Post 2002 Budget Planning

Scope for stamp duty planning still exists, says PHILIP VICKERY, solicitor, although the Revenue is taking steps to limit this.

CONTRARY TO RECENT trends, the 2002 Budget did not announce any direct increases in the rates of stamp duty on land transactions, or changes in the applicable thresholds. Rather, the Treasury has focused on counteracting some, but not all, of the techniques for avoiding or mitigating stamp duty on high value property transactions, which have become increasingly commonplace over the last few years.

The Budget also contained announcements of other stamp duty changes, including an extension of the favourable treatment of property in disadvantaged areas and the abolition of duty on transfers of goodwill. In addition, there is advance notification of what will be a comprehensive review of stamp duty to be implemented in the 2003 Budget, subject to responses to the Revenue's consultative document published on Budget day (responses must be submitted by 19 July 2002).

Although initial reaction to the Budget changes was that these had largely curtailed many of the more popular planning techniques, the actual position is not quite so straightforward. It is likely that there will still be significant opportunities for mitigating the incidence of stamp duty, prior to the proposed major changes in 2003, when the tax will effectively escape the restraints of its historical basis as a tax on documents, becoming instead a transaction based charge, triggered by the payment of consideration.

The purpose of this article is to review briefly the implications of the Budget changes, in relation to various stamp duty planning techniques, prior to the further changes proposed for 2003.

Split title structures

A popular scheme has involved transferring the legal title of a property to a company (usually offshore) to hold it as nominee for the transferor. Contracts for the sale of the property would then be exchanged but not completed and the purchaser would also acquire the nominee company for a very small sum. This is counteracted by a new charge on a contract for sale of a property, which is not completed by a transfer or conveyance within 90 days (or such longer period as the Revenue 'may think reasonable in the circumstances of the case'). The new measure will also affect simple 'resting on contract'. However, points are important:

• The new charge applies only to documents relating to properties with a market value in excess of £10 million (either singly, or as part of a larger transaction or series of transactions).
• It does not take effect in relation to a contract for sale of any property, executed prior to the Finance Act receiving Royal Assent; thus the opportunity in which such structures may be implemented is limited, at least, in circumstances where the interests in a property are already held appropriately within the vendor group.
• After Royal Assent, any split title/resting on contract structures will be subject to the risk of penalties running from execution, if it transpires that the property sale contract has to be stamped, for example in relation to the purchaser's direct tax affairs or in connection with a dispute between the parties, irrespective of whether the contract is executed in the United Kingdom or offshore. However, in some cases, parties may still be able to take the view that the saving derived from the structure outweighs the risk.

Leaving aside the split title structures, there is a question as to how the new charge on sale contracts will apply in relation to contracts which may be subject to conditions subsequent. Interestingly, the Finance Bill provides that, where duty has been paid on a contract which is afterwards, for any reason, 'not substantially performed or carried into effect', there is provision for the duty to be repaid. This seems to cover the situation where a binding contract comes into effect and duty is paid, in order to close off any liability to penalties, but conditions subsequent prove not to be satisfied and the contract is not completed for that reason. In this situation, it would appear that a reclaim should be possible.

Alternatively, it is possible that the Revenue may be persuaded that, where it is appropriate for parties to wait in order to ascertain whether conditions subsequent will be satisfied, this might in some cases constitute reasonable grounds for extending the period for stamping beyond 90 days. Greater certainty might have been achieved in such cases if the approach adopted for stamp duty reserve tax purposes were to have been followed, under which a conditional sale contract becomes stampable only on the day that conditions are satisfied.

Leases

There is still considerable scope for stamp duty planning using leases to 'value shift' out of a stampable property transfer. Although this area has been clearly targeted for review in Finance Act 2003, and planning possibilities are likely to be restricted at that point, there are no changes in the Finance Bill 2002 which directly affect the use of leases (or agreements for lease) for stamp duty planning.

Although the new rules on penalties for late stamping of documents executed offshore will impact on some lease schemes involving offshore execution where there is a risk that a lease or agreement for lease will have to be brought onshore, in some cases the parties may conclude that this risk will be minimal. This would often be the case, for example, in relation to purchases by a non-United Kingdom investor, particularly where the potential stamp duty saving outweighs any capital allowances available.

Special purpose vehicles

'Property rich' special purpose vehicles are likely to be targeted in Finance Act 2003. The indications in the consultative document are that the rates of duty applicable to real property transactions will apply also in relation to transfers of a substantial interest, i.e.
not less than 30 per cent, in any corporate or non-corporate vehicle incorporated within or outside the United Kingdom, where at least 70 per cent of the value of that entity's assets comprise property holdings.

Transactions involving special purpose vehicles are targeted to a limited extent with immediate effect, where a property is not currently held in a special purpose vehicle, given that a vendor group would often rely on obtaining relief under section 42, Finance Act 1930 (property transferred between associated companies), or section 76, Finance Act 1986 (acquisition of undertaking of another company in exchange for shares), in relation to a transfer to a special purpose vehicle, prior to finding a buyer for the whole or part of its interest in the vehicle. Both reliefs are now subject to clawback where the vehicle leaves the vendor group (in relation to group relief) or changes control (in relation to section 76 relief) within two years of a property being transferred into it (see clauses 109 and 110
of the Finance Bill).

It should be noted, however, that:

• where property is already held in a special purpose vehicle (including a partnership) the disposal of an interest in the vehicle will still benefit from the applicable reduced (or nil) rate, prior to Finance Act 2003;
• there are also possibilities for intra-group transfers of non-property assets out of a company with mixed holdings, leaving this company suitable for disposal with the benefit of the lower rates of duty, again prior to 2003;
• there may still (subject to direct tax implications) be routes by which properties can be transferred into a special purpose vehicle avoiding the charge on market value under Finance Act 2000, for example by utilising one of the statutory exemptions at section 120, Finance Act 2000, and thereby avoiding the requirement for group relief or section 76 relief on the transfer to the special purpose vehicle; again, the vehicle may then be sold on with the benefit of reduced stamp duty rates, prior to Finance Act 2003.

Group relief

The changes relating to section 42, Finance Act 1930 relief for intra-group transfers (and the corresponding relief for intra-group leases, at section 151, Finance Act 1995, which is similarly amended) take effect from 24 April 2002. The existing anti-avoidance provisions relating to the granting of group relief have been supplemented by a provision for clawback of any relief, where United Kingdom land is transferred or leased within a group and the transferee/lessee leaves the transferor group within two years of the transfer or lease. Under section 42, Finance Act 1930, relief is currently denied where at the time of an intra-group transfer, 'arrangements' are in place for, inter alia
the transferee to leave the group and similar provisions apply for section 151, Finance Act 1995 purposes. However, the clawback will operate even where there are no such arrangements. A secondary liability for any clawback will attach to group companies other than the transferee, and also to any person who at the relevant time was a 'controlling director' of the transferee or a company controlling the transferee.

The new provision will be relevant to any intra-group transfer executed on or after 24 April 2002 and will make it more difficult (but not impossible) to avoid stamp duty on property sales by an intra-group transfer to a special purpose vehicle, followed by a change of control of that company.

It should be noted that this provision will also affect exit routes from existing split title structures, where a purchaser wishes to reunite the legal and beneficial interests in a property within its group prior to a sub-sale, and purchasers under one of these structures may wish to review their options at this stage.

Section 76, Finance Act 1986

Relief under section 76, Finance Act 1986 will now also be subject to clawback provisions.

Relief is currently available under section 76 for transfers of an undertaking (including an investment property) in consideration of non-redeemable shares of the transferee; such transfers are currently subject to duty at a reduced rate of 0.5 per cent. Section 76 relief has been used in relation to intra-group transfers in many cases where section 42, Finance Act 1930 relief cannot be claimed because 'arrangements' are in place for the transferee to leave the group. However, in future, section 76 relief will be subject to clawback where there is a change of control of the transferee, within two years of a transfer of United Kingdom land qualifying for relief. Secondary liability for a clawback arises, as in relation to group relief.

In addition to the potential clawback of relief under section 76, on a change of control, schemes involving the sale of a property in consideration of shares of a purchaser group company have been specifically targeted by the imposition of new conditions for section 76 relief, which effectively put an end to such schemes in their current form.

The new rules relating to section 76 apply to transfers on or after 24 April 2002.

Penalties for late stamping

Penalties for late stamping of documents, which currently apply from the date of execution only for documents executed in the United Kingdom, will in future also run from the same date for documents executed and retained offshore which relate, to any extent, to land in the United Kingdom.

Interest is already payable from the date of execution, for documents executed offshore. However, such documents are currently subject to penalties only after 30 days from being brought into the United Kingdom. The penalty for late stamping of a document is equal to the stamp duty payable, where the delay in stamping exceeds one year.

The proposed changes mean, broadly, that there will be no stamp duty advantage in executing documents offshore, where these relate to United Kingdom land.

The new rule on penalties applies to documents executed after the date that the Finance Bill receives Royal Assent, expected in July 2002.

Finance Act 2003

In addition to the proposed rules on special purpose vehicles, Finance Act 2003 will contain further specific anti-avoidance measures, some of which are indicated in the consultative document published on 17 April 2002.

In particular, as already noted, there are proposed changes to the method of charging duty on leases, and changes to discourage the use of leases in tax avoidance to reduce the stamp duty charge on the sale of freehold property.

Another area highlighted for future change in the consultative document is property exchanges. With effect from Finance Act 2003, it is proposed that the scope of stamp duty on exchanges of property will be extended so that it will no longer be possible to structure an exchange as a sale of the more expensive property, thereby avoiding duty on the transfer of the less expensive property.

More importantly, the 'modernisation' of stamp duty and the introduction of electronic conveyancing which this presages, will impact very significantly on tax planning in relation to United Kingdom land acquisitions.

Summary

The lesson to be drawn from the Budget is that, although stamp duty planning for high value property transactions may now be more difficult, it has certainly not been ended and various possibilities remain, pending Finance Act 2003. The situation following 2003 is, however, likely to be very different.

Philip Vickery
is with Stephenson Harwood and can be contacted on 020 7329 4422.

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