The Up and Coming Tax -- II - Sharon Anstey concludes her stamp duty guide for the tax practitioner.

The Up and Coming Tax – II
Sharon Anstey concludes her stamp duty guide for the tax practitioner.
All rates of duty set out in this article are those which applied at the time of writing. SHARON ANSTEY plans to provide an update in a future issue to deal with any changes announced in the Budget.
Leases
Stamp duty is chargeable on a lease of land. There is no duty on a licence because it does not convey a right to exclusive possession. An agreement for a lease is charged to duty as if it were a lease.
Rates
Stamp duty is charged on both the rent and the premium reserved in a lease as follows.
A short lease (definite term of less than one year)
On furnished lettings for a definite term of less than one year there is no duty if the rent is below £5,000 per annum; if it exceeds £5,000 per annum, duty of £5 is payable. In other cases, duty is charged as for a lease for a year at the rent reserved for the definite term.
Leases for a definite term or for an indefinite term
Where there is a premium, duty is charged as if the lease were a conveyance on sale. Therefore the thresholds for the nil rate and lower rates are available if the appropriate certificate of value is endorsed. However, the £60,000 threshold is not available if part of the consideration is rent which exceeds £600 per annum.
Where rent is payable, the rates are:

Operation of the contingency principle
Where the rent is uncertain and dependent on the happening of a contingency, the contingency principle will apply (L M Tenancies Plc v Commissioners of Inland Revenue [1998] STC 326). However, where the consideration cannot be ascertained at the time the instrument is executed, the consideration will be deemed to be the market value (section 242, Finance Act 1994).
Where leases have a rent review formula based on the increase in the retail prices index, the Revenue has confirmed that only any change in the retail prices index over the period (if any) from the commencement of the lease to its date of execution will be taken into account (press release 14 May 1999).
Therefore it is advisable in such a situation to avoid having a lease commence before it is executed.
Duration of lease
As the duration of a lease is a key element in calculating stamp duty, its length must be identified at the date of execution. The following rules apply:
(1) A lease for a term with an option to renew is treated as a lease for the original term only.
(2) A lease for a fixed term which can subsequently be determined by notice, the term is the fixed term plus the period which must lapse before determination.
(3) A lease for a specified period which may terminate on an earlier event is treated as a lease for the specified period.
(4) A lease for life or for lives or for a term determinable on the marriage of the lessee is treated as a lease for 90 years.
As can be seen from the above, to mitigate stamp duty it is better to have the lease as short as possible. However, for income tax purposes the reverse is true for a lease of less than 50 years (section 34, Taxes Act 1988).
Surrenders
Where a lease is surrendered, duty is charged on any consideration paid by the landlord as if the surrender were a conveyance or transfer on sale. If no consideration is paid, it is subject to fixed duty of £5. Prior to section 243, Finance Act 1994, duty could be avoided by an agreement to surrender being entered into but for the actual surrender to be effected by operation of law (i.e. the tenant handing over the lease and keys in return for cash) so that there was no document to stamp.
Section 243 provides that a written agreement for surrender is dutiable as if it were a deed. Although this caught certain surrenders where written agreements were made, it did not catch arrangements; for example, landlords could ensure registration at the Land Registry by submitting a statutory declaration which was not stampable. Section 128, Finance Act 2000 provides that now a statutory declaration or other documentary evidence of the surrender is stampable.
Other instruments
Part III of Schedule 13 to the Finance Act 1999 provides that a fixed duty of £5 will be chargeable on the following instruments:
A conveyance or transfer of property otherwise than for sale.
This includes a considerable number of instruments. The 1987 Exempt Instrument Regulations, however, provide exemption from the fixed duty in a number of the more common situations where property is transferred otherwise than for sale (see below). Examples of where the fixed duty does remain payable include a transfer of property from a beneficial owner to his nominee and back from the nominee to the beneficial owner.
A declaration of trust which does not constitute a conveyance or transfer on sale.
A disposition in Scotland of any property or any right or interest in property which is not otherwise chargeable.
A duplicate or counterpart of any instrument chargeable with duty.
A release or renunciation of property unless the instrument constitutes a conveyance or transfer on sale.
A surrender of property unless the instrument constitutes a conveyance or transfer on sale.
One may consider that the requirement to have a trust deed stamped with a £5 fixed charge is an unnecessary administrative burden. The reasoning behind the fixed duty according to the Stamp Duty Manual at paragraph 1.9 is that 'the main function of the £5 charge is to protect the ad valorem duty on sale by ensuring that the relevant categories of document have to be sent in for stamping, so that we can spot those that that are actually sales'. This unnecessary administrative burden on the many is considered to be important in order to identify the small number of those who evade stamp duty.
Exempt instruments
There are a number of general exemptions outlined in paragraph 24 of Schedule 13 to FA 1999. These include:
(a) transfers of Government stock and gilt strips;
(b) instruments transferring all or part of any ship or vessel;
(c) wills;
(d) renounceable letters of allotment and similar instruments where the rights are renounceable no more than six months after issue.
Paragraph 25 of the Schedule confirms that stamp duty is not chargeable on mortgages, bonds and debentures and life assurance policies and superannuation annuities. Nothing in the Schedule affects any other exemption or relief from stamp duties which would include the Exempt Instruments Regulations 1987, the exemptions for loan capital, and reliefs relating to transfers between associated companies and companies' reorganisations.
Stamp Duty (Exempt Instruments) Regulations 1987
