Who Pays The Piper? - II

REG NOCK, barrister, continues his review of the new stamp duty compliance régime.

Incidence and third party risks

Since the stamp duty, penalty and interest fall upon the person who presents the document. The Bar Council's change in the law of evidence (see Part I of this article published in last week's issue of Taxation) coupled with the compliance régime has now become a major practical issue for persons who were not parties to the documentation but may need to produce the instrument in order to justify their conduct. Sub-purchasers, mortgagees, trustees and liquidators are amongst those who in the writer's experience within the last few weeks have encountered problems in this area. Fortunately it has not yet proved necessary to consider the question whether auditors need to carry out an exercise in stamp duty due diligence and risk analysis of the company's documentation not merely in relation to current litigation but all documentation since there may be future risks and the latent liability may be 'material' at current rates. Such persons may need to rely upon documents to which they are not parties in order to establish their title or to justify their conduct. (See, for example, the question of a chairman of a meeting relying upon unstamped proxies which are no longer subject to stamp duty as discussed in Marx v Estates and General Investments Ltd [1976] 1 WLR 380l.)

The new compliance régime now raises serious problems for such persons who now may find that if they have not carried out proper investigation into the stamping of the documents relating to the transaction, they could be exposed to serious economic consequences without a right of redress. For example, if, in an action against a trustee for breach of trust in paying the trust assets to a wrong person, the trustees wish to rely upon an unstamped assignment of the beneficial interest, which must be in writing to comply with the requirements of section 53(1)(c), Law of Property Act 1925, they will now have to pay any duty or penalty or interest charge that could arise. As this may have been a written agreement dutiable pursuant to paragraph 7 of Schedule 13 to the Finance Act 1999, the purchaser is specified as being liable for the duty upon the written agreement, if any, but not the interest or penalty thereon.

If the parties proceed directly to a formal assignment, there is no person identified as liable to the stamp duty since this would be within paragraph 1 of Schedule 13 to the Finance Act 1999 and not paragraph 7 thereof. Trustees will be well advised to make sure that the agreement and the assignment are duly stamped before making the distribution. The argument, that the trustees are entitled to an indemnity upon equitable or restitution grounds from the assignee because he has paid that other person's obligation, looks rather thin particularly in the context of the prohibitions upon stamp duty indemnities in section 117, Stamp Act 1891.

Illustrative problems

Some of the standard situations which will now give rise, and which, in the writer's experience, have already given rise to problems on a routine basis include:

The sub-sale trap

Much current stamp duty planning is based around relying upon contract (relying upon the exemptions in paragraph 7 of Schedule 13 to the Finance Act 1999 and avoiding drafting traps such as Peter Bone Ltd v Commissioners of Inland Revenue [1995] STC 921) and not taking a transfer relying upon sub-sale relief pursuant to section 58(4), Stamp Act 1891. As an incidental point, certain editions of the standard conditions for the sale of land preclude the use of sub-sales and need to be amended in order to be stamp duty efficient.

However, this basic stamp duty planning arrangement is giving rise to problems so that, even in a standard sub-sale situation, a sub-purchaser could find himself in difficulties, particularly in the light of certain comments in the Inland Revenue Stamp Taxes Office Manual referring to Fitch Lovell v Commissioners of Inland Revenue [1962] 3 All ER 685. It appears to be the view of the Inland Revenue Stamp Taxes Office that if the sub-sale conditions in section 58(4), Stamp Act 1891 are not satisfied strictly, then the ultimate transferee of the legal title is liable to the aggregate total of the stamp duty in respect of all of the transactions in the contract chain and not merely to the stamp duty upon his own purchase.

This can be compounded in certain types of sub-sale by the fact that section 58(5), Stamp Act 1891 (as amended) is strictly unworkable because it is dependent upon the aggregate consideration for the sub-sales of the various parcels. This deals with a situation where a person, such as a retail housing developer or a person developing an industrial or retail site, contracts to purchase a single parcel of land but sub-sells it in separate parcels to different persons and arranges for there to be several transfers to the various sub-purchasers.

