Calculations>2% Non Resident Surcharge)

➤ A company is considered non-UK resident for Stamp Duty purposes if it is incorporated outside the UK or managed from another country, potentially incurring a 2% SDLT surcharge on residential property purchases in England.

A company is generally considered non-UK resident if it’s incorporated (officially formed) outside the UK and its main decision-making activities aren’t carried out in the UK. Additionally, a company formed in the UK but managed from another country, and treated as resident in that country under a tax agreement between the UK and that country, is also seen as non-UK resident.

Why It Matters for Stamp Duty

Non-UK resident companies buying residential properties in England are subject to a 2% surcharge on top of the standard Stamp Duty Land Tax (SDLT). This is important for property investors to know because it affects the total cost of buying property in England.

Examples

• Example 1: Imagine a company named “Global Homes Ltd” is formed in the Netherlands and buys a house in England for £350,000. Since Global Homes Ltd is based outside the UK and manages its business from the Netherlands, it’s considered non-UK resident. Therefore, it must pay the 2% non-UK resident surcharge on its purchase, in addition to the standard SDLT rates.
• Example 2: “Safari Investments Ltd” is a company incorporated in the UK but managed from South Africa. Due to a tax agreement between the UK and South Africa, Safari Investments Ltd is treated as a South African resident for tax purposes. When it buys a residential property in England for £450,000, it faces the 2% surcharge because it’s considered non-UK resident, plus the standard SDLT rates.

Key Points for Property Investors

1. Incorporation Location: If your company is formed outside the UK, it’s likely to be considered non-UK resident.
2. Management Location: Where the company’s key decisions are made can affect its residency status.
3. Tax Agreements: Some UK agreements with other countries can influence a company’s residency status for tax purposes.
4. Additional Charges: Non-UK resident companies face a 2% surcharge on residential property purchases in England, on top of standard SDLT rates.

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Non-UK Resident Surcharge for UK-Based Companies

(SDLT Rates and Calculations>2% Non Resident Surcharge)

➤ To prevent non-UK residents from avoiding a 2% surcharge by using UK-based companies, a special rule applies to “close companies” controlled by a small number of non-UK residents, ensuring they are treated as non-UK residents for this tax.

Without specific regulations, non-UK residents could purchase residential properties in England and Northern Ireland using a UK resident company. This method would allow them to enjoy the benefits of owning property in the UK without paying the additional 2% surcharge that non-UK residents are typically subject to.

Special Rule for Close Companies

To address this loophole, a special rule exists for “close companies” that are considered UK residents for corporate tax purposes. A close company is generally one that is controlled by five or fewer individuals (or directors). This rule is designed to ensure that these companies, which might otherwise be considered UK residents, are treated as non-UK residents for the purpose of the 2% surcharge under certain conditions.

What is a Close Company?

A close company is a type of business structure that’s privately owned and controlled. It’s characterised by having a small group of shareholders who often have a direct involvement in the management of the company. In the context of property investment, many property investment companies can be classified as close companies due to their ownership structure.

Key Features of Close Companies

• Limited Number of Shareholders: Typically, a close company has five or fewer shareholders. These shareholders are often family members or close associates, which is why it’s termed “close.”
• Direct Involvement in Management: Shareholders of a close company are usually directly involved in the decision-making and management of the company. This involvement can range from strategic decisions to day-to-day operations.

Conditions for Applying the 2% Surcharge to Close Companies

For a close company to be treated as non-UK resident for the surcharge, three specific conditions must be met:

1. Close Company Status: The company must be recognised as a close company at the time of the property transaction.
2. Non-UK Control Test: The company must pass the “non-UK control test,” indicating that its controlling parties are not based in the UK.
3. Not an Excluded Company: The company cannot be an “excluded company,” a category defined by specific criteria that exempts certain companies from this rule.

Example to Illustrate the Rule

Imagine a company called “London Homes Ltd” that is incorporated in the UK and is controlled by three individuals living outside the UK. This company decides to buy residential property in England. Although “London Homes Ltd” is a UK resident company for corporate tax purposes, under the special rule, it would be treated as non-UK resident for the purpose of the 2% surcharge because it meets all three conditions: it is a close company, controlled by non-UK residents, and not exempted as an excluded company.

This rule ensures that non-UK residents cannot bypass the 2% surcharge by purchasing property through UK resident companies, promoting fairness in the tax system and ensuring that non-UK residents contribute appropriately when investing in UK residential properties.

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Non-UK Resident Surcharge for Individuals

(SDLT Rates and Calculations>2% Non Resident Surcharge)

➤ For SDLT, individuals are considered UK residents if they spend at least 183 days in the UK around the transaction date, with special rules for joint purchases, marriages, and Crown employment, allowing some non-residents to be treated as residents.

