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  1. Wealth
February 20, 2019

Why rich buyers might get snookered by stamp duty, again

By Spear's

The proposed stamp duty surcharge might pose more problems for foreign investors, writes Jonathan Neumann

This month, the government published a consultation on its proposed Stamp Duty Land Tax (SDLT) surcharge on purchases of residential property in England by non-residents.

The prime minister announced her intention to introduce this surcharge – at a rate of 3 per cent – in her speech to the Conservative Party conference back in September 2018. However, in his Autumn Budget the Chancellor of the Exchequer indicated the rate would in fact be 1 per cent, and that is the proposal in this consultation.

SDLT, as any property purchaser will know all too well, is a tax on land transactions in England and Northern Ireland. (Since 2015 Scotland has had a similar Land and Buildings Transaction Tax, and Wales replaced SDLT with its own Land Transaction Tax in 2018.)

If enacted into law, the proposed surcharge will effectively add 1 per cent to all existing SDLT rates where the purchaser, firstly, is not resident anywhere in the UK, and, secondly, buys residential property in England or Northern Ireland. An individual resident in Scotland, for example, will not be subject to the surcharge, nor will a non-resident purchaser of commercial property.

To illustrate, take an individual who intends to buy a house in England worth £2 million. Currently, if the individual does not own another property anywhere else in the world, he will pay SDLT at a graduated rate up to 12 per cent. If, however, he does already own another property, he will pay SDLT at a graduated rate up to 15 per cent. If the surcharge comes into effect and our purchaser is not resident in the UK, he would pay the graduated rate up to 13 per cent or 16 per cent in those respective scenarios.

Corporate entities are currently subject to a 15 per cent flat rate of SDLT, and that rate will rise to 16 per cent for non-resident corporates. Reliefs will generally continue to apply as normal.

For the purposes of the surcharge, the proposed rules on non-residency are more straightforward than existing non-residency rules for other taxes. It is intended that a purchaser will be treated as non-resident if he has spent fewer than 183 days (midnights) in the UK in the 12 months preceding the effective date of the transaction (usually completion of the purchase). For other types of purchasers, such as companies, partnerships and trusts, the rules are more complicated.

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If an individual who was subject to the surcharge spends 183 days or more in the UK in the 12 months following the effective date of the transaction he will be eligible for a refund of the 1 per cent surcharge and will have 24 months from the effective date to claim it.

Since its introduction in 2003 (when it replaced the old stamp duty for land transactions), SDLT has been variously used by successive governments to manipulate demand at different levels of the housing market, increase home ownership by first time buyers, and raise revenue.

The proposed 1 per cent surcharge is a case in point. The government announced that the proceeds of the surcharge will be put towards measures to tackle rough sleeping. However, in her conference speech, the Prime Minister also justified the policy on the grounds that it would ‘help level the playing field for British buyers’ by raising the rates on purchasers ‘who do not live and pay taxes in the UK’.

By expressing multiple motivations, the government puts itself in a strong position to deflect criticism. In the consultation, the government asks whether the proposed surcharge strikes the right balance between increasing home ownership and the UK remaining an open and dynamic economy, and inquires how the surcharge might affect purchase decisions by non-residents. But little hangs on the answers. If respondents argue that the surcharge will have little impact on non-resident decision-making, the government can be satisfied that it will simply raise more revenue from SDLT. Meanwhile, if the answer provided is that the surcharge will adversely affect overseas demand, then the government will rest assured that more houses will be available for first-time and other domestic buyers.

It may be a win-win for the government, but such policies can also have losers, which in this case may include those invested in – or looking to invest in – the UK housing market, as well as those in industries that rely on such investment, from construction to conveyancing to concierge.

That said, in comparison with other jurisdictions, according to a study by Savills, whilst the higher-end of the market in the UK capital has been hit by changes to capital gains tax, inheritance tax, and ATED in recent years, London remains ‘significantly’ cheaper than Vancouver, Hong Kong and Singapore which have all, already, hiked stamp duty on overseas buyers.  Indeed, the 8 per cent surcharge purchaser levy in Sydney, puts the proposed 1 per cent rise into perspective.

Jonathan Neumann works at boutique private wealth law firm Maurice Turnor Gardner LLP

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