Stamp Duty Alert

MATTHEW HUTTON MA (Oxon), FTII, AIIT, TEP examines the rules which determine how much stamp duty a purchaser is liable to pay.

Stamp duty is a tax on documents (or, rather, 'instruments'). It works on the basis that, when a document is executed (from which runs the 30-day period for paying any tax due), one knows, or can relatively easily determine, the stampable amount. This article sets out to examine some of the ramifications of that principle in practice; it does not address the separate issue of stamp duty liability on grant of leases.

The consideration

The liability to stamp duty is fixed by the value of the consideration, with no discount given for deferred payment: compare the capital gains tax relief under section 280, Taxation of Chargeable Gains Act 1992 in a case where the consideration is payable by instalments.

Stocks or securities

The same rule applies where the consideration is expressed to be any stock or marketable security, in which case the value is generally taken to be the average price on the date of the instrument. In practice, the quarter up rule for capital gains tax purposes is used.

A change made by section 126, Finance Act 2000 means that rights to receive a future issue of securities now count as consideration. This new statutory rule settles a past difference of view.

If the consideration is a security which is not a marketable security, duty falls due in respect of the amount due on the date of the conveyance for principal and interest upon the security (section 55(2), Stamp Act 1891). This would cover a loan stock issued by a private company.

Professional fees payable by purchaser

All the elements of the consideration must be identified.

Example 1 assumes that the solicitor's costs can be quantified. If at the date of completion the fees are unknown and cannot be ascertained (and no maximum or minimum is expressed), the market value rule under section 242, Finance Act 1994 will apply (see below).

Quantifying the liabilities

In a case where there is a transfer of a property subject to a mortgage, the stamp duty charge under section 57, Stamp Act 1891 will be the amount of the liabilities assumed by the transferee (even if in excess of the gross value of the property).

Payment by instalments

If all or part of the consideration is due by payments over a period, the consideration is calculated under section 58, Stamp Act 1891 (as amended), as follows:

• Where the period for payment does not exceed 20 years, so that the total payment can be ascertained in advance, that total is the consideration;
• Where the period is definite, but exceeds 20 years or is in perpetuity or indefinite not terminable with life, the consideration is the total amount payable over the next 20 years; and
• Where the payment period is for life or lives, the consideration is the total payable over the next 12 years.

While no discount for stamp duty purposes is given by reason of the delay in payment, interest due on the purchase price which may be payable by instalments similarly does not attract duty (Hotel Otung v Collector of Stamp Revenue [1965] AC 766). That would mean therefore that, if the consideration can be broken down into principal and interest, there could be a stamp duty saving in exempting the interest element from duty. If on the other hand the consideration is merely expressed as £X payable by equal annual payments over Y years, £X will necessarily include an amount representing interest and yet will be subject to duty.

A useful planning tip where consideration is payable by instalments over a period, is to consider whether there could be a reduction in stamp duty liability by expressing part of the consideration due as interest in respect of late payment (especially if this might enable use of one of the lower rate thresholds). That might, however, have an implication for other taxes, for both parties, in converting part of what would otherwise be treated on capital account as interest, income paid and receivable.

The 20-year rule requires that more than one payment is made during the 20-year period (even though subsequent payments may be made thereafter). It was held by the Court of Appeal in Blendett v Commissioners of Inland Revenue and Quietlece v Commissioners of Inland Revenue [1984] STC 95 that a lease premium which was paid by instalments, only one of which fell within the 20-year period, did not attract the benefit of that rule. Therefore in those cases the total premiums paid attracted ad valorem duty. Those decisions leave open what is necessary to fall within the second of the above points: certainly, the instalments do not have to be equal in amount, nor do they have to be annual.

VAT-inclusive consideration

The consideration for stamp duty purposes is the VAT-inclusive amount. This was the finding of the Court of Session in Glenrothes Development Corp v Commissioners of Inland Revenue [1994] STC 74.

Consideration unknown but ascertainable

In circumstances where the amount of the consideration is unknown when the instrument is executed, the 'contingency principle' comes into play. If the instrument itself mentions no figure, but an amount can be ascertained when the document is signed, that is the value of the consideration for stamp duty purposes. The ascertainable amount may not be fixed, in which case the dutiable amount will be determined by the following rules:

• A stated amount which may vary up or down depending upon certain circumstances is the dutiable consideration (see Independent Television Authority v Commissioners of Inland Revenue [1961] AC 427).
• If the document states a minimum consideration, or a minimum consideration can be ascertained from the document itself, that will be the dutiable consideration.
• If the document states a maximum consideration, or a maximum consideration can be ascertained from the terms of the document, that will be the dutiable amount.
• If the document states, or there can be ascertained from its terms, both a maximum and a minimum consideration, the maximum will be the dutiable amount, regardless of what is ultimately paid (Underground Electric Railways Ltd v Commissioners of Inland Revenue [1906] AC 21).

