New Charge

PHILIP VICKERY, solicitor, discusses the mechanics of stamp duty sub-sale relief.

A KEY ELEMENT of the Revenue's attack on stamp duty avoidance in the Finance Act 2002, and a precursor to the transaction-based charge to stamp duty which is to be introduced by Finance Act 2003, is the new charge to duty on certain contracts for the sale of United Kingdom land, at section 115, Finance Act 2002. The new charge is primarily aimed at resting on contract structures, including split title schemes where a purchaser effectively acquires control over both legal and equitable titles. However, its effects go further than this and it could, for example, give rise to a charge on conditional contracts which may not be completed for some time pending satisfaction of conditions subsequent.

Charge on contracts

Section 115, Finance Act 2002 provides that a contract is chargeable where it relates to land in the United Kingdom and the amount or value of the consideration applicable to the land exceeds £10 million. One should bear in mind that when ascertaining the consideration payable, for these purposes, any VAT payable on the price and also any contingent consideration, payable for example on the grant of planning permission, must be taken into account. There is also provision at section 115 against a transaction being broken down into constituent parts each of which has a value under £10 million, in that the new charge also applies where a contract is part of a 'larger transaction or series of transactions' in respect of which the aggregate consideration exceeds £10 million.

Interestingly, there is no requirement for a certificate of value to be given in an appropriate case, to the effect that a contract does not form part of a 'larger transaction or series of transactions'. However, in determining whether this is the case, one would expect that a similar test will apply to that which determines whether a certificate of value may be given in relation to a stampable transfer. Accordingly, section 115 would seem not to apply to a transaction comprising several constituent parts each with a value under £10 million which, although linked commercially, are contractually independent.

Ninety-day period

The charge under section 115 applies where a contract remains uncompleted by a conveyance or transfer 'in conformity with the contract ...' presented for stamping within 90 days of the execution of the contract, or such longer period as the Revenue may think reasonable in its discretion, in all the circumstances of the case. The Stamp Office has stated, however, that it has no discretion to extend the period for stamping where 90 per cent or more of the consideration payable under the contract has been paid prior to completion of a transfer. The concept of a contract being completed by a document 'in conformity' with the contract is familiar from the provisions at section 240A, Finance Act 1994, relating to agreements for lease and also the provisions at paragraphs 7 to 9 of Schedule 13 to the Finance Act 1999, relating to those categories of contracts which were stampable prior to Finance Act 2002. The principal significance of the concept in that context, from a stamp duty enforcement perspective, is that where a contract is completed in favour of a person who was not a party to the contract, this will only be accepted as being 'in conformity' with the contract if that person can show a proper title, any documents assigning the benefit of the contract being properly stamped. There is some guidance on the circumstances in which a transfer will be treated as being 'in conformity' with a contract, in the Customer Newsletter which has been issued by the Revenue dated 25 July.

Sub-sale relief

Following the publication of the Finance Bill on 17 April 2002, there was widespread concern that the new charge to duty on contracts would effectively mean the end of the relief from duty on sub-sales at section 58(4), Stamp Act 1891, in cases where the new provision applies, i.e. in relation to properties over £10 million in value. In relation to those contracts stampable prior to Finance Act 2002, including contracts for the sale of an equitable interest in land, there is a separate specific provision for sub-sale relief at paragraph 8 of Schedule 13 to the Finance Act 1999. However, no corresponding provision was included in this year's Finance Bill in its original form.

The issue of sub-sale relief is of great practical significance not only for clients with extensive property interests or who are actively involved in property development, where sub-sales will be commonplace, but also for example in relation to the potential United Kingdom growth market for Sharia compliant Islamic property financing. The difficulty in the Islamic context with conventional Western property finance techniques is the Sharia prohibition on interest-based finance. As a result, Islamic asset finance commonly takes one of two forms, ijara (lease) finance, and murabaha finance. Where the latter technique is used, in broad terms, asset (including real property) finance takes the form of a purchase contract in favour of the financing bank, followed by a sub-sale to the customer at an agreed margin. Hence one can see the importance of sub-sale relief. Several of the banks interested in the Islamic market are understood to have been among those lobbying the Government for the introduction of sub-sale relief for the purposes of the new provisions, which resulted in the introduction of the new relief at Schedule 36 to the Finance Act 2002.

Method of relief

In summary, the old style sub-sale relief at section 58(4), Stamp Act 1891, which continues to apply to property transactions generally, provides that where a person has contracted for the purchase of property but, prior to taking a conveyance of that property, contracts to sell the property to another person, then the conveyance to the sub-purchaser is chargeable to duty only by reference to the consideration payable under the sub-contract. The relief is available not only where the whole of any relevant property is sub-sold, but also in cases of sales of part to various sub-purchasers. The effect is that the consideration payable by the intermediate purchaser will be exempt from duty in most cases.

There is one important statutory qualification to the relief. This is that relief is not available where the consideration payable by the sub-purchaser, or the aggregate consideration where property is sub-sold in parts, is less than the market value of the property. There is also a separate qualification relating to council houses sold at a discount by local authorities. It should be noted that the relief applies only where the intermediate purchaser has not taken a conveyance of the relevant property. Care must be taken in certain circumstances, for example where parties have rested on contract but a declaration of trust or other similar documentation has been entered into which could constitute a conveyance for stamp duty purposes. In such cases, the availability of sub-sale relief may be in doubt.

The separate sub-sale relief at paragraph 8 of Schedule 13 to the Finance Act 1999 which applies in circumstances where there is a charge to stamp duty on a contract in the circumstances set out at paragraph 7 (applying, for instance, to contracts for the sale of an equitable interest in land, or contracts for the sale of receivables) is in terms somewhat different from the section 58(4), Stamp Act 1891 relief. It is important to note that it is the former provision which forms the model for the relief which has been introduced in relation to the new section 115, Finance Act 2002 charge.

The new relief which applies in the context of section 115 is, however, helpfully, more fully expressed and makes specific provision for various of the conceivable sub-sale scenarios which may arise, whereas in clarifying the application of the paragraph 8 relief in these circumstances, one was required to delve into the Stamp Office internal manual for confirmation of the Revenue's view of the position. In examining the application of the new relief, it is important to remember that this must necessarily operate differently from the existing section 58(4) relief, given that the charge to duty potentially attaches not just to any ultimate transfer but to the initial sale contract and any sub-sale contract(s).

Customer Newsletter

The new relief is contained at Schedule 36 to the Finance Act 2002 and a clarifying Customer Newsletter was released on 25 July 2002. This contains helpful worked examples of the way in which the new section 115 charge operates and its interaction with the new sub-sale relief, in various scenarios. Unfortunately, one area in which the newsletter fails to provide sufficient clarification in relation to the basic charge is with regard to the circumstances in which the Revenue will consider that it is right for it to exercise its discretion to extend the period for stamping beyond the usual 90 days. There is, however, an indication that one circumstance in which an application for an extension may be appropriate is where one or more sub-sales is in contemplation. All applications for an extension of the time period for stamping and all other matters relating to the new charge on contracts will be dealt with by a new Stamp Office unit based in Manchester.

Some of the potential situations which may arise are outlined below.

Contract completed by a transfer

Where duty has been paid on a contract under section 115, because no transfer has been executed in conformity with the contract within the prescribed 90 days, or any extended period for stamping, duty is, as one would hope, payable on the transfer only to the extent that the duty on the transfer would under general principles exceed the duty which has been paid on the contract. In other words, duty paid on the contract will, in broad terms, frank the transfer.

Sub-sale of whole

A similar principle applies where a sub-sale contract of the whole of a property is entered into, in circumstances where duty has already been paid under section 115 on the initial sale contract and no transfer has been entered into, i.e. there should be no double charge to stamp duty on the sub-sale contract in this situation. This follows the approach of the paragraph 8 of Schedule 13 sub-sale relief which applies in other situations involving stampable contracts.

Sub-sale of part

Where duty has been paid on a sale contract under section 115 and the property is then sub-sold in parts, in order to determine whether additional duty is payable on transfers of those parts, it is necessary to ascertain whether the duty on the sub-sale transfers, calculated according to normal principles, exceeds an 'appropriate proportion' of the duty paid on the original sale.

For example, one would normally expect a transfer on sub-sale of one third of the property originally acquired to carry a credit of one third of the duty paid on the original purchase contract, which may be set off against the duty payable on the transfer.

In other sub-sale situations, including successive sub-sales, the application of the stamp duty charge, as modified by the Schedule 36 provisions, can become quite complicated and the worked examples in the Customer Newsletter are helpful in appreciating the implications of the various scenarios.

Repayment of duty

One point to be aware of when acting for a client who has acquired and sub-sold property and who has paid duty on a purchase contract under section 115 is that duty may become repayable in certain circumstances. For example, where a property is sold off in parts, it may be the case that the sales of part attract duty at a lower rate than the original acquisition so that even if the intermediate purchaser makes a profit, the aggregate duty payable on the sub-sale transfers of part may be less than was paid on the contract. In these circumstances, the Stamp Office will repay the difference to the original purchaser (see paragraph 6 of Schedule 36) subject to the usual caveat that the price payable in relation to the sub-sales must be not less than market value. Clearly, however, any repayment claim on this basis would only be possible once the whole of any property has been disposed of by the intermediate purchaser.

Contract not substantially performed

It is an important element of the section 115 charge that if a contract is rescinded or annulled or 'for any other reason not substantially performed or carried into effect' in circumstances where ad valorem duty has been paid on the contract, the duty will be repaid. It remains to be seen in what circumstances a contract will be accepted to have been not 'substantially performed'.

Summary

In summary, although it is unclear why no-one thought to include sub-sale relief in the original draft of the Finance Bill, its inclusion albeit at a late stage can only be welcomed.

In addition, the worked examples in the Customer Newsletter repay careful reading.

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

Issue: 3878 / Categories: