HMRC has published details of a proposed 1% Stamp Duty Land Tax (SDLT) surcharge for residential property purchases by non-UK residents. The surcharge was announced by Theresa May at the Conservative Party conference last autumn, as part of the government's commitment to tackle the housing crisis. Few details were given at the time, and the assumption by many was that this may be limited to foreign individuals acquiring private residences. The consultation makes it clear that the charge will apply much more broadly and could increase SDLT costs for businesses in the build-to-rent and private rental sectors.

Key points from the consultation:

• The surcharge applies to all residential property acquisitions by non-resident individuals and corporates. It will add 1% to the relevant rate of SDLT, including where the flat rate of 15% is currently payable under the rules for companies acquiring property for private purposes. It will also apply in addition to the 3% surcharge introduced in 2016 for individuals buying second homes, and which currently applies to all corporate acquisitions of residential property.
• An individual will be non-UK resident under these rules if they have spent fewer than 183 days in the UK in the 12 months prior to the property purchase. This is a different residence test to the one used for other UK tax purposes. While HMRC point out that the existing test is complex and ill-suited to SDLT, the addition of yet another test will increase the complexity of the regime. It is also likely to be difficult to monitor, not least because if a person has paid the surcharge and spends 183 days or more in the UK in the year following their purchase, they will be entitled to a refund.
• The normal tax residence rules apply to determine the residence of a corporate buyer, so the surcharge will catch companies and unit trusts established and managed outside the UK. While the extension of capital gains tax to non-resident investors in UK real estate has made the use of non-UK corporates to hold real estate less attractive, there are still groups that use non-UK vehicles to hold their property interests, for example build-to-rent funds and joint ventures looking to benefit from exempt status under the new capital gains tax regime. These groups will often benefit from the lower commercial rates of SDLT (top rate of 5%, compared to 15% for residential assets), as transactions involving six or more individual dwellings can be treated as commercial acquisitions. However they can also benefit from a relief that applies to the acquisition of multiple residential properties, which can reduce the rate to only 3%. The effect of the proposed changes may be that the lowest rate available to these groups is now 4%, a material additional cost. Arguably this surcharge should not apply to groups in the build-to-rent and private rental sectors, given the role they play in alleviating the housing crisis, but this argument - regularly made to oppose the 3% surcharge - will need to be raised again during the consultation.
• Where there are multiple purchasers of a property, including where the buyer is a partnership, the surcharge will apply to the whole of the price if any of the buyers is non-resident. This is similar to the existing 3% surcharge, which applies if any of a group of joint purchasers owns a second home.
• Where a UK company is used to acquire residential property and the company is controlled by a small number of non-UK private entities, it will also be caught by the surcharge.
• The surcharge will apply to acquisitions of English properties. Separate regimes apply to properties in Scotland and Wales and there is no suggestion as yet that the Scottish and Welsh governments will follow suit with a surcharge of their own.

Conclusion

Many foreign buyers have accepted the vertiginous rates of SDLT that apply to residential property in the UK, and may not be put off by a further 1%. The impact of the new surcharge will be more keenly felt by the build-to-rent and private rental sectors if the new rules increase their costs, which seems an odd result given the policy objective of tackling the housing crisis. The SDLT regime is already a confusing patchwork of different rates and surcharges, the product of piecemeal changes over recent years. This new surcharge will leave the rules ever more complex and difficult to navigate.