Meeting Points

RALPH RAY FTII, TEP, BSc(Econ), solicitor, reports an IBC Private Client Tax Conference.

Stamp duty: land and buildings

Section 115, Finance Act 2002 imposes stamp duty liability on contracts for the sale of an interest in land where the amount or value of the consideration exceeds £10 million (or where it forms part of a larger transaction where the consideration exceeds that figure).

Note that the consideration for stamp duty purposes includes any applicable VAT; as the section will mainly apply to commercial property, this may well be an issue which frequently arises.

Matthew Hutton FTII, MA, AIIT, TEP, solicitor, said that the section broadly means that the days of stamp duty avoidance by 'resting on contract' are numbered. Previously, uncompleted contracts in relation to real property did not incur stamp duty liability, except where they related to an equitable interest in property.

The device of resting on contract will effectively become redundant following the Finance Act 2003. That Act is expected to introduce a streamlined administration system for stamping transfers of land or buildings, whether or not under electronic conveyancing. The stamp duty liability will be triggered by value passing under a contract or an agreement, as with stamp duty reserve tax, as well as by legal transfer. The liability will be expressly that of the purchaser or lessee, which will be a new feature of the stamp duty legislation.

Bare trusts of milk quota

Following the case of Swift v Dairywise Farms Limited [2000] AER 320, Adrian Baird said that it is now clear that milk quota can be held on trust as a partnership asset. In that case Mr Justice Jacob observed: '… that a trust of quota or the fruits of quota is a complete analogy with a trust of non-assignable contracts ….'.

Thus a landowner can act as bare trustee with regard to the quota so that it is possible to register the quota in the name of a landowner and for a partnership to own it.

If a distinct valuation of the quota is then made, it is possible for it to qualify for 100 per cent business property relief under section 105(1)(a), Inheritance Tax Act 1984 rather than 50 per cent relief under section 105(1)(d), or agricultural property relief.

What is a business?

Under section 10(1)(a), Inheritance Tax Act 1984, business property relief can apply to 'a business or interest in a business'. Adrian Baird emphasised that use is made of the six indicators of business activity set out in the VAT case of Lord Fisher v Commissioners of Customs and Excise [1981] STC 238. In that case it was stated that a business exists where the activity:

(i) is a 'serious undertaking earnestly pursued',

(ii) is 'an occupation of function actively pursued with reasonable or recognisable continuity';

(iii) has 'a certain measure of substance as measured by the quarterly or annual value of supplies made';

(iv) is conducted in a regular manner and on sound and recognised business principles;

(v) is 'predominantly concerned with the making of … supplies to consumers with consideration';

(vi) the supplies 'are of a kind which, subject to differences in detail, are commonly made by those who seek to profit by them'.

Non-domiciled vendors

Rupert Baldry, barrister, advised that non-domiciliaries holding shares in an owner-managed business could (under current rules, albeit under review by the Government) convert their shares into bearer shares. The bearer shares could then be taken out of the country and transferred by way of gift into an offshore trust, whether settlor interested or not. A gift to the trustees would be a deemed disposal giving rise to a gain but, as the disposal is purely notional without any actual proceeds, it cannot be caught by any of the remittance rules.

Farm cottages

In 1997 it appears that the Inland Revenue Solicitor advised Inland Revenue Capital Taxes Office as to agricultural workers who occupied farm cottages with rights of security of tenure on termination of employment under the Rent (Agriculture) Act 1976 or equivalent provisions of the Housing Act 1988. As a consequence, where such rights first existed before 1 September 1995 and after 1 March 1981 (and 'double discount' of agricultural property relief on tenanted value is available) only 50 per cent agricultural property relief is due. Adrian Baird considered it to be both highly questionable whether this is legally correct and highly likely that it will go unchallenged (because the amount of tax at stake is ever significant to warrant litigation).