Strictly on the wording of legislation, the exemption from stamp duty in respect of the first purchaser's transaction is not available unless and until all of the plots have been sub-sold for a relevant consideration of an appropriate total amount. Clearly, therefore, the initial sub-purchasers are not entitled to relief and must wait until the final sale has taken place and the aggregate consideration of all of the sub-sales has been determined. The Inland Revenue Stamp Taxes Office has informally indicated that it is now considering taking this point in practice and difficulties may arise, for example, if the developer decides to keep one or more of the plots as investments.

In these situations, therefore, where the vendor is making title based upon an uncompleted contract (as opposed to a Land Registry transfer which has been delivered to but not yet registered at the Land Registry), a well advised sub-purchaser who is taking a transfer of all or part of the land will require an undertaking from his seller to contribute to the stamp duty liability should this exceed the amount which the sub-purchaser expects to pay in respect of his transaction. Such an arrangement involving the agreement by the parties to share the stamp duty upon their own instrument is not an indemnity rendered void by section 117, Stamp Act 1891 (but see later for difficulties).

Assuming that the basic conditions can be satisfied, there are still problems arising from the implementation of the arrangement which gives rise to risks in the new régime. For example, A contracts to sell land to B and B then contracts the land to sell to C. C may intend to receive a transfer and may be raising all or part of the purchase price by means of a loan which is to be secured by a charge on the property. B may be nervous about relying simply upon a contract with A, who may die, become incapable, disappear or be liquidated. In consequence, B may decide to take a power of attorney in order to be able to deal with the transfer of title and deal with the property in due course. Unfortunately, a power of attorney given to a purchaser, which is both irrevocable at common law as an authority coupled with an interest (see Smart v Sandars [1848] 5 CB 895) and is protected against revocation and cancellation by the Powers of Attorney Act 1971, is also an equitable assignment (see Diplock v Hammond (1854) 5 De G M and G 320). In consequence, it is a conveyance on sale and should be stamped accordingly. This raises various stamp duty problems for C; namely:

Loss of sub-sale relief

B, having received a 'conveyance', cannot meet the conditions for sub-sale relief pursuant to section 58(4), Stamp Act 1891. As far as C is concerned, he is exposed as above to the aggregate stamp duty. Moreover there is the question of whether C's advisers can prepare the documentation in accordance with the disclosure requirements of section 5, Stamp Act 1891 (as amended) without disclosing the existence of the power of attorney; although this may be apparent from the face of the instrument as being executed by A through his attorney B.

Land Registry objections

B, using the power of attorney, executes a Land Registry transfer in A's name in favour of C. On presentation, the Land Registry is entitled to see the power of attorney under which the Land Registry transfer was executed. It may, quite correctly, take the view that if the document is unstamped it is not required to look at it and therefore there is a doubt as to whether the Land Registry transfer has been validly executed. C, although not a party to the transaction between A and B and not a party to the power of attorney, would, in order to obtain registration, have to present the document for stamping and, being the person presenting the document, is liable for the stamp duty, late presentation penalty and late payment interest charge.

Mortgagee's objections

Even if the Land Registry accepts the transfer, C's mortgagee may also be a little nervous since, should he ever need to enforce the security by selling the property, then the purchaser under that sale may wish to take certain stamp objections to the transaction. Where the property is not registered land, then a purchaser under the mortgagee's sale may on investigation of title take the sort of objections that the Land Registry might wish to take and refuse to act unless and until the power of attorney is stamped and any interest and penalties dealt with accordingly. Insofar as the bank or any receiver that it appoints wishes to justify its sale and the validity of its security, it would have to present the document and pay the said duty, interest and penalties.

Trustees

Trustees may be nervous about distributing money out of trusts where there are unstamped assignments between beneficiaries and purchasers of their beneficial interest, in case they should be challenged for breach of trust later. A, a beneficiary, sells his interest to B for cash (note also the restrictions upon the exemptions from the market value stamp duty in such a case of a transfer out of the trust pursuant to section 120, Finance Act 2000). Subsequently A's insolvency or a dispute with the taxation authorities raises questions of whether the trustees have acted properly. They will prima facie be liable for the cost of stamp duty, late stamping penalties and the late payment interest charge if they do not insist that B stamps the instrument before distribution of the property.

Debtors

Debtors, including, for example, insurance companies, may feel that assignments of debts such as policies should be stamped including any powers of attorney or other notices that have been given in relation to any sale of the policies. Here the position may be complicated because intangibles such as the sale of debts and of a policy issued by a United Kingdom company is a transaction that falls within the charge upon any written agreement pursuant to paragraph 7 of Schedule 13 to the Finance Act 1999. However, there are still issues that other documentation may be dutiable as a conveyance.

