.png)
.png)
KEY POINTS
- Rates of stamp taxes are increasing.
- Ensure that dividends in specie are correctly documented and not within FA 2003, Sch 4 para 8.
- Steps for duty free incorporation by a partnership within FA 2003, Sch 15.
- Changes in company ownership can result in a clawback.
- Company purchase of own shares, CA 2006, s 707 and form SH303.
Despite being around for well over 300 years, stamp taxes were rarely worried about because they were levied at such a low rate. This all started to change from 1997 with the quite rapid rise in rates from a then paltry 1% top rate to 4% by 2000.
Now, from April 2011, we have a new 5% rate for residential property over £1 million. With these new higher rates, stamp taxes and, particularly, stamp duty land tax (SDLT) are becoming thorns in the side of acquirers.
At 4% for non-residential property and 5% for residential property, our top rates still fall way below our European cousins (where the average is 6% to 7%, with France having a top rate of 11.4%).
However, at 0.5%, stamp duty (SD) on shares ranks as one of the highest.
So, with rates having risen and transaction values having generally increased over the same period, the stamp taxes involved in a transaction have become a key consideration and there are many pitfalls that can catch the unwary.
Over the past eight years, since the introduction of SDLT, there has been a noticeable shift in the responsibility for stamp taxes and SDLT in particular from the solicitors (as it was a document-driven tax after all) to accountants and tax advisers, quite possibly due to the number of mathematical formulae the government deemed it necessary to introduce.
The aim of this article is to highlight ten areas where traps can catch you, but also where opportunities can arise.
1. Dividends in specie
There may be occasions where, rather than paying a dividend in cash, it is decided that a distribution of assets should take place; this is called a ‘dividend in specie’. #
There is no obligation to pay a dividend, it is a voluntary disposition and, therefore, providing the paperwork is correct, no SDLT liability will arise because there is no chargeable consideration. However, there are a couple of traps that one can fall into.
First, if the shareholder is taking on debt that is, perhaps, attached to the asset being distributed, the assumption of debt is chargeable consideration (FA 2003, Sch 4 para 8) and a charge to SDLT could arise.
Second, and perhaps the biggest trap, if the wording of the dividend is wrong, a nasty SDLT surprise could result.
The documentation approving the dividend must stipulate that this is a distribution of assets by way of a dividend in specie. It must not state that it is a cash dividend which is to be settled by way of a transfer of assets.
If the documentation is written in the latter way, the transfer of assets is in consideration for a debt that has been created by the voting of a cash dividend, which then results in the entire asset value being subject to SDLT, again under FA 2003, Sch 4 para 8.
2. Acquisitions and reconstructions
It may be decided, for a number of reasons, that a company is to be split up, so that investment assets are separated into one company, with the trading activities taken into another.
Where investments and trades are being split, a statutory demerger is not possible, so a Companies Act 1985, s 110 insolvency reconstruction will be used. Often, clearances will be obtained under TCGA 1992, s 138 and ITA 2007, s 701, to confirm no that capital gains tax charges or anti-avoidance legislation issues apply.
These clearances do not, however, extend to SDLT. There are two reliefs that may be available on this type of arrangement: reconstruction relief under FA 2003, Sch 7 para 7 and acquisition relief under FA 2003, Sch 7 para 8.
Reconstruction relief provides a complete exemption providing the various conditions are met, one of which is that there is a mirror image shareholding before and after the reorganisation (in other words, the same shareholders in the same proportions as owned the company being liquidated, own the new split-off companies).
Acquisition relief deals with the situation where, perhaps, the older generation wish to hold the investment assets, and are comfortable for the younger generation to run the trade. In that situation there are not mirror image shareholdings, so one would rely on acquisition relief to reduce the effective rate of SDLT to 0.5%.
Prior to F(No2)A 2005, the transfer of investment assets, which would be classed as an undertaking for SDLT purposes, would have qualified for acquisition relief. However, from its enactment, FA 2003, Sch 7 para 8(5A) is amended and now stipulates that to qualify ‘the undertaking or part acquired by the acquiring company has as its main activity the carrying on of a trade that does not consist wholly or mainly of dealing in chargeable interests’.
