HMRC SDLT: SDLTM09950 – SDLT – increased rates for non-resident transactions: Alternative property finance – para 16 Sch 9A FA03

SDLT Increased Rates for Non-Resident Transactions

This section of the HMRC internal manual provides guidance on the increased Stamp Duty Land Tax (SDLT) rates applicable to non-resident transactions, specifically focusing on alternative property finance arrangements under paragraph 16 of Schedule 9A of the Finance Act 2003. Key principles and concepts include:

• Understanding the criteria for non-resident status in property transactions.
• Application of increased SDLT rates for non-residents.
• Details on alternative property finance arrangements.
• Compliance requirements for non-resident property buyers.

Understanding SDLT and Alternative Property Finance

Introduction to Alternative Property Finance

Alternative property finance refers to various financial arrangements that people use to acquire property. It usually involves financial institutions that help manage these transactions. More detailed guidance can be found in the HMRC documents starting at SDLTM28000.

Key Concepts of SDLT and the Surcharge

When dealing with Stamp Duty Land Tax (SDLT) and alternative property finance, it is essential to understand how the residence of parties involved affects the amount of tax payable.

– Financial Institutions: These are firms, like banks or other organisations, that lend money for property purchases.
– Chargeable Transaction: This refers to a sale or purchase that attracts SDLT.
– Residence Test: This test determines whether a person is considered a resident in the UK based on the number of days spent in the country.

The legislation states that when a financial institution is involved in a property finance arrangement, the residence status of the person borrowing the money is key to determining the institution’s taxes.

How the Surcharge is Determined

For the SDLT surcharge to apply, we need to consider:

1. Who is the Borrower?: This refers to the person taking out the finance.
2. What is the Residence Status?: This is assessed by looking at the time the borrower has spent in the UK.

When assessing the surcharge for transactions involving financial institutions, the burden of proof for determining residence falls on the person receiving the finance.

Examples of Alternative Property Finance Transactions

To illustrate these points, here are two examples involving different individuals and financial institutions.

Example 1: Aya and Strix Corporation

– Transaction 1: On 1 September 2022, Strix Corporation, a financial institution, buys a residential property in Northern Ireland for £400,000.
– Transaction 2: Strix Corporation then sells this property to Aya for £500,000.

Payment Arrangement: Aya agrees to pay Strix Corporation £500,000 over 25 years and gives them a charge (like a mortgage) over the property.

SDLT on Transaction 1: Strix Corporation must pay SDLT for their purchase. However, because Aya is claiming relief under the alternative property finance section, Transaction 2 is exempt from SDLT.

Residence Considerations: The rule here is that Strix Corporation is treated as a non-resident in relation to the transaction if Aya is also a non-resident.

Using the residence test from the legislation, we find:
– Aya spent 180 days in the UK from 2 September 2021 to 1 September 2022.

Because Aya is non-resident, Strix Corporation is also considered non-resident for this transaction.

Example 2: Rosalee and Qetsiyah Limited

– Transaction 1: On 31 December 2023, Qetsiyah Limited, another financial institution, buys a freehold property in England for £550,000.
– Transaction 2: Qetsiyah Limited then provides a 25-year lease to Rosalee for the property, with an annual rent of £24,200.

Payment Arrangement: Similar to the first example, Rosalee has the option to purchase the freehold later.

SDLT on Transaction 1: Qetsiyah Limited is responsible for paying SDLT on this purchase. Rosalee claims relief under the relevant section, meaning Transaction 2 is exempt from SDLT.

Residence Considerations: Here, just like in Example 1, the residence test is key to understanding if Qetsiyah Limited is liable for the surcharge.
– Rosalee spent 305 days in the UK during 2023.

Since Rosalee is considered a resident, Qetsiyah Limited is not seen as a non-resident. Therefore, they are not subject to the surcharge.

Why Residence Status Matters

– Non-Residents: Financial institutions paying SDLT on chargeable events might face different tax obligations depending on the residence status of the borrower. Non-residents are often subject to different rates and regulations regarding SDLT.
– Residents: Persons who are classified as residents do not incur the same tax liabilities under the same conditions as their non-resident counterparts.

Application of the Guidance

The application of these principles regarding financial institutions and alternative property finance is specified in legislation. The rule essentially operates so that a financial institution is treated as non-resident in relation to charges on property transactions, but only if the borrower’s residence status confirms this.

This means that financial advisers must keep detailed records of their clients’ time spent in the UK to properly assess whether the surcharge applies. The consequences of these designations can significantly impact the costs associated with property transactions.

Determining Residence Status

To apply the residence test accurately:

1. Track Days in the UK: Individuals should diligently record how many days they have spent in the UK over the given period.
2. Understand the Rules: Familiarise yourself with how time spent in the UK, such as periods of residence or absence, influences SDLT obligations.

This ensures that both financial institutions and borrowers are aware of their responsibilities regarding SDLT. Proper documentation can reduce the risk of unexpected charges or penalties.

Conclusion on Surcharge Implications

Whether you are a borrower or a financial institution, understanding the implications of residence on SDLT will help navigate the costs and charges associated with property transactions. Keeping track of time spent in the UK is essential for compliance with SDLT laws and can lead to significant financial benefits through exemptions or reliefs provided under the alternative property finance arrangements.

By applying these principles, all parties involved can ensure smooth transactions and avoid unexpected tax implications.

Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLTM09950 – SDLT – increased rates for non-resident transactions: Alternative property finance – para 16 Sch 9A FA03

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