For example, A owes money to B who owes money to C. B authorises C to collect the money due from A. This is an assignment of the debt from A on sale to C (see, for example, Diplock v Hammond [1854] De G M and G 141) dutiable pursuant to section 57, Stamp Act 1891 as a sale being in satisfaction of B's debt to C. Depending upon whether there is a written agreement which may shift the liability to B at least in part, A may have to pay stamp duty late stamping penalties and the late payment interest charge upon the letter of authority should he rely upon it to defend the payment to C. He should insist that the letter or any other documentation is duly stamped before making payment to C.

Liquidators and receivers

Liquidators of companies may be nervous about distributing funds to the members or even embarking upon a liquidation where there are unstamped documents that may have to be produced in evidence in dealing with claims being made against the company or liquidator. Receivers would seem to fall into the same sort of category, being persons who could be prejudiced by anything that would jeopardise the title of the mortgagee or other person appointing them or where they are seeking to attack or defend transactions where the documentation is unstamped. They may be vulnerable if they pay out claims without checking the stamp duty position of the claimant's documentation.

Mortgagees

The same scenario exists as above, but C has mortgaged the land to D who seeks to enforce his security or to appoint a receiver. Any challenge could lead to D or the receiver having to pay the stamp duty, late stamping penalties and the late payment interest charge upon the power of attorney.

Therefore, persons such as receivers, liquidators, trustees and mortgagees who agree to distribute monies or to make advances where there are possibly unstamped documents in the chain of title, cannot rely upon any undertaking by a particular person to pay stamp duty and interest and penalties should that document ever be required to be stamped. They should also be able to recognise a stampable instrument when they encounter one.

What is a 'conveyance'?

It is not easy to spot a stampable 'conveyance' because of its extended definition for the purposes of stamp duty. In some cases the point is obvious, such as a Land Registry transfer or similar disposition in Scotland; a stock transfer form and formal assignments of intangible property are obvious. Contracts are not conveyances, but the drafting line for liability between contract and conveyance can be easily crossed, as in Peter Bone (supra) – this line may be different in Scotland. In addition to applying to unnecessary drafting as in Peter Bone, stamp duty also applies to unnecessary documentation. For example, title to goods passes by delivery but if the parties elect to have a document passing title, such as a bill of sale in North American form, it will be a dutiable conveyance.

Where the arrangements for the sale of intangible property have been entered into 'orally', relying upon Carlill v Carbolic Smokeball Company [1892] 2 QB 484, any other documentation would be vulnerable as being possibly a 'conveyance', such as a notice to debtors whether to pass title pursuant to section 136, Law of Property Act 1925 (which requires as a condition for the effective passing of legal title written notice to be given by the parties to the debtor or person whose obligations are being assigned) or to preserve priority against later creditors. There being no written contract for which the purchaser is responsible as regards the stamp duty, the assignment in stamp duty terms would be a vulnerable document. The form of the writing appears to be immaterial. It need not be a document explicitly transferring the title, such as a formal written assignment of the chose in action complying with section 136, Law of Property Act 1925.

In the absence of a written assignment, a written notice given by the vendor to the debtor would be a 'conveyance' because this is the instrument that has the effect of passing control over the property and is a conveyance in the absence of any more formal documentation. Instruments which have been held to be stampable as conveyances include receipts (Garnett v Commissioners of Inland Revenue [1899] 8 LT 633), letters of directions and orders to pay, memoranda of sales (Horsfall v Hey [1848] 2 Ex 778), memoranda of agreements (Fleetwood Hesketh v Commissioners of Inland Revenue [1936] 1 KB 351), court orders. A written notice exercising an option gives rise to a written contract which may be dutiable as a written agreement for sale pursuant to paragraph 7 of Schedule 13 to the Finance Act 1999 or as an agreement for lease pursuant to paragraph 14 of Schedule 13 to the Finance Act 1999. The parties should investigate whether provisions such as section 2, Law of Property (Miscellaneous Provisions) Act 1989 restrict the use of oral exercises of options (see Spiro v Glencrown Properties [1991] 2 WLR 931).