As a result, the splitting-off of investment assets can no longer qualify for this valuable relief which could result in a reorganisation giving rise to a 4% (or perhaps 5%) SDLT liability. Reconstruction relief is still available for investment assets, providing the mirror image condition is met.
3. Clawback of relief
Having already mentioned reconstruction relief and acquisition relief, it is worth adding another often missed fact.
Relief from SDLT is given under FA 2003, Sch 7 para 1 where the vendor and purchaser in a transaction are members of the same group of companies, but this relief can be clawed back (Sch 7 para 3) if the purchaser ceases to be a group member within three years.
Note that the clawback of SDLT does not just apply to group relief, it also applies to both reconstruction relief and acquisition relief (FA 2003, Sch 7 para 9).
The effect of this is that, where one of those reliefs is claimed, if control of the acquiring company changes within three years from the effective date of the transaction, the relief claimed is withdrawn and SDLT (based on the market value of the asset(s) acquired) is due and payable by the acquiring company.
What is often missed is that it is not just a de facto change of control that is caught by these rules, but also a change of control ‘in pursuance of, or in connection with, arrangements made before the end of the period’ (FA 2003, Sch 7 para 9(1)(a)(ii)).
The term ‘arrangements’ is drawn very wide in Sch 7 para 9(5)(a) and ‘includes any scheme, arrangement or understanding, whether or not legally enforceable’. This could, therefore, include options, verbal agreements, side letters, etc.
Where any of the three reliefs in Sch 7 are being claimed (group, reconstruction or acquisition) it is essential to monitor the ownership of the company afterwards to ensure that no SDLT shocks arise in the following three years.
4. Partnerships
The question regarding SDLT and partnerships is whether the rules constitute a nightmare or an opportunity. Anybody who has looked at FA 2003, Sch 15 will immediately answer the above question with the answer ‘nightmare’ because it is, in my opinion, an incredibly poorly drafted piece of legislation that neither advisers nor HMRC understand.
The phrase ‘sledgehammer to crack a nut’ definitely applies to Sch 15.
However, regardless of its complexity, there are opportunities. When a partnership exists, Sch 15 supersedes all other SDLT legislation; including, quite interestingly, FA 2003, s 53 which applies a deemed market value rule where the purchaser of a chargeable interest is a connected company.
At first glance, therefore, one could assume that incorporations would be caught, so no relief is available on the transfer of property to the company.
What about a situation where the business incorporating was a trading partnership which contained a chargeable interest and this partnership was run by Mr and Mrs Trim? If that is the case, s 53 no longer applies and we need to consider Sch 15.
The relevant paragraphs of Sch 15 are paras 18 to 20. One needs to calculate the ‘sum of the lower proportions’ and para 20 provides the steps to do this.
In identifying the relevant owner before the transfer to their connected company, one considers not only the individual, but also those connected to him.
In our example, Mr Trim is a relevant owner, but then so is Mrs Trim; not only by virtue of being entitled to a proportion of the chargeable interest, but also because she is connected to Mr Trim.
At Step Two, we need to identify the corresponding partners who, again, are Mr and Mrs Trim.
In Step Three, we need to find the proportion that the relevant owner is entitled to after the transaction.
Surely we have a problem here, because after the transfer neither Mr or Mrs Trim own the property, it is Trim Limited?
Not necessarily, because don’t forget, you need to take into account connected parties. Connected parties for this purpose are as defined in CTA 2010, s 1122 which includes a company controlled by an individual, or by an individual and those connected with him.
Trim Limited falls squarely within that definition. Therefore, at Step Three, the relevant owner is also entitled to 100% of the property after the transaction.
If you then follow through on Steps Four and Five, you end up with the sum of the lower proportions being 100.
If you were to then apply the formula in para 18(2) of MV x (100 – SLP)% – where MV is the market value of the interest transferred and SLP is the sum of the lower proportions – the result is a nil chargeable consideration.
