Stamp Duty - Changing Times

JONATHAN HAYDEN and MICHAEL RIDSDALE review the Revenue's plans for modernising stamp duty.

STAMP DUTY IS famed as being one of the oldest 'modern' taxes and for having as its foundation some of the oldest tax legislation in force today; the last consolidating Act of Parliament was the Stamp Act 1891. It has acquired quite a high profile and contributes several billion pounds to the Exchequer.

Over the last couple of years, the charge to stamp duty has been removed from transfers of intellectual property (Finance Act 2000) and, more recently, from transfers of goodwill (Finance Bill 2002). Bundled together with the abolition of stamp duty on transfers of goodwill, were changes to existing legislation aimed at reducing the current level of stamp duty planning undertaken by taxpayers (e.g. the imposition of the two year 'clawback' rule for relief under section 42, Finance Act 1930). These changes, apparently, are designed to tighten up existing legislation to take us to the next phase in the Inland Revenue's reform of stamp duty.

The Revenue intends to 'modernise' stamp duty, so perhaps the use of the word 'reform' is inappropriate. However, part of the modernisation will see a completely new piece of legislation.

Current concerns

A number of matters currently concern the Revenue. It views the existing régime as no longer being appropriate as 'it does not reflect modern commercial practice in the ownership, use and transfer of land and buildings, and is not suited to the rapidly developing world of e-business and electronic transactions'. Taxpayers are also perceived to be taking positive, sometimes artificial, steps to exploit the archaic nature of the legislation and mitigate the charge to stamp duty. The Revenue is concerned about the effects of this on its tax base, particularly as stamp duty on United Kingdom land and buildings alone contributes around £4 billion to the Government's annual tax-take. The case for reform is now, the Revenue says, 'overwhelming'.

To this end, the Revenue has published a consultative document entitled 'Modernising stamp duty on land and buildings in the United Kingdom', which advocates the introduction of a new stamp duty régime. This document, which impacts slightly on stamp duty reserve tax, has been published as part of the Revenue's commitment to consultation. Comments from interested parties are requested by 19 July 2002 and the format of the consultation will be similar to the exercise recently undertaken for the new régime on the taxation of intangibles.

The principle charge to stamp duty, which is on a conveyance or transfer on sale, can be found in the Finance Act 1999. Broadly speaking, this imposes a charge on, among other things, every instrument by which property (or an estate or interest in that property) is being transferred to another person in the course of a sale. The important point to note is that it is the instrument of transfer that attracts the charge.

The rate of duty to be applied varies depending upon the type of property being transferred by the instrument in question. For example, a stock transfer form transferring shares will attract stamp duty at 0.5 per cent, whereas an asset purchase agreement or a property transfer transferring real property will attract ad valorem stamp duty depending on the level of payment, up to a maximum rate of four per cent (both rounded up to the nearest £5). Bearing in mind the size of modern commercial transactions, the charge to stamp duty can be significant and it is, therefore, in the commercial interests of a taxpayer to mitigate against the charge to stamp duty as far as possible.

This objective can be achieved, in the appropriate circumstances, quite easily because of the way the legislation is drafted. The practice of drafting a business acquisition document in the form of an offer letter, for example, is a well known method of preventing a charge to stamp duty from arising (although its relevance is questionable given the recent abolition of stamp duty on transfers of goodwill). Similarly, limited companies have been used as a vehicle for disposing of property in order to reduce the stamp duty charge to 0.5 per cent from, potentially, four per cent.

The proposed modernisation

It is envisaged by the Revenue that the nature of the charge will be revised and will in the future catch any transaction where a party transfers, grants, or agrees to transfer or grant, an interest in United Kingdom land in return for value (in money or money's worth). The new charge will also catch 'certain other arrangements' between parties where the value of land is affected. The Revenue proposes to draft legislation along these lines to make it possible to remove certain assets, e.g. receivables, from the charge at the outset. Fixed duties are also likely to be abolished.

This is a marked shift away from the existing situation where the charge is on instruments of transfer. Although deposits could potentially trigger a charge, this is not the Revenue's intention, provided that the deposit is within certain parameters (likely to be about ten per cent) and the contract price represents market value.

The treatment of property exchanges will be different under the proposed régime. These can currently be structured so duty is only payable on one of the transfers by using one property as consideration for the transfer of the other. Under the new régime, a stamp duty charge will be triggered on each transfer.

Another fundamental change is the desire to make the purchaser or lessee specifically liable for the duty (or the payer if no property is transferred). This essentially represents commercial practice, but the obligation provides the new régime with more teeth and will effectively end the concept of stamp duty being a voluntary tax. In addition, the liable party must keep records to support the notification details for at least six years after the date the liability to notify arises.

Practical issues

Transactional documents will no longer be submitted to the Revenue. Instead, the Revenue will need to be notified (using a standard form) within 30 days of the charge crystallising, and the payment will fall due at the same time. In view of this, the Revenue is querying if the rule preventing the production of insufficiently stamped documents in court proceedings is still necessary.

In the long term, the current 30-day limit is likely to be reduced as the use of e-conveyancing should become more widespread (the requirement for duty to be paid before transfers can be registered at HM Land Registry is to be retained). Those companies who deal in property on a regular basis may have the option of making quarterly returns in order to ease the administrative burden on them.

The document used to notify the Stamp Office of a transaction will be risk-assessed by the Revenue, and will presumably be computerised. As with the risk assessment of an individual's self assessment return, we assume that this will facilitate the sharing of reported information with other revenue departments for intelligence purposes.