Landlord and tenant issues

For agreements for lease, the position is even worse. Paragraph 14 of Schedule 13 to the Finance Act 1999 provides that an agreement for lease is dutiable in full and it is accordingly liable to late stamping penalties and the late payment interest charge. Section 240, Finance Act 1994 (as amended) provides that where the agreement for lease and the lease are presented together for stamping, the late stamping penalties and the late payment interest charge in relation to the agreement for lease run from thirty days after the lease is executed. However, this applies only where the two are presented together.

This will not be possible where, for example, one of the parties is suing the other for breach or specific performance of the agreement for lease, since by definition there cannot be a lease to present. In such a case, the late stamping penalties and the late payment interest charge appear to run from thirty days after the execution of the agreement for lease. There is some confusion in the Inland Revenue Stamp Taxes Office as to the difference between an escrow arrangement, where the liability does not arise until the escrow conditions are satisfied and the document becomes an executed and delivered instrument, and a conditional agreement for lease, such as an agreement to grant a lease after practical completion which is dutiable at once.

Moreover, parties seem to be unaware of what is an agreement for lease for these purposes. The litigation may relate to the possible breach of building arrangements which are frequently included in a building contract which contains a schedule setting out the term of the lease to be granted in due course, so that the building agreement is itself dutiable as an agreement for lease pursuant to paragraph 14 of Schedule 13 to the Finance Act 1999. As it is a lottery as to who may be bringing the proceedings, there is a question whether a landlord can safely run the risk of allowing the tenant not to stamp the agreement for lease and lose the relief conferred by section 240, Finance Act 1994.

Alternatively the parties would now be prudent to consider whether the agreement for lease should be included in a separate instrument from the building agreement, so that if the building works are in issue it may not be necessary to produce the agreement for lease, although it is not difficult to imagine a degree of tactical skirmishing around whether it can be successfully left out.

Restitution

There is an open question of whether there is room for any form of equitable relief in this situation. Usually there is some form of restitution where someone meets the outstanding liability of another person. However, in this context there is no longer any person identified as being liable to the tax or penalties, so that there is no third party liability being discharged which appears to be a fundamental condition for this type of relief. Moreover, there is a policy issue of whether equity is in a position to grant relief in the face of the statutory prohibition in section 117, Stamp Act 1891.

Indemnities

There is little point in parties looking to indemnities or undertakings by some person to stamp the document or to reimburse someone if he has to pay the stamp duty. These are of extremely limited effect. This has become a significant practical issue now that the new Bar Council ruling increases the risk of stamp duty points being taken in practice.

The much overlooked section 117, Stamp Act 1891 provides, inter alia, that any indemnity concerning the absence or insufficiency of stamp on a document is void. This is clearly aimed at the situation of a person attempting to carry forward a transaction upon the basis that he has unstamped or insufficiently stamped documents in his title and is trying to persuade the purchaser to proceed on the basis that should the problem come home to roost the vendor will look after the problem.

Sharing agreements

Section 117 must, however, be viewed in its context and it would seem not to apply to a stamp duty sharing arrangement between the parties. Thus an undertaking between a vendor and a purchaser that the vendor will pay the stamp duty would appear to be a perfectly valid arrangement. There are certain provisions in the Law of Property Act 1925 which do not make sense if a stamp duty sharing arrangement in respect of the instrument as between the parties to it were affected by section 117. However, from the moment third parties are involved, section 117 begins to bite.

Thus, in the sub-sale agreement illustrated above, although an indemnity by B that the power of attorney will be duly stamped is void, an agreement between B and C that if C should have to pay more stamp duty upon the Land Registry transfer than will be justified by his price, B will contribute towards the excess, is not within section 117. The latter arrangement would be outside section 117, Stamp Act 1891 because it relates to the instrument to which they are the parties; the former arrangement is struck down because it relates to a document title in the vendor's chain of title.

Similarly an agreement that the mortgagee can add the amount of any costs including stamp duty to the principal amount secured would be subject to attack and, in the writer's view, pro tanto void since section 117, Stamp Act 1891 also strikes down any 'contract, arrangement, or undertaking for assuming the liability on account of absence or insufficiency of stamp' which is, of course, precisely what such a provision is designed to achieve.

Reg Nock is a member of chambers at 24 Old Buildings, Lincoln's Inn.

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