HMRC SDLT: SDLTM09910 – SDLT – increased rates for non-resident transactions: Non-resident in relation to a chargeable transaction: Companies, second condition – para 7(3) Sch 9A FA03

SDLT Increased Rates for Non-Resident Transactions

This section of the HMRC internal manual explains the principles and concepts related to the increased rates of Stamp Duty Land Tax (SDLT) for non-resident transactions, specifically focusing on companies under the second condition of paragraph 7(3) Schedule 9A FA03.

  • Details the criteria for a company to be considered non-resident in relation to a chargeable transaction.
  • Explains the implications of non-residency status on SDLT rates.
  • Provides guidance on applying the second condition for companies.

Guidance on SDLT Increased Rates for Non-Resident Transactions

Overview of SDLT for Non-Residents

When non-UK residents want to buy property in the UK, they can do so through companies that are based in the UK. This allows them to benefit from property ownership without having to be directly involved. Normally, if a non-UK resident individual buys property through a UK resident company, they wouldn’t have to pay an additional charge called the surcharge. However, there are specific rules that apply to determine whether a company is still seen as non-resident when it comes to this surcharge.

Understanding the Surcharge

For the purpose of the surcharge on Stamp Duty Land Tax (SDLT), a company is considered non-resident if it meets certain conditions on the effective date of the transaction. Here’s what you need to know:

– The company must be UK resident according to the Corporation Tax Acts.
– It must be classified as a close company.
– It must pass a non-UK control test related to the transaction.
– It must not fall under the category of excluded companies.

Defining a Close Company

According to the rules laid out in the Corporation Tax Act 2010 (specifically Chapter 2 of Part 10), a close company is generally defined as follows:

– It is under the control of five or fewer participators. Participators refer to individuals who have a stake in the company, either through shares or other interests.
– Alternatively, control can also be deemed if all participators are directors of the company.
– If more than half of the company’s assets would go to five or fewer participators in the event of the company being liquidated, it will also be classified as a close company.

Exceptions to the Close Company Definition

There are certain exceptions to the definition of a close company that are worth noting, especially when considering the surcharge for SDLT:

1. Controlled Companies:
– If a company is managed by other companies that are not close companies, it is considered close only in relation to the specific non-close company that counts as one of the five or fewer participators.

2. Quoted Companies:
– Certain types of quoted companies can have public shares held by at least 35% of the voting power, which might exempt them from being classified as close companies under regular conditions.

For more in-depth information regarding close companies, you can refer to CTM60000 onwards.

Control Test for Non-Residents

The non-UK control test assesses whether a company is influenced or controlled by someone outside the UK:

– If a non-UK resident has the ability to direct or influence the company, it may be considered non-resident, despite the company being UK resident for tax purposes.
– This test ensures that the economic benefits of owning property in the UK are genuinely for the UK economy and not simply a means for foreign entities to benefit without paying their fair share.

Excluded Companies

A few types of companies do not have to adhere to these rules and will be regarded as exempt from the surcharge:

– Companies with specific characteristics set out in the legislation.
– Companies known to have gone through or are undergoing significant operational changes that legitimately affect their residency status.

These exclusions provide a further layer of depth in understanding which companies may be seen as non-resident for SDLT purposes.

Application of the Rules

Explaining this in practice, we can consider the example of a non-UK resident individual who uses a UK resident close company to buy a dwelling:

– If the individual controls the company via a small number of shares, then the close company rules come into play.
– If it’s determined that the individual does not enjoy control of the company, the company might still be seen as non-resident, thus avoiding the surcharge.

However, if the ownership structure indicates that non-UK residents maintain control (for instance, if there are foreign shareholders involved), the surcharge could be applicable.

Determining Residency and Surcharge Implications

To determine if a company is liable for the surcharge, HMRC will need to examine the following aspects on the transaction date:

1. Company Status:
– Is the company classified as a close company?
– Are there only five or fewer participators, or are all participators also directors?

2. Control and Influence:
– Is there a non-UK resident with control or significant influence over the company’s decisions?
– Does this affect the company’s operations in a way that would classify it differently?

3. Exemptions:
– Is the company an excluded type that qualifies it for exemption from the surcharge?

Attention to these details can significantly impact the tax liabilities for those involved in the transaction.

Practical Steps for Companies

If a company is considering making a property purchase, it is important to ensure that:

– The structure of share ownership is clearly outlined.
– Appropriate records are kept to determine who has control over the company.
– Legal advice might be sought to clarify the definitions and structures to ensure compliance with tax laws.

Additionally, reviewing dealings with non-UK individuals or entities can help illustrate the company’s standing and adherence to residency rules, ultimately affecting obligations under SDLT.

Resources for Further Information

For any specific inquiries or further details about SDLT and the applicable rules, please visit the HMRC website or consult with a tax professional. Important reference materials and legislative texts can be useful for understanding how these guidelines apply in individual circumstances.

For a detailed examination of the close company rules and other relevant guidance, you can view this resource: CTM60000 onwards.

Understanding these rules is vital for ensuring compliance and avoiding unexpected tax liabilities during property transactions in the UK for non-residents and their associated companies.

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Written by Land Tax Expert Nick Garner.
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