Because the Revenue will be relying on the information on the notification form, there is likely to be a period during which it can raise enquiries into a particular transaction. This is likely to be three years for companies, but should be shorter for homebuyers. Notwithstanding this, if any discoveries are made outside these time limits, it seems that the Revenue will still be able to raise enquiries.

Interest and penalties

Penalties and interest will be charged for failing to notify the Revenue of a charge arising and for late payment of the duty respectively. However, it is unclear at this stage whether the Revenue will continue to have powers to mitigate against penalties. As now, interest will be charged from the end of the period within which payment of stamp duty is required.

Reliefs

All existing reliefs and rules will be imported into the new legislation unless they are no longer needed or are being exploited. However, group relief provisions will be tightened up (following on from the changes introduced by this year's Finance Bill) and reliefs supporting reconstructions will be re-examined. A mechanism is also envisaged to ensure that new avoidance schemes can be shot down as they emerge.

Helpfully, advanced guidance should be available from the Revenue prior to completion of transactions, and there may also be the option of a post-transaction review. The consultation document also hints that there will be a move towards having a single point of contact with the Revenue for all major deals. This could potentially encompass all tax aspects, i.e. it might be possible to make a single composite application in respect of section 707 Taxes Act 1988, section 138 Taxation of Chargeable Gains Act 1992 and section 77, Finance Act 1986).

Special purpose vehicles

The Revenue has been aware for some time of the use of special purpose vehicles in planning schemes and wants to limit their effectiveness as a stamp duty saving device. Consequently, it is proposed that there will be a charge on the transfer of shares or interests in such property owning vehicles that will be similar in size to an actual transfer of the underlying property itself. Presumably, if this charge is operated in parallel to the stamp duty reserve tax régime, regard will be had to the amount of duty paid on the actual transfer of the shares or interests themselves.

The charge will apply to all qualifying transfers involving special purpose vehicles regardless of whether they are incorporated inside or outside the United Kingdom. It is proposed that duty will be charged where there are transfers of substantial interests (greater than 30 per cent) in qualifying entities whose major activity involves ownership or exploitation of United Kingdom land or buildings and whose assets consist primarily of interests in United Kingdom land or buildings (greater than 70 per cent of gross assets).

Calculation of stamp duty

It is proposed that the system of stamp duty rates will be retained, i.e. one rate will apply to the entire consideration, and that the reliefs from stamp duty for properties in disadvantaged areas will be reflected in the new legislation.

Duty on contingent/instalment payments is also to be reformed and the Revenue has proposed two alternatives to the existing system. The first is to make a best estimate of the stamp duty liability rather than the present assumption of receipt by a seller of a maximum or minimum level of consideration. When a payment is made on the basis of a best estimate, a mechanism will exist for amending this payment should the estimate prove to be incorrect. The second alternative is for a stamp duty charge to crystallise at the date of each payment, using stamp duty percentage rates based on the overall consideration for the transaction.

Leases

Although a further consultation document is expected in relation to leasehold property, the recently published document suggests how lease duty could also be reformed. The favoured approach is what is described as the formulaic approach. This entails taking the premium and total rent payable over the term and then calculating stamp duty on the total. This might lead to large increases in stamp duty compared to the current régime, and the Revenue acknowledges that a discount may be needed to avoid unfair levels of stamp duty on long leases.

It is suggested that there will ultimately be a three-year registration limit for leases and a seven-year limit is already planned to come into effect with the Land Registration Act 2002 in summer 2003.

Shares

On reading the consultation document, it is unclear whether or not shares will fall within the new legislation. Its title makes no reference to shares and securities, and references to what is intended to fall within the charge are restricted to land and buildings. The document states that 'The Government's intention is to apply stamp duty only to transactions relating to United Kingdom land, and to transfers of shares and securities'. Following the Revenue's open morning on stamp duty modernisation, we understand that it is the Revenue's intention that shares will not fall within the new legislation and that transfers of shares, etc. will be subject to stamp duty reserve tax; hence the need for minor changes to be made to existing stamp duty reserve tax legislation. This is, perhaps, something to watch out for.

Conclusion

The Revenue realises that the new régime will have a large impact upon commercial arrangements. It is particularly concerned with the impact on partnerships and joint ventures, development arrangements, property based financing and investment in United Kingdom property through non-United Kingdom registered companies.

As the Revenue's aim is to ensure improved compliance, it is no wonder that there is expected to be a direct tax cost to some taxpayers. However, it is surprising that the Revenue estimates that as many as five per cent of commercial property deals will no longer be viable under the new régime.

The proposed reform represents a fundamental change in the nature of stamp duty. The intended effect is clearly to combat stamp duty planning schemes, thereby protecting the tax base, and therefore one could argue that it is essentially a piece of anti-avoidance legislation. It will, however, also bring the United Kingdom more in line with other European countries.

The Inland Revenue is establishing committees and sub-groups (with delegates from various professions and other Government departments), and one-to-one meetings and presentations are also planned. Draft legislation should be available at the time of the pre-Budget report in the autumn.

The new régime will be introduced in the Finance Bill 2003 and will come into force later that year.

Jonathan Hayden and Michael Ridsdale are both solicitors in the tax strategies unit of Hammond Suddards Edge. They can be contacted on jonathan.hayden@hammondse.com and michael.ridsdale@hammondse.com respectively.

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