SDLT surcharge for non-residents may make mixed use developments taxed at commercial rates more attractive

The Finance Bill published on 11 March 2021 has confirmed that the non-resident surcharge will apply to the residential elements of a mixed use development where the buyer claims multiple dwellings relief.

The non-resident surcharge

Non-resident buyers of residential property in England and Northern Ireland will be subject to a 2% stamp duty land tax (SDLT) surcharge from 1 April 2021. There is currently no equivalent in Scotland and Wales and transitional rules apply where a land transfer completes after 1 April 2021 under a contract exchanged before 11 March 2020, provided conditions are met.

The buyer must be non-resident to be caught by the surcharge. For companies, residence is tested at the effective date of the land transaction. Unit trusts are not treated as companies for these purposes, and the surcharge will follow the tax residence of the trustees. The surcharge will apply to joint pur-chases, if any of the buyers is non-resident (although there are special rules for co-habiting spouses), and there is no ability to apportion the price between resident and non-resident buyers. For partner-ships, where the partners are deemed to be the buyers for SDLT, this means the surcharge will apply even if only one partner is non-resident.

The surcharge applies to the acquisition of dwellings, including other land existing to benefit the dwell-ings (for example, offsite parking and grounds), but not where that other land is acquired in isolation. It does not apply to care homes or student halls that fall outside the SDLT definition of dwellings. The dwellings do not have to be fully built when acquired, and, in certain circumstances, the surcharge can apply even if construction of the dwellings has not started at the effective date of the land transfer. This follows a trend emerging from case law, with some cases showing taxpayers and HMRC seeking to identify bare land with residential planning consent as residential for SDLT, and will be particularly relevant for forward-funded developments.

Mixed use developments and MDR

The draft legislation, which was published in July 2020, provided that the non-resident surcharge would apply to the acquisition of land that "consists of" dwellings (only).

The same language is used in respect of the 3% surcharge on higher rates transactions in dwellings, and HMRC has recently confirmed that "consists of" should imply "exclusively". This means that the higher rates 3% surcharge does not apply to mixed residential and non-residential properties where multiple dwellings relief (MDR) is claimed (unless the non-residential element is negligible or artificially contrived - see our previous Insight ). Consequently, practitioners had expected that a similar ap-proach to mixed-use developments would be taken in respect of the 2% non-resident surcharge.

However, the draft legislation published on 11 March 2021 has been amended from the July draft such that the non-resident surcharge now applies to transactions consisting of dwellings that are "alone or with other property". HMRC guidance (at SDLTM09860) confirms that the non-resident surcharge will therefore apply to the residential element of a mixed use development, where the buyer claims MDR (even if the commercial element of the transaction is not artificial and more than negligi-ble). Where no MDR claim is made (and SDLT is paid at non-residential rates), the non-resident sur-charge will not apply.

Residential-only developments

After 1 April 2021, non-resident investors acquiring residential only developments will be subject to a minimum 5% SDLT rate (comprising the 2% non-resident surcharge and the 3% surcharge on higher rates transactions in dwellings), even with MDR. Since the acquisition of six or more dwellings can be treated as a non-residential transaction for SDLT, build-to-rent investors may benefit from paying SDLT at non-residential rates (at a maximum rate of 5%).

Osborne Clarke comment

Investors should be aware of the distinction HMRC has drawn between the non-resident surcharge and the 3% SDLT surcharge for higher rates transactions (although it remains to be seen whether HMRC will seek to amend the law on the 3% surcharge in due course). Investors should model the SDLT cost carefully to determine whether it is more cost effective to pay SDLT at commercial rates than to claim MDR with a minimum rate of 2%.