The Basics of Residency and SDLT

Unlike other taxes that use the “statutory residence test” to determine if you’re a UK resident, SDLT follows its own rules. This means you could be considered a resident for income tax but a non-resident for SDLT purposes.

How Residency Is Determined for SDLT:

• If you’re in the UK for at least 183 days in any 365-day period around the property transaction date, you’re considered a UK resident for SDLT. This period spans from 364 days before to 365 days after the transaction.
• Being in the UK at the end of the day counts as being present for that day.

Specific Scenarios and Rules

Filing and Amending Returns:

• If you haven’t been in the UK for 183 days by the time you file your SDLT return, you must file as a non-resident.
• You can amend your return within two years if you later meet the residency criteria to claim back the 2% surcharge.

Joint Purchases and Marriage:

• If a property is bought jointly by spouses or civil partners, and one is a UK resident while the other is not, the non-resident is treated as a UK resident for this transaction. This rule applies if they’re living together at the time of purchase.
• This means that for married couples or civil partners, if one partner meets the residency criteria, both are considered UK residents for SDLT purposes.

Crown Employment:

• Special rules apply if you or your spouse/civil partner is working overseas in Crown employment (e.g., diplomats, military personnel). You’re considered UK residents for SDLT if your overseas presence is due to this employment.
• This special consideration requires a claim to be made in your SDLT return or amendment.

Example 1: Changing Residency Status

• Jordan, initially considered non-UK resident for SDLT, purchases a property in the UK. At the time of filing the SDLT return, Jordan hadn’t been in the UK for 183 days within the relevant 365-day period. Therefore, Jordan files as a non-resident and pays the 2% surcharge.
• However, Jordan later spends enough time in the UK to meet the 183-day rule within the specified period. Jordan can then amend the SDLT return to claim residency status and request a refund of the surcharge.

Example 2: Married Couple Buying Property

• Alex and Taylor, a married couple, buy a property in the UK. Alex is a UK resident, but Taylor has been living abroad. Because they’re purchasing the property together and living together at the time of the transaction, Taylor is treated as a UK resident for SDLT, avoiding the 2% surcharge.

Example 3: Crown Employment Abroad

• Morgan, a diplomat stationed overseas, buys a property in the UK. Despite being abroad, Morgan is considered a UK resident for SDLT because of the Crown employment rule. Morgan must claim this special status on the SDLT return to benefit from it.

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Claiming Relief and Proving Your Location for SDLT

(SDLT Rates and Calculations>2% Non Resident Surcharge)

➤ To claim location-based reliefs on SDLT, HMRC requires evidence like bank statements, work records, and utility bills to verify your presence in the UK, emphasising the importance of detailed record-keeping for property investors.

HM Revenue and Customs (HMRC) requires evidence if you claim you were in the UK (or not) during specific times. 

Evidence to Prove Presence in the UK

HMRC looks at various pieces of evidence to understand where you spend your time. This information is crucial when you’re claiming reliefs on Stamp Duty Land Tax (SDLT) that depend on your location. Here are the types of evidence you might need:

• Bank and Credit Card Statements: These can show where you’ve been making everyday purchases, helping to indicate where you’ve been living or staying.
• Work Records: Diaries, planners, or timesheets that outline where you’ve been working can serve as proof of your location.
• Phone Bills: The location and frequency of your calls, as well as the billing address on your mobile phone bill, can hint at where you spend most of your time.
• Utility Bills: Bills for services like electricity, gas, or water can prove that you’ve been living in a particular place if the bills are in your name.
• Club Memberships: Records from sports, health, or social clubs that show regular attendance or membership could indicate your presence in the UK.

Keeping Detailed Records

For those who travel a lot or live part of the year outside the UK, it’s wise to keep detailed records, especially if you plan on buying a property. If you know in advance about a potential purchase, start keeping track of:

• The days you spend in the UK versus abroad.
• Evidence of your activities and transactions in both places.

Example Scenario

Lisa, a consultant who splits her time between the UK and Spain. She knows she’ll be buying a home in England next year. To prepare, Lisa starts meticulously documenting her travels, keeping all her flight tickets, and saving receipts from her expenses in both countries. She also retains her mobile phone bills and records from her gym in London to prove her presence in the UK.

Submitting Your Claim

When the time comes to file your SDLT1 form for your property purchase, you can claim any relevant reliefs at Question 52. Alongside your claim, be prepared to provide the evidence you’ve collected to HMRC, showcasing your presence in the UK.

Remember, HMRC will assess the overall quality and relevance of the evidence you provide. They’re known to consider even your digital footprint—so, keeping a well-documented trail of your time in the UK can be invaluable in supporting your SDLT relief claims.