Instruments falling within the exempt categories listed below which are correctly certified are exempted from the fixed duty of £5 which would otherwise be chargeable and should not be presented at Stamp Offices for adjudication. The appropriate certificate should be included as part of the document or be endorsed upon or where separate physically attached to the instrument concerned and should refer to the category under which the exemption is claimed. A suggested form of wording is 'We hereby certify that this instrument falls within category [ ] in the Schedule to the Stamp Duty (Exempt Instruments) Regulations 1987'.
The exempt categories are:
(A) the vesting of properties subject to a trust in the trustees on the appointment of a new trustee or in the continuing trustees on the retirement of a trustee;
(B) the conveyance or transfer of a property subject to a specific devise or legacy to a beneficiary named in the will;
(C) the conveyance or transfer of property which forms part of an intestate's estate to the person entitled on intestacy;
(D) the appropriation of property in satisfaction of a general legacy of money or in satisfaction of any interest of a surviving spouse in an intestate's estate;
(E) the conveyance or transfer of property forming part of the residuary estate from a testator to a beneficiary entitled under the will;
(F) a conveyance or transfer of property out of a settlement in or towards the satisfaction of a beneficiary's interest in accordance with the provisions of the settlement (the relevant interest must not have been acquired for money or money's worth);
(G) the conveyance or transfer of property on and in consideration of marriage to a party to the marriage or trustees to be held in a marriage settlement;
(H) the conveyance or transfer of property in connection with divorce;
(I) the conveyance or transfer by the liquidator of a company of property which formed part of the assets of the company to a shareholder in satisfaction of his rights on the winding up;
(J) the granting in fee simple of an easement in or over land for no consideration in money or money's worth;
(K) the grant of a servitude for no consideration in money or money's worth;
(L) the conveyance or transfer of property as a voluntary disposition inter vivos;
(M) the conveyance or transfer of property under a post death variation;
(N) declarations of trust within life assurance policies.
Corporate transactions reliefs
There are the following exemptions from stamp duty:
Transfers between associated companies
There is an exemption from duty on a conveyance or transfer on sale on a transfer of property between associated companies under section 42, Finance Act 1930. Section 42 requires that one of the companies in question must beneficially own, directly or indirectly, at least 75 per cent of the ordinary share capital of the other or a third company beneficially owns directly or indirectly at least 75 per cent of the ordinary share capital of each. There is no residence restriction as a foreign company may benefit from the relief and in addition its inclusion in a group will not prevent the group qualifying for the relief. The grouping test was tightened up by Finance Act 2000 to correspond with the 75 per cent economic ownership group requirement under Taxes Act 1988 for purposes of corporation tax on chargeable gains.
Company reconstructions
Relief from stamp duty is available on a conveyance or transfer when one company (the acquiring company) acquires all or part of the undertaking of another company (the target company) under a scheme of reconstruction of the target company (section 75, Finance Act 1986). There are very strict conditions which must be satisfied which are:
(i) The registered office of the acquiring company must be in the United Kingdom.
(ii) The consideration for the acquisition must consist of all or include the issue of shares in the acquiring company to all the shareholders of the target company and should not include anything else but the assumption or discharge by the acquiring company of the target company's liabilities.
(iii) The acquisition must be effected for bona fide commercial reasons and does not form part of a scheme or arrangement of which the main purpose or one of the main purposes is avoidance of liability to tax.
(iv) After the acquisition each shareholder of each of the companies must be a shareholder of the other. In addition, the proportion of shares of one company held by any shareholder must be the same as the proportion of shares of the other company held by that shareholder.
The acquiring company must only give consideration to the shareholders of the target company in the form of shares in itself. This means that consideration in the form of cash is not allowed. As a result of these strict requirements, a reconstruction may fail to achieve a complete exemption from stamp duty under section 77, Finance Act 1986. However, it may qualify for section 76 relief.
Acquisitions: reduced rate of duty
Section 76 provides that stamp duty of 0.5 per cent is payable (as against the full rate on property other than shares of 4 per cent). The relief applies where the acquiring company acquires the whole or part of an undertaking of the target company. The conditions are:
(a) that the registered office of the acquiring company is in the United Kingdom;
(b) that the consideration for the acquisition of the company consists of or includes the issue of shares in the acquiring company to the target company for all or any of its shareholders.
(c) that the consideration includes nothing else (except cash not exceeding 10 per cent of the nominal value of those shares or the assumption or discharge by the acquiring company of liabilities of the target company or both).
Although it used to be possible to avoid the 10 per cent rule by having part of the consideration in the form of redeemable shares, this is no longer permitted under section 127, Finance Act 2000.
Acquisition of target company share capital
Relief is given under section 77, Finance Act 1986 where a new holding company is imposed on an existing group. Again, there are a number of conditions which need to be satisfied in order for the relief to be available which are detailed in the legislation.
Not to be ignored
This article was written to give an outline of the general principles of stamp duty, which is no longer an incidental cost of any transaction. No-one can afford to ignore stamp duty. The demand for stamp duty mitigation which involves complex planning is bound to increase as stamp duty rates increase. Coupled with the Inland Revenue's intention to reform stamp duty in light of the Electronics Communications Act 2000 stamp duty is certainly moving closer to the centre stage in the world of tax planning.
In preparing this article I have had the advantage of referring to Matthew Hutton's excellent book on stamp duty 'Stamp Duty 2000/01 A Practical Guide' published by the PTP Group. Both Matthew and Patrick Cannon have been kind enough to comment on this article.
Sharon Anstey will shortly be joining Arthur Andersen to specialise in stamp duty.
 

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