Meeting Points

RALPH RAY FTII, TEP, BSc(Econ), Solicitor reports a conference on understanding stamp duty and applying the rules.
The conference was presented by Matthew Hutton MA, FTII, AIIT, TEP, assisted by Simon McKie MA, FCA, FTII, ASFA, TEP.
Chattels passing on delivery
The Revenue's Stamp Office Manual states at paragraph 4.18 that 'the most common test we apply as to whether an item is a fixture or a chattel is whether its removal would damage the property. If it would, it is a fixture'.
A more recent announcement allows for the fact that it is not always easy to establish whether or not plant and machinery which is bolted to the floors or walls of a property was actually unbolted on the day of conveyance. Severing such items from the property to which they are fixed would enable them to be treated as 'loose plant and machinery' which can pass by delivery. The Stamp Office no longer insists that unbolting is actually done, provided that it is capable of being done without damage to the property.
It is still necessary to ensure that assets which can pass by delivery are not expressly transferred by the agreement for sale or other documents. If they are, stamp duty liability will arise in respect of them, and might even cause disproportionate liability if the value conveyed thereby exceeds one of the reduced rate thresholds.
Sub-sales
Where a contract for the sale and purchase of property is not completed before the purchaser has agreed with a sub-purchaser to sell on that property, there is a relief from stamp duty provided by section 58(4), Stamp Act 1891, as amended by section 112, Finance Act 1994. The relief prevents two successive charges to stamp duty arising. No time limit is expressed within which the sub-sale must take place. Provided that the sub-sale consideration is equal to or exceeds the value of the property concerned immediately before the contract for the sub-sale, only the consideration for the sub-sale is liable to stamp duty. It is important to take care to comply with the statutory rules and, in particular, the subject matter of the two transactions must be exactly the same.
Variable consideration
If the consideration payable for assets is dependent upon future events and is therefore unknown at the time of transfer, one should avoid mentioning any maximum figure in the documentation. If there is an upper limit, stamp duty liability will be calculated on that figure. Obviously if there is every expectation that the maximum will in any event be paid, then the stamp duty risks of having a maximum figure are reduced, but such a scenario may not be very common.
If commercially practicable, one should defer the date of completion until the consideration is known. This is particularly appropriate in relation to earn-outs on the sale of a business.
In certain cases, the Stamp Office applies a 'wait and see' approach; see paragraph 4.308 of its manual where it is stated that this approach applies where consideration is payable in the future but is based on events prior to execution of the document or completion. It is therefore simply a case of having the calculation done in due course and in such cases the Stamp Office will defer stamping until the relevant calculations have been carried out. The practice therefore applies only to ascertainable consideration at the date of conveyance which has not yet been ascertained.
Where consideration is unascertainable, for instruments executed after 7 December 1993, section 242, Finance Act 1994 applies a market value rule in relation to the transfer of any estate or interest in land or the grant of any lease (which presumably could include a lease of chattels). In such cases where the consideration is not ascertainable from the conveyance or lease at the time it is executed, the market value of the interest or estate immediately before execution of the instrument of transfer will be the stamp duty consideration.
Where section 242 may apply, it will therefore be all the more important to avoid mentioning any figure in the instrument which is greater than the market value of the property, because that greater figure will then be treated as the consideration.
Consideration in instalments
In a case where consideration is payable by instalments over a period of time, a possible method of reducing stamp duty liability would be to express part of the consideration to be interest in respect of late payment; this might especially be useful if it would enable one of the lower rates of stamp duty to apply. There would of course be other tax implications for both parties in converting part of what would otherwise be treated as capital into interest payable and receivable.
Gifts and liabilities
An unexpected and unwelcome stamp duty charge may arise on a gift of property to which liabilities attach. Unless it is absolutely clear from the documentation and the surrounding circumstances that the donee of the asset is not accepting responsibility to pay for a liability attaching to the asset (whether secured on it or not), section 57, Stamp Act 1891 will treat the amount of the liability taken over by the donee as consideration liable to stamp duty. If the donor remains responsible for the liability, so that the gift is of the beneficial interest only, this should be expressly recorded in the deed of gift.
So long as the share of the liability passing does not exceed £60,000, stamp duty can be avoided by certifying the document at £60,000. Where the liability assumed by the donee is more than that amount, one should consider the possibility of making a series of gifts, provided it is clear that they cannot be associated.
Development sites
Where a developer is selling or leasing land on which all or part of the building work remains to be carried out, there should be two quite separate contracts, one dealing with the sale or lease of the land and the other with the building works. This will ensure that stamp duty is paid on no more than the price of the land.
Option agreements
Option agreements should state that the price payable on exercise is only the sum payable at that stage, and not the full consideration including the amount paid for the grant of the option. Although it is possible to certify the agreement itself on the basis that it does not form part of a series of transactions, the exercise of the option is a series which includes the grant and the exercise. However, the amount liable to duty will be only the balance payable on exercise, so long as the agreement is correctly worded.
VAT and the option to tax
On the grant or transfer of a lease of commercial property where the landlord has not opted to tax it for VAT purposes, there is the possibility of additional stamp duty liability arising under the contingency principle. Only if at the date of the lease or assignment the landlord has irrevocably committed himself not to exercise the option will VAT be left out of account in computing the stamp duty liability.
Transfers of going concerns
Since stamp duty is payable on the VAT-inclusive amount of consideration payable, particular care is necessary on the sale of a business as a going concern. The parties will be expecting the transfer to be free of VAT liability, but the purchaser should protect his or her position in the event that transfer of going concern treatment is not accepted by Customs. Under current Stamp Office practice, the purchaser of the business can give an undertaking to the Stamp Office that the transaction is believed to be free of VAT liability, but if this proves to be incorrect, the Stamp Office will be advised and additional duty paid. Accordingly those acting for the purchaser should ensure that if VAT is paid on the purchase price, the purchaser is also in funds to pay the additional stamp duty.
Stamp duty and leases
In the case of leases, the simple way of mitigating stamp duty is to have the lease for as short a period as possible. Alternatively, consider having an initial short lease period followed by a lease of the reversion. If the term of the lease cannot be restricted to seven years or less, the real stamp duty incentive with a maximum charge of 1 per cent of the rent is to keep it to no more than 35 years. For a lease of more than 35 years, and less than 100 years, there is a fairly massive stamp duty increase from 2 per cent to 12 per cent of the average rent payable.
An increase in rent is cheaper to achieve in stamp duty terms by having a deed of variation, rather than a surrender of the old lease followed by the grant of a new. Similarly, with a proposed extension of the term of a lease, a surrender and re-grant should be avoided if possible; instead have a reversionary lease to cover the additional period.
Acquisitions of businesses
The standard strategy for dealing with book debts of a business is to provide in the agreement for sale that the purchaser will collect debts as agent for the vendor and will use the monies raised to discharge the liabilities of the vendor. This effectively avoids having to include the debts in the consideration for stamp duty purposes. Alternatively, vendor and purchaser together could appoint a third party agent to collect the debts and pay off the liabilities as agent for the vendor and then to pay to the purchaser any surplus arising. That would not constitute an assignment of all the debts to the purchaser and would therefore limit the stamp duty cost.
Funds on a business deposit account should be transferred to a current account at the date of sale to avoid unnecessarily increasing the stamp duty liability.

Issue: 3835 / Categories: