Casebook Stamping Down On Duty

SIMON McKIE and SHARON ANSTEY of McKie & Co (Advisory Services) LLP show how the application of basic principles can put the brake on excessive stamp duty liabilities.

AFTER CARRYING ON a business in partnership for a number of years and sharing the profits equally, Mr A and Mr B wished to retire and had agreed to sell the business to their friend, Mr C, who was the client.

The balance sheet of the partnership included the assets as shown in Table 1 below.

It was agreed between the parties that the business was worth £2 million. The excess, over and above the net book value of the business, represented goodwill.

The draft sale agreement, composed by the vendors, stated that the assets listed in the balance sheet were to be sold to Mr C for the agreed value of £2 million. Mr C was proposing to sell one of the properties ('the commercial property') for £150,000 to a third party immediately after purchasing the business.

Mr C wished to know the stamp duty implications of the proposed transaction.

What was the stamp duty liability?

With the agreement in its initial form, the stampable consideration was £1,910,000, which was chargeable at four per cent producing a liability of £76,400. Mr C was shocked at the size of the liability. Looking at the terms of the agreement, it was possible to redraft clauses to provide that some of the assets were transferred by way of delivery.

Motor vehicles

A contract or agreement for the sale of 'goods, wares or merchandise' is not chargeable to stamp duty (see paragraph 7 of Schedule 13 to the Finance Act 1999). Motor cars would fall within this definition and so no duty would arise on the sale agreement provided ownership of the motor vehicles was not transferred under it. As originally drafted, ownership of the motor vehicles was transferred under the terms of the sale agreement so, to avoid a charge arising, the motor vehicles were transferred by way of delivery and not under any document.

Stock

A contract or agreement for the sale of stock in trade will not be chargeable to stamp duty. As the agreement was originally drafted, however, the stock was transferred under the agreement and would have been stampable. Again the stock was transferred by way of delivery to avoid a stamp duty charge arising.

Cash

A contract to sell any interest in property, not included in a list of excluded categories of asset, is chargeable to ad valorem duty as if it were an actual transfer or conveyance on sale (see, again, paragraph 7 of Schedule 13 to the Finance Act 1999). The Stamp Office, however, does not normally seek to collect duty on cash held on current account. Agreements or contracts for the sale of cash held on deposit, however, will be subject to stamp duty. It seems particularly foolish to sell a bank account balance for cash. The deposit account balance was therefore removed from the list of assets being sold and a balancing decrease made in the sale price.

Debtors

A contract or agreement for the sale of book debts would be chargeable to stamp duty. It is possible, however, to avoid this liability arising by providing in the sale agreement that the book debts are to be collected by Mr C as agent for Mr A and Mr B.

In this case there were no creditors of the business. If there had been, however, Mr C might have collected in the debts as agent for Mr A and Mr B and might have applied the monies collected from the debtors as agent for Mr A and Mr B to pay their creditors.

Where the liabilities exceed the book debts, it is important that the agent does not agree to pay off the excess, as the Stamp Office may claim duty on the whole amount of the liabilities under the contingency principle. If the terms of any agreement are such that he does undertake to pay off the excess, a maximum limit to the excess which Mr A will pay (for example, an amount calculated on the assumption that all the debts will prove good ones) should be included.

Alternatively, the parties could appoint a third party agent to collect the debts and pay the liabilities as agent for the vendors and then pay any excess to the purchaser. This would not constitute an assignment of all debts and would limit the duty chargeable. Another possibility is that a particular debt could be novated under an agreement whereby the vendor would release the debtor in consideration of a payment made by Mr C to the others and the debtors would become liable to Mr C. Provided this happens outside the terms of the agreement for the sale of the business, it would not attract stamp duty.

It is important that the quantification of debts is clear. If the debts are those in force at a date before the agreement, duty will be charged on the amount at that trigger date and not the amount at the date of the agreement (see Measures Bros v Commissioners of Inland Revenue [1900] 82 LT 689).

Goodwill

Section 116, Finance Act 2002 provides that stamp duty is no longer payable in respect of goodwill in relation to all instruments transferring goodwill executed after 22 April 2002. Mr C was lucky that the law changed between formulating the proposals and the actual purchase.

Property subject to stamp duty

The remaining assets on which stamp duty was payable were the properties.

Paying stamp duty on the sale of the commercial property to Mr C was quite unnecessary. Either Mr A and Mr B could make the sale reducing the sale consideration accordingly or advantage could be taken of subsale relief under section 58(4), Stamp Act 1891.

Apportionment

The agreement provides for a single consideration which has not been apportioned to the individual assets which are being sold. Legislation permits the parties to apportion the consideration as they think fit (section 58(1), Stamp Act 1891), but subsequent case law states that any apportionment of the consideration must be on a bona fide basis (West London Syndicate v Commissioners of Inland Revenue [1898] 2 QB 507). This does not necessarily mean a market value.

Where, however, an agreement deals with goodwill and other assets, any apportionment must be on a 'just and reasonable' basis ( paragraphs 1 and 2 of Schedule 37 to the Finance Act 2002).

Rate of stamp duty

The highest rate of stamp duty at four per cent applies not only where the consideration exceeds £500,000, but also in any other case where the instrument is not duly certified.

Paragraph 6 of Schedule 13 to the Finance Act 1999 states that an instrument certified at a particular amount means that 'it contains a statement that the transaction effected by the instrument does not form part of a larger transaction or series of transactions in respect of which the amount or value, or aggregate amount or value, of the consideration exceeds that amount'.

It is the responsibility of the parties to the document, and particularly the vendor, to decide whether a certificate of value can properly be included in a document.

A certificate of value may be inserted in a document chargeable under paragraph 1 of Schedule 13 even if the overall consideration exceeds a particular stamp duty band, for example £60,000, but the net amount after making certain allowable deductions does not exceed that amount, i.e. £60,000. The only sums which may be deducted in this way are those which are apportioned to goods, chattels, movables, loose plant and machinery, stock in trade, cash in hand or at the bank on current account, goodwill and goods subject to hire purchase less the hire purchase debt thereon.

Revised stamp duty liability

A satisfactory conclusion to Mr C's stamp duty problems were achieved when, after taking account of the above measures, the revised stamp duty was reduced, by way of a rapid deceleration, from the original amount of £76,400 to £1,000 as shown in Table 2 below.

The example used in this article is based on an actual case on which advice was given and which was the subject of a lecture delivered at Matthew Hutton's Stamp Duty Conference, held on 24 September 2002.

McKie & Co (Advisory Services) LLP can be contacted on 020 7600 1147 or e-mail taxation@mckieandco.com.

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