Avoid upper limits

If the consideration is unknown, avoid mentioning a maximum figure which will trigger the stamp duty liability, unless there is every expectation that that will in the event be paid.

Delayed payment

Sometimes the payment of the consideration will be delayed, e.g. where payable by periodic instalments. If the amounts of the instalments are uncertain, for example based upon the accounts of the target company for future years, the contingency principle may apply if the amounts of those instalments are ascertainable. If they are not, and the subject matter of the sale is land, section 242, Finance Act 1994 will apply the market value rule. If the subject matter of the sale is other than land and the consideration is not quantified at all in the instrument (that is, no minimum or maximum is expressed) and is not ascertainable when the instrument is executed, there will be no ad valorem stamp duty liability.

In a case where, when the contract is executed (and the contract itself does not attract duty, under paragraph 7 of Schedule 13 to the Finance Act 1999), the consideration is not known and the contingency principle could mean a high charge to stamp duty because of the mention of a maximum figure in the contract, consider deferring the ultimate conveyance. If the parties are content to leave the legal ownership in the name of the vendor, subject always to appropriate protection for the purchaser, the final stamp duty liability will be on the actual price paid.

If commercially practicable, the date of completion should be deferred until the consideration is known, to avoid paying what might be an excessively high stamp duty liability.

Wait-and-see

There may be cases where the consideration is ascertainable, but has not yet been ascertained, e.g. where the consideration for the sale of a business is equal to the net asset value shown by the audited accounts for the year ending on the day before the date of the sale. Here the Stamp Office applies a 'wait-and-see' practice, to await preparation of the accounts in question, and will charge duty on what is shown as the net value of the assets. Application of 'wait-and-see' will displace the contingency principle, e.g. in a case where the document mentions a maximum or minimum amount.

Strictly speaking, the 'wait-and-see' approach is applicable only where the date to which the accounts are to be prepared occurs on or before the sale of the business. However, the Stamp Office Manual says at paragraph 4.310 that, if the accounting date follows the date of sale by only a few weeks and the taxpayer suggests adopting 'wait-and-see', no objection should be raised. Presumably, the taxpayer would not make such a suggestion if application of the contingency principle would produce a lower stamp duty liability. This practice applies only to cases of ascertainable consideration which have not yet been ascertained. It is the contingency principle which will apply where there is unascertainable consideration, but a maximum or minimum sum is mentioned.

The critical thing, therefore, in deciding whether 'wait-and-see' or the contingency principle applies, seems to be a matter of timing. If the accounting date for the accounts which will determine the amount of the consideration follows the date of sale by more than a few weeks, it is the contingency principle which will be applied by the Stamp Office.

During the period in which the stamp duty is being computed, interest will be running against the taxpayer. He may therefore want to deposit an amount on account. Further he may want the document stamped, albeit only provisionally, so that any transfers can be registered. This is accepted by the Stamp Office, the provisional duty being calculated either on an estimated consideration figure or on a variable sum mentioned in the document.

Consideration unknown and unascertainable

The market value of the estate or interest in land immediately before execution of the instrument or transfer will be the stamp duty consideration, that is in a case where the consideration is not ascertainable from the conveyance or lease at the time it is executed (section 242, Finance Act 1994). This rule applies only to the transfer of any estate or interest in land or the grant of any lease (which presumably could include a lease of chattels). It is therefore important to avoid mentioning any figure in the instrument which is greater than the market value of the property, because that greater figure will be treated as the consideration.

Apart from real property, if there is no quantification of the consideration at all, no stamp duty liability results.

The sale of shares for an unascertainable consideration, geared say to the market value of the underlying assets at some defined point in the future, say six months hence, would attract no liability to stamp duty. The element of uncertainty in fixing the consideration may make this idea unattractive in most commercial contexts. However, consider a case where a transfer between associated companies would attract exemption under section 42, Finance Act 1930 except that the 75 per cent beneficial ownership test is not satisfied. Such a mechanism might be attractive in such circumstances.

