SDLT Non-Resident Surcharge: Alternative Property Finance and Residence Tests Explained

Non-resident SDLT surcharge in alternative property finance

In some alternative property finance arrangements, a financial institution is the legal buyer and pays SDLT on the initial purchase, but the 2% non-resident surcharge is worked out by looking at the residence status of the customer receiving the finance, not the institution itself. This rule applies only to certain arrangements within sections 71A(1)(a) or 73(1)(a)(i) of FA 2003.

• If the financed customer is non-resident for Schedule 9A purposes, the financial institution is treated as non-resident for the surcharge on its purchase.
• If the financed customer is resident, the institution is treated as resident for this surcharge test, even though it is the SDLT payer.
• The rule is a specific look-through provision in paragraph 16 of Schedule 9A FA 2003 for certain alternative finance structures.
• Relief on the later lease or sale to the customer does not remove the need to consider SDLT and any surcharge on the institution’s earlier purchase.
• You must identify the chargeable transaction, confirm the arrangement falls within the relevant statutory provisions, and apply the correct Schedule 9A residence test to the financed person.

Scroll down for the full analysis.

Non-resident SDLT surcharge and alternative property finance

This page explains a special rule for the 2% SDLT non-resident surcharge where a property is bought through certain alternative property finance arrangements. In these cases, the financial institution may be the legal buyer and the person who pays SDLT on the purchase, but the surcharge position is not decided by looking at the institution’s own residence status. Instead, the law looks through to the person receiving the finance.

What this rule is about

Certain alternative property finance arrangements are designed so that a financial institution buys the property first and then provides the customer with finance in a way that complies with the relevant structure. Under the SDLT rules, the institution may be the purchaser on the initial acquisition and may be the person charged to SDLT on that transaction.

That creates an obvious question for the non-resident surcharge: whose residence status matters? Is it the financial institution’s, because it is the purchaser for SDLT purposes, or the customer’s, because the institution is effectively financing that customer’s acquisition?

Paragraph 16 of Schedule 9A FA 2003 answers that question for certain alternative property finance transactions. It prevents the surcharge outcome from turning simply on the financial institution’s own residence position.

What the official source says

The HMRC manual says that where:

• the purchaser is a financial institution, and
• the chargeable transaction forms part of an alternative property finance scheme within section 71A(1)(a) or section 73(1)(a)(i) FA 2003,

the residence of the financial institution for surcharge purposes is determined by applying the relevant residence test to the person taking out the finance.

In other words, for the transaction on which the financial institution pays SDLT, the institution is treated as non-resident if, and only if, the financed customer is non-resident in relation to that transaction. If the customer is resident, the institution is treated as resident for this purpose.

The manual illustrates this with two examples:

• Under a section 73 structure, the institution buys a freehold and then sells it on deferred payment terms to the customer. The first transaction is chargeable, and the second is relieved. The surcharge on the first transaction depends on whether the customer is non-resident.
• Under a section 71A structure, the institution buys the freehold and then grants the customer a lease with an option over the freehold. Again, the first transaction is chargeable, and the second is relieved. The surcharge on the first transaction depends on whether the customer is non-resident.

The manual also notes that the appropriate residence test must be applied to the financed person. In its examples, because the purchaser is a company, it refers to the company residence test in paragraph 5(1) of Schedule 9A when determining the customer’s status for the transaction.

What this means in practice

The practical effect is that the surcharge analysis follows the customer, not the financing institution.

This matters because in alternative property finance structures the institution often appears as the buyer on the land transaction that actually bears SDLT. Without this rule, the surcharge could depend on the institution’s own residence status, which would not reflect the policy of charging the surcharge by reference to the person whose property acquisition is being financed.

So if the financed customer is non-resident for the purposes of Schedule 9A, the financial institution’s purchase can attract the 2% non-resident surcharge. If the financed customer is resident, the institution’s purchase does not attract the surcharge on that basis.

The rule does not mean every alternative finance case is exempt from SDLT. The initial acquisition by the institution can still be chargeable. What changes is how residence is tested for the surcharge.

The examples also show another important point: in these structures, relief may make the later lease or sale to the customer exempt from charge, but that does not remove the need to consider SDLT and the surcharge on the institution’s earlier purchase.

How to analyse it

A sensible way to approach the issue is to ask these questions in order:

• Is this a transaction involving alternative property finance within section 71A(1)(a) or section 73(1)(a)(i) FA 2003?
• Is the chargeable purchaser on the relevant transaction a financial institution?
• Which transaction is actually chargeable to SDLT, and which transaction, if any, is relieved or exempt under the alternative finance rules?
• Who is the person taking out the finance? That is the person whose residence status must be tested for surcharge purposes.
• What is the appropriate residence test under Schedule 9A for that person in relation to the transaction?
• Applying that test, is that person resident or non-resident in relation to the effective date of the transaction?

Only after working through those steps can you decide whether the financial institution is treated as a non-resident purchaser for the purposes of the surcharge.

The manual examples focus on day-counting in the UK, because that was enough to determine the customer’s status on the facts given. In real cases, the correct residence test must be applied carefully under Schedule 9A, and the answer may depend on the type of buyer and the detailed facts.

Example

Illustration: a bank or other qualifying financial institution buys a dwelling in England as part of a section 73 alternative finance arrangement. It pays SDLT on that purchase. It then enters into the onward finance arrangement with the customer, and the later transaction is relieved.

For the 2% non-resident surcharge on the institution’s purchase, you do not stop at the fact that the institution is the SDLT payer. Instead, you ask whether the customer taking out the finance is resident or non-resident in relation to that transaction under Schedule 9A. If the customer is non-resident, the institution is treated as non-resident for surcharge purposes. If the customer is resident, the institution is not treated as non-resident for that purpose.

Why this can be difficult in practice

The main difficulty is that the person who is legally buying the property and paying SDLT is not the person whose residence status decides the surcharge. That is counterintuitive if you are used to ordinary SDLT analysis.

Another difficulty is identifying the correct residence test. The manual states that the appropriate test must be applied to the financed person. That means you must be careful not to assume that a simple individual day-count always answers the question. The correct test depends on the structure of Schedule 9A and the status of the relevant person in relation to the transaction.

It is also important not to confuse the alternative finance relief with the surcharge rule. Relief on the later transaction does not answer the surcharge question on the earlier one. These are separate parts of the SDLT analysis.

Finally, the rule described here is limited to specific alternative property finance provisions. It should not be assumed to apply to every arrangement that is commercially similar unless it falls within the relevant statutory provisions.

Key takeaways

• In certain alternative property finance cases, the financial institution may pay SDLT on the purchase, but the non-resident surcharge is determined by the financed customer’s residence status.
• The key statutory gateway is that the arrangement must fall within section 71A(1)(a) or section 73(1)(a)(i) FA 2003, with paragraph 16 of Schedule 9A applying the look-through rule.
• Do not assume the surcharge follows the institution’s own residence, or that relief on the later transaction removes the need to analyse the earlier chargeable purchase.

This page was last updated on 24 March 2026

Useful article? You may find it helpful to read the original guidance here: SDLT Non-Resident Surcharge: Alternative Property Finance and Residence Tests Explained

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