HMRC SDLT: SDLT Non-Resident Transactions: Non-UK Control Test and Rights Attribution Explained

SDLT – Increased Rates for Non-Resident Transactions

This section explains the rules for determining non-UK control in relation to chargeable transactions for companies. It focuses on the attribution of rights and powers under the close company rules, detailing limitations on these attributions for the purposes of the surcharge.

• Rights and powers of others can be attributed to a participator under section 451 CTA 2010.
• Attributions cannot be made between business partners only.
• Spouses or civil partners living together cannot have rights attributed if one is UK resident.
• Attributions are not made if a person’s interest in a company is de minimis.
• De minimis interest is defined as less than 5% in share capital, voting rights, income distribution, or asset distribution.
• Loan creditor rights are disregarded in de minimis calculations.
• Spouses or civil partners are considered living together unless legally or permanently separated.

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Guidance on SDLT Increased Rates for Non-Residents

This article discusses the increased Stamp Duty Land Tax (SDLT) rates for non-resident buyers. It outlines how non-residency is determined in relation to chargeable transactions, particularly for companies, as well as the conditions under which rights and powers can be attributed to individuals. Understanding these rules is important for anyone involved in property transactions where the buyer may be a non-resident.

Understanding Control of a Company

In the context of UK tax law, especially under the close company rules found in the Corporation Tax Act 2010, the notion of ‘control’ is key. The definition of who controls a company can include not just direct ownership but also rights and powers that can be attributed to a person. According to section 451 of the Corporation Tax Act 2010, if a participator possesses certain rights and powers, these can also be considered as theirs for determining control.

Attribution of Rights and Powers

For the purposes of increased SDLT rates levied on non-residents, there are specific limitations regarding how rights and powers can be attributed. Here are the key points:

• Attributions are not allowed between business partners (paragraph 10(2)). This means if two individuals are in a business partnership, their rights and powers related to the company cannot be attributed to each other.
• If person A is a UK resident and is living with person B, who is their spouse or civil partner, the rights and powers of person A cannot be attributed to person B (paragraph 10(3)). This limitation ensures that marital status does not affect the taxation outcomes of individual rights.
• No attributions can be made if a person’s interest in a company is considered ‘de minimis’ (paragraph 10(4)). So, if a person holds only a minimal stake in a company, their rights won’t transfer to others for tax purposes.

What Does ‘De Minimis’ Mean?

A person’s interest in a company is classified as ‘de minimis’ if it meets one of the following criteria:

• The person owns less than 5% of the share capital or issued share capital of the company (paragraph 10(5)(a)). This means that even if a person does own shares, if they account for less than 5% of the total shares, they will not have significant rights attributed to them.
• The person’s voting rights in the company are also below 5% (paragraph 10(5)(b)). If someone cannot exercise meaningful influence over company decisions due to holding a small number of voting shares, this also results in a de minimis classification.
• If the income a participant can expect to receive from their shareholding is less than 5% of what would be distributed, their interest is de minimis (paragraph 10(5)(c)). For example, if a company earns £100,000 and a shareholder would only receive £4,000 from their share, they would not be viewed as having significant rights.
• In cases of company liquidation, if their rights would entitle them to less than 5% of its assets available for distribution, the interest is treated as de minimis (paragraph 10(5)(d)). If there are creditors or other shareholders ahead of them, a minimal payout also indicates limited control.

Determining Living Arrangements for Spouses and Civil Partners

When it comes to establishing whether spouses or civil partners are living together, section 1011 of the Income Tax Act 2007 provides clear definitions.

• Spouses or civil partners are considered to be living together unless they have been separated by:
• A court order.
• A deed of separation.
• Actual separation in circumstances likely to be permanent.

Understanding this definition is essential when determining how rights and powers may or may not be attributed between partners for tax purposes. If they are classified as living together, certain rights cannot be transferred from one to the other, which can impact SDLT rates and liabilities.

Practical Examples

Example 1: Business Partnership

Consider John and Sarah, who co-own a local café as business partners. If they each own 40% of the shares in the company, their rights cannot be attributed to each other. This means that when assessing if either qualifies for non-resident rules under SDLT, their ownership stakes remain individually assessed, and they cannot pool their rights together for tax benefits.

Example 2: Marital Residence

Now, let’s take a look at Sarah and Tom, who are married and live together. Tom is a UK resident and owns 10% of a property company. If they want to buy another property and Tom’s rights are considered for SDLT calculations, Sarah’s rights cannot be included. This means that despite their marriage, for SDLT purposes, Tom’s interest in the property company stands alone.

Example 3: De Minimis Interest

Suppose David owns only 3% of a tech start-up’s shares. His stake is below the 5% threshold required to be considered significant. Thus, his rights cannot be attributed to anyone else for tax purposes, and if David and his wife were to buy a property together, his minimal involvement in the company would not affect her tax status in relation to SDLT.

Example 4: Rights During Liquidation

Imagine a scenario where a company is going under and Anna holds 4% of the company shares, meaning her interest would be de minimis. If the company’s assets are distributed during liquidation and Anna’s share would yield under 5% of the assets, her rights will not allow her to influence SDLT outcomes.

Conclusion

This article clarifies how controlling interests in companies, especially regarding spouses and civil partners, affect SDLT when considering non-resident buyers. The principles of control, attribution of rights, and the meaning of de minimis are essential to comprehend when making property transactions in the UK.

Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLT Non-Resident Transactions: Non-UK Control Test and Rights Attribution Explained

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