Market value is expressly defined by reference to the section 241(2), Finance Act 1994 definition, that is the price which the property 'might reasonably be expected to fetch on a sale at that time in the open market'. There is an express exclusion from the ambit of this rule for the case where the consideration (or rent) could be ascertained 'on the assumption that any future event mentioned in the instrument in question were or were not to occur'.

The Stamp Office takes the view that the market value rule in section 242 cannot be avoided simply by expressing in the document an artificial minimum amount of consideration which does not really represent the consideration agreed by the parties (see Stamp Duty Manual at paragraphs 4.294 and 4.297). The manual quotes at paragraph 4.297 in support of this view the statement by Lord Radcliffe in Independent Television Authority v Commissioners of Inland Revenue [1961] AC 427 that 'What is necessary is that it should be possible to ascertain from the agreement that there is some specific sum agreed upon as the subject of payment which may perhaps fairly be called the prima facie or basic payment'. The argument seems to be that the 'prima facie or basic payment' must be something that realistically equates to what the purchaser is going to pay, i.e. if the document expresses an amount by way of consideration which by any standards is substantial but which represents only, say, 80 per cent of what the vendor expects to receive, the Stamp Office will apply the market value rule. While this may be an understandable view, there is clearly a gap in the reasoning, as Lord Radcliffe did not lay down such a specific requirement: in any case there will obviously be room for argument in individual cases.

Apportionments

A purchaser of domestic property has traditionally faced the temptation, by agreement with the vendor, to undervalue the property (typically, to no more than one of the stamp duty thresholds) and to attribute the excess of the overall consideration to chattels which would pass by delivery. Not only should individuals steer well clear of such a dishonest device, all the more so should a solicitor. In Saunders v Edwards [1987] 1 WLR 1116 the Court of Appeal held that a solicitor involved in such a device was guilty of professional misconduct. This could well have the consequence for his purchaser client that the contract to buy the property cannot be enforced. Note that, although chattels 'in an actual state of severance' pass by delivery, the Stamp Office does not accept that (for example) fitted carpets are in an actual state of severance, even though they are not fixtures.

What happens where no apportionment of the consideration paid to acquire a business is expressly made by the agreement? It seems clear that any apportionment must be a bona fide one (see the dictum of Lord Justice Rigby in West London Syndicate v Commissioners of Inland Revenue [1898] 2 QB 507). In Re Brown & Root McDermott Fabricators Ltd's and another's application [1996] STC 483, Mr Justice Jacob said:

'And it recited a valuation bona fide placed on the assignment by both parties. Section 58(1) entitles them to do that. It permits parties in circumstances such as this (i.e. where many things are bought for a lump overall consideration) to apportion the consideration as they think fit. These are wide words. Doubtless they would not extend to a dishonest apportionment. But if the apportionment is bona fide, that is enough (see West London Syndicate Ltd v Commissioners of Inland Revenue)'.

While any apportionment must be bona fide, it need not necessarily be based upon market values, as long as 'just and reasonable', except in relation to intellectual property (now exempt) acquired as part of a business, where Schedule 34 to the Finance Act 2000 sets out specific apportionment rules.

The Stamp Office form used to quantify the consideration attributable to constituent parts of a business acquired by the purchaser in stamp 22: column A lists the consideration given (which will include assumption of liabilities) and column B the various assets. The totals in columns A and B in the form must be the same.

However, there may be cases where it is not all that easy to quantify every element, that is, there might appear to be variables. Liabilities assumed by the purchaser will include mortgages secured on real property for which the purchaser will accept responsibility, but could also extend to contingent liabilities under commercial agreements or employment protection legislation. The effect of including such liabilities in column A might be to increase the value of goodwill in column B. While the consideration attracting stamp duty, whether on contract or on conveyance, will prima facie be the total at the foot of columns A and B, not every item in column B will attract stamp duty. For example, cash on current account and assets passing by delivery will escape stamp duty (even to the extent that they might be balanced by liabilities in column A).

Warning

This article has sought only to introduce what can be a complex principle and has not begun to touch on the rates of duty, once the stampable consideration has been determined. If, however, it has alerted some readers to the point that identifying the consideration for stamp duty purposes is not necessarily a straightforward exercise, the article will have served its purpose.

Matthew Hutton is organising a stamp duty conference in London on 25 September 2001; for details ring 01508 528388. Publication of the second edition of his book Stamp Duty – A Practical Guide, published by the PTP Group, is also scheduled for the end of September.

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