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JEREMY DE SOUZA, consultant to White & Bowker in Winchester, warns of some difficult aspects with certain stamp duty avoidance schemes.
JEREMY DE SOUZA, consultant to White & Bowker in Winchester, warns of some difficult aspects with certain stamp duty avoidance schemes.
WITH THE CURRENT high rates of stamp duty applicable to transfers of property, it is no surprise that avoidance schemes have surfaced in an endeavour to mitigate liability. The Budget material announced new legislation which may impact in this area, in particular a charge on certain transfers of shares in 'special purpose property owning vehicles', but this is to be the subject of forthcoming consultation in the summer and so the start date is still some way off.
There are variants, but one such basic scheme involves the vendor buying a shelf company and transferring the legal title of his property to it. Such transfer inevitably incurs the costs involved with preparing the transfer document and registering it at the Land Registry, which are normally far from negligible. The hope will be that the transfer will incur only £5 stamp duty and this will involve persuading the Stamp Office that section 90, Finance Act 1965 does not apply to it. In broad terms, section 90 provides that an instrument conveying property to any person in contemplation of a sale of that property is to be treated for stamp duty purposes as a conveyance or transfer on sale such that duty is payable on the market value of the property. As I see it, this requires that the property is not on the market for sale at the time of the transfer.
This also involves persuading the Stamp Office that section 119, Finance Act 2000 does not apply. It will be recalled that this introduced a stamp duty charge where land is transferred or vested in the name of a company and the person transferring or vesting the land is connected with that company. (Section 119 also dealt with other circumstances not relevant here.) To establish that section 119 does not apply in these circumstances will, in practice, mean that there must be a recital in the document to establish that the exception in section 120(3), Finance Act 2000 is in point; this is where the company is to hold the interest in the land purely as nominee or bare trustee for the transferor. However, this recital will result in the Land Registry putting a restriction on sale on the register to the effect that the nominee cannot sell the property of itself because it is not a trust corporation; there must therefore be two trustees to give effect to a sale.
Vendors who succeed with the first stage of this scheme by transferring the legal title to the company under a £5 stamp may find that purchasers are unwilling to share the anticipated ad valorem stamp duty saving with them.
The problems
Non-lawyers propounding such schemes appear to misunderstand the scope of paragraph 7(1)(a) of Schedule 13 to the Finance Act 1999 which imposes ad valorem duty on a contract for the sale of 'any equitable estate or interest in land'. By transferring the legal title to a nominee, the beneficial ownership will have been converted into such an interest. It will, therefore, be incumbent upon the purchaser to show why it is that the contract should not be stamped.
The mere fact that the contracting vendor does not hold the legal title (since the shelf company holds this), does not bring a contract within paragraph 7(1)(a) of itself. Where it is genuinely intended that the purchaser will either take a transfer into his own name or sub-sell, ad valorem duty does not have to be paid on the contract. But can such an intention be inferred, as an issue of fact to be decided on the balance of probabilities, from this type of structure? The presumption must be that it should not, even if the contract contained provisions suggesting that this was an option available to the purchaser.
First, there would have been no point in the vendor acquiring the shelf company and transferring the land into its name if the purchaser will have the intention to have the land transferred on. The expense of acquiring the company and transferring the land to it would have made no sense in these circumstances.
Second, as already mentioned, the Land Registry would not give effect to a transfer by the company alone on a sale to the purchaser. With the usual form of restriction being likely to appear on the register, the clear inference from this must be that no transfer by the company to a purchaser can have been envisaged.
Third, under section 19(1)(b) and (2)(b), Trusts of Land and Appointments of Trustees Act 1996, the beneficial owner could require the shelf company to transfer the legal title to a set of trustees who could transfer that title on a sale made at his request.
Not so easy
Consequently, those setting up such arrangements in the expectation of increasing the price that the purchaser is willing to pay in view of an anticipated stamp duty saving should bear in mind that the purchaser's solicitor may take the view that the duty-free status of the contract cannot be regarded as established. Any duty which should have been paid thereon could in some circumstances give rise to problems on a subsequent sale by the purchaser. The client will be advised accordingly.