Reversionary lease schemes

It is generally thought that section 102A, Finance Act 1986 (Gifts with Reservation: Interest in Land) has no impact on reversionary lease schemes in relation to a person's home so long as that person acquired the interest in the home more than seven years previously. The scheme would then work by means of a lease over the property being granted to an intended beneficiary, the start date for the lease being deferred until a suitable date in the future, say, fifteen years. The existing interest in the land would be given away to some other party to avoid the application of the associated operations provisions.

Kate Howe, solicitor, considered that the scheme has a good chance of success, but said that the doubts that there are arise from subsections (2) and (5) of section 102A. Subsection (2) requires that the donor or his spouse must not enjoy 'a significant right or interest' in relation to the land after the gift of an interest in it and during a 'relevant period' as defined. Subsection (5) provides that a right or interest is not significant for this purpose if it was acquired more than seven years before the date of the gift.

Subsection (2) also requires that the donor must not be a 'party to a significant arrangement' in relation to the land in the relevant period; it is thought that the Capital Taxes Office considers that the exception in subsection (5) does not apply to 'significant arrangements', but only applies to 'significant rights or interests'. A significant arrangement is one which enables the donor to occupy all or part of the land.

The scheme also suffers from the drawback that the reversionary lease will normally have a very low capital gains tax base cost that will ultimately come to be worth all the value in the property. Thus there is a significant capital gains tax problem.

Stakeholder pension planning

Matthew Hutton pointed out that an individual aged 50 or over can, regardless of earnings, pay the maximum stakeholder premium of £3,600 and immediately elect to take the pension benefits. The cost after basic rate tax relief reduces to £2,808 and after higher rate relief, if applicable, reduces to £2,160.

After the maximum tax-free cash of £900, a fund of £2,700 remains with which to purchase an annuity. Allowing a ten-year guarantee to ensure a return of capital, a 50-year old man can currently achieve an annuity rate of just over 6 per cent. This produces an annual gross income of £162. However, allowing for the tax relief on the original investment, this represents a return of 8.5 per cent for a basic rate taxpayer or 12.8 per cent for a higher rate taxpayer. Although it is a long term investment, it does give absolute security, and the same exercise can be carried out each year until the individual attains the age of 75.

The historic house as a business

In considering the essentials of the historic house opening business, William Massey QC said that, for the relevant property or part of it to qualify for inheritance tax business property relief, the opening of the property to the public must be a business carried on for gain. Therefore an inherently loss making concern, or an activity carried on with a view merely to defraying expenses is not a business for these purposes.

The property must be used wholly or mainly for the purposes of the business or, alternatively, part of it must be used exclusively for the business (see section 112(4), Inheritance Tax Act 1984). The property must not be used wholly or mainly for the personal benefit of the transferor or a person connected with him (section 112(6)).

It is also important that the activities at the property must conform with the concept of 'business' laid down in the case of Lord Fisher v Commissioners of Customs and Excise [1981] STC 238, and the business must not be one which consists wholly or mainly of the making or holding of investments. William Massey considered that the taxpayer's task would be more difficult as a sole trader; the formation of a partnership or limited company would be a better alternative.

Relief for partnership assets

Business property relief is only available at 50 per cent on property which is owned by a partner outside the partnership but used in the partnership (sections 104 and 105, Inheritance Tax Act 1984) but an 'interest in a business' qualifies for 100 per cent relief. As a result, Jeremy Heal MA, LLM, MA(Cantab), solicitor, TEP suggested that it is often desirable to put development land into the partnership if commercial risks justify it and the partnership agreement gives capital profits to the right person. This can include an undivided share in the land.

Estate planning with the home

In the light of the High Court decision in Commissioners of Inland Revenue v Eversden [2002] STC 1109, Kate Howe LLB, solicitor, TEP suggested a simple scheme, under which the donor settles his house on revocable life interest trusts for his spouse with remainder to his children. The spouse's life interest is terminated and the children allow the donor and spouse to continue to live in the property. The consequences of this are:

• The gift by the donor is an exempt transfer.
• The ending of the spouse's life interest is not a gift and so no question of reservation of benefit arises.
• However, the capital gains tax principal private residence relief is lost.
• A further downside is that the donor and spouse have no security of tenure.

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