Stamp Duty - Modern Régime - I

EARLY LAST YEAR, the Inland Revenue outlined proposals to modernise stamp duty which were designed 'to better reflect modern commercial practice'. In April 2002, it published a consultative document on the modernisation of stamp duty outlining its proposals for reform to the current régime. The draft legislation promised in the document was published in part during November 2002 together with a set of explanatory notes. This can be found at www.inlandrevenue.gov.uk/consult_new/clauses_and_schedules.pdf and www.inlandrevenue.gov.uk/consult_new/explanatory_notes.pdf respectively.

Owing to the volume of legislation and explanatory notes published, this article is divided into two parts. This part discusses the main charging aspects of the legislation, and the second part will discuss the administrative aspects, e.g., notification and collection of tax.

The new tax is likely to be known as land transfer tax or property transfer tax, although a definite name has yet to be announced. The legislation should be introduced in the Finance Act 2003 and is expected to take effect during late 2003. However, it should be noted that the consultation process, which has been running for some time, is rumoured to have been suspended by the Revenue. If true, this could potentially delay the introduction of the new legislation.

In addition, there are parts of the legislation which have yet to be published covering, among other things, reliefs, anti-avoidance, the charge to tax on leases and indirect property transactions (special purpose vehicles, etc.). Accordingly, we still await the critical aspects of the new legislation.

The new tax will also introduce an obligation on the purchaser to a transaction to pay any tax due (and in cases where there is more than one purchaser, the liability will be joint and several). As such, the new tax will not take the voluntary form of the present stamp duty which is in effect enforced by the consequences of non-payment, i.e. the inability to register transfers at HM Land Registry and the inability to produce unstamped instruments in evidence before an English court.

A 'purchaser' for the purposes of the new legislation is the person acquiring the main subject matter of the transaction and will include:

• in the case of a conveyance or an assignment, the purchaser;

• on the grant of a lease, the lessee;

• in the case of a surrender, the landlord; and

• in the case of variations of covenants, the person whose estate, interest or right is benefited or enlarged.

There will also be an obligation for the 'purchaser' to notify the Revenue when an appropriate transaction has taken place.

Taxable 'land transactions', as they will be known, will comprise the following.

Equivalent legislation applying to Scotland and Northern Ireland has yet to be published.

'Substantially performed' for these purposes is where the purchaser is entitled to enjoy substantially the whole of the economic benefit of the subject matter of the transaction (receiving the keys to a property or assuming the right to receive rent in respect of it (if it is tenanted) will be sufficient for this purpose), or if the vendor receives substantially the whole of the consideration (around 90 per cent). Completion is said to mean completion in substantial conformity with the contract or agreement in question. Such a transaction will be deemed to be a land transaction and physical (or legal) completion will be treated as a separate transaction in itself, although the liability to tax will never exceed the proper amount of tax that would be payable on a transaction which is fully completed at the outset. There is also a provision for repayment of tax by the Revenue if an agreement is rescinded or annulled post-completion. Accordingly, there should be no double charge to tax.

The Revenue indicated in the consultative document that it intends the charge to the new tax to be triggered by transfers of shares or interests in property owning vehicles. Such vehicles will comprise companies (both United Kingdom and non-United Kingdom), trusts and partnerships. It is expected that the charge will approximate to the tax that would be due if the land in the vehicle had been transferred directly to the new owner.

The consultative document noted that indirect land transactions are likely to be those:

• involving the transfer of substantial interests, e.g. shareholdings of 30 per cent or more;

• in qualifying entities, e.g. companies or partnerships;

• whose major activity involves the ownership or exploitation of United Kingdom land and buildings; and

• whose assets consist primarily of interests in United Kingdom land and buildings, the example being given of at least 70 per cent of total gross assets.

Where a land transaction effects the partition or division of an interest or estate in land, each party receiving a proportion of land as a consequence will be chargeable to tax only on the amount of consideration each has paid or provided.

With regard to contingent or unascertainable consideration, the purchaser will have to calculate the level of tax due based on his best estimate of what level of consideration will ultimately be payable. Amounts expressed as a minimum or a maximum will need to be taken into account, but if the purchaser knows that he is never likely to pay either of those amounts, he can arrive at a different estimate depending on the circumstances. The new rules could, therefore, benefit the purchaser as he will no longer be required to pay the tax by reference to a specified maximum if he considers it unlikely that the future payment will become payable.

When the purchaser has paid the tax on this basis, he will need to contact the Revenue again when he in fact pays the future payment. If his best estimate on completion was insufficient, he will have to make an additional payment of tax plus interest; the Revenue will make a refund if he overpaid at completion. Accordingly, the contingency principle will not be adopted by the new régime. It should also be noted that no discount will be given for deferred consideration.

As consideration can take the form of the satisfaction or release of a debt or the assumption of liabilities, these circumstances will also give rise to a charge. The amount satisfied, released, or assumed will constitute consideration for the purposes of the new legislation. It will be capped so that tax will never be due on an amount exceeding the market value of the subject matter.

Special valuation rules cover situations where the purchaser agrees to carry out works on land as part of the consideration. If the works include works to be carried out on land other than that acquired by the purchaser under the land transaction, the fair value of the works will be brought into account as consideration. However, to the extent that the works are undertaken on the land acquired under the land transaction, the fair value of that extent is disregarded for consideration purposes.

As alluded at the beginning of this article, the draft legislation (when implemented) will introduce a heavy compliance burden on those involved in land transactions, particularly the purchaser. The details of that aspect of the legislation are outlined in part two of this article, which will appear in next week's issue of Taxation.

Michael Ridsdale is a solicitor in the tax strategies unit of Hammonds.