So, if you can navigate the complexity of Sch 15, you can actually come out with a pleasant surprise. All of a sudden, family partnerships should be able to incorporate all of their assets without giving rise to an SDLT liability.
There are various worked examples of these types of computation in HMRC’s Stamp Duty Land Tax Manual at SDLT33700 et seq.
5. Linked transactions
The effect of the linked transactions rules may have been lessened somewhat by the new relief for acquisitions of multiple dwellings (F(No3)A 2011, Sch 22), but non-residential property is still affected by the linked transactions rules at FA 2003, s 108.
The reason behind these rules is to stop parties breaking down a single contract for numerous properties into multiple contracts for one property each, thereby reducing the chargeable consideration for each property and paying a lower SDLT rate.
A common misconception, however, is that if there are a number of transactions between the same vendor and purchaser, they will always be linked. This is not the case.
Even HMRC’s Stamp Duty Land Tax Manual confirms this at SDLTM30100 stating that ‘just because two transactions are between the same purchaser and seller does not necessarily mean they are linked. The transactions will be linked however if they are part of the same deal’.
This, on the face of it, makes perfect sense. If you have a single deal for a number of properties that is broken down into multiple contracts, s 108 will apply.
However, consider the situation where a client walks into a new industrial development, where each property is marketed separately, and decides to buy three properties. Are these linked? In my view, no, providing each property was separately marketed.
The position becomes somewhat clouded where a special price is given for a ‘bulk purchase’, but it does not necessarily mean that they have to be aggregated for SDLT purposes.
This part of the legislation is notoriously grey, but the important point is to consider each case on its own facts, rather than just assume that contracts between the same vendor and purchaser are linked.
6. Works and Prudential
Consideration for SDLT purposes includes both money and money’s worth (FA 2003, Sch 4 para 1). Specific examples of money’s worth are then referred to throughout Sch 4. One such example is the carrying out of works (para 10).
This paragraph states that where the whole or part of the consideration consists of the carrying out of works for construction, improvement or repair of a building, or other works to enhance the value of the land, then the value of the works should be taken into account to calculate the consideration chargeable to SDLT.
There is an exemption from this if the following conditions are met (Sch 4 para 10(2)):
- that the works are carried out after the effective date of the transaction;
- that the works are carried out on land acquired or to be acquired under the transaction or on other land held by the purchaser or a person connected with him; and
- that it is not a condition of the contract that the works are carried out by the vendor or a person connected with him.
It is (c) that is of most interest and is consistent with the decision in the case of Prudential Assurance Co Ltd v CIR [1992] STC 863.
If a purchaser acquires land from a vendor and, under a separate construction contract, agrees for the vendor to build the property, the value of those works does not need to be taken into account for the purposes of SDLT.
The important point is that the contract for the disposal of the land should have no contractual linkage to the construction contract; provided it is drawn up correctly, this should help to reduce the purchaser’s exposure to SDLT.
7. If you don’t know, defer
It’s not often that the chance to defer a tax liability arises. Yes, there is the ‘time to pay’ arrangement at the moment (although that is getting harder by the day), but it is rarely contained within the legislation.
Finance Act 2003, s 90, however, offers exactly that option and, where it applies, it should be used.
This deferral option covers situations where the chargeable consideration is contingent or uncertain at the effective date of the transaction and where the consideration falls to be paid or provided on one or more future dates of which at least one falls, or may fall, more than six months after the effective date of the transaction.
This deferral does not remove the obligation of the purchaser to pay SDLT on consideration that is known or payable within six months, but can be useful in certain circumstances. Deferral is not automatic and needs to be applied for.
The particulars that need to be included within the application can be found in HMRC’s Stamp Duty Land Tax Manual at SDLTM50910.
8. Purchase of own shares
The main focus when undertaking a company purchase of own shares is to make sure the shareholder qualifies for capital treatment, but what about the SD implications?
There used to be some debate between advisers and HMRC as to whether SD was due when a company purchased its own shares.
Any debate was stopped when Companies Act 1985 stipulated that a return form in accordance with s 169 needed to be completed, such form bearing duty as it is deemed to be a conveyance on sale. This legislation is replicated in the new Companies Act 2006, s 707 and the relevant form now requiring completion is SH303.
SD is then payable at a rate of 0.5%, but only if consideration exceeds £1,000. Also, it should be remembered that SD is rounded up to the nearest £5 (never rounded down!).
9. The stamp duty ‘principles’
Although it is SDLT that has the higher percentage, with corporate sales often into millions of pounds, 0.5% SD can still be a significant cost, so it is worth reminding ourselves of the contingency principle that applies in calculating the SD liability on a share purchase:
(a) A stated amount, which may increase or decrease depending on certain circumstances, is the dutiable consideration.
(b) If the document states a minimum consideration, or a minimum consideration can be ascertained from the document, that will be the dutiable consideration.
(c) If the document states a maximum consideration, or a maximum can be ascertained from the document, that will be the dutiable consideration.
(d) If the document has both a maximum and a minimum consideration, the maximum will be taken as the dutiable consideration.
Where the consideration can be ascertained, but has not yet been because, for example, it is based on the net asset value shown in the accounts ending on the day before sale, the Stamp Office apply a ‘wait and see’ principle.
They will wait until the accounts are prepared and charge SD on the net value of the assets. This ‘wait and see’ principle supersedes the contingency principle.
Where the consideration is unascertainable, perhaps because it is based on results or the market value of assets in, say, 12 months’ time, the document would attract no SD liability. The uncertainty is unlikely to make this a viable option, but may be possible between connected parties.
10. Don’t forget SDRT
Stamp duty reserve tax (SDRT) is often forgotten, because it was introduced in 1986 to catch transfers of shares or securities on the paperless system of share transfers (CREST) within the London Stock Exchange.
Of course, as SD is a document-driven tax, the absence of paper would have left HMRC unable to collect tax on the millions of shares traded on that system, so SDRT was born.
Generally, any share transaction will have a document reflecting the transaction, so SDRT will not normally be in issue.
However, the interaction between SD and SDRT is worth considering, particularly in circumstances whereby a contract is entered into, but is not completed for a particular reason.
Because the contract has not been completed, no SD is due.
However, SDRT is payable on entering into a contract for the sale of shares, and is notifiable and payable at the rate of 0.5% (rounded up to the nearest £5 as with SD) by the seventh of the month following the month in which the contract was entered into. Interest will run from this date.
If the contract is then completed within six years of being entered into, the stock transfer form will be stamped and SD payable. This SD would displace the SDRT (assuming it has been paid) and result in a refund of SDRT and any interest paid to HMRC.
Of course, if it is known that the contracts will be completed within six years, one could decide not to pay the SDRT, but just pay SD on completion.
While there is no penalty for the failure to pay SDRT, there is a penalty for the failure to notify HMRC of the liability. The penalty for failing to give notice is £100 and can rise to 100% of the SDRT liability when more than one year late.
The problem here is that, once notified, HMRC are more than likely to chase for payment. It is a tricky situation and one not easily managed, but the most important thing is to be aware of the interaction between SD and SDRT so clients can be forewarned.
Conclusion
Stamp duty, stamp duty land tax and stamp duty reserve tax may be taxes that practitioners tend to steer clear of. However, a client’s eternal gratitude – and perhaps a fee – may be earned by having any potential stamp duty problems and pitfalls pointed out in advance.
If the adviser is, for example, dealing with the income, corporation or capital gains tax associated with a property transaction, the client may logically assume that he will also be advised of any stamp duty land tax liability as well.
If the adviser is not going to do this, then the client should at least be directed to someone who will.
My final and 11th tip? Don’t let any of the stamp taxes come as a surprise to you or your clients.
Nick Haines is a tax partner at Hazlewoods LLP, and is the firm’s stamp taxes specialist. He can be contacted by telephone on 01242 237661 and via email
