UK: Budget 2003 - Stamp Duty Changes

The Government announced yesterday a number of stamp duty anti-avoidance measures and also signalled their intentions on future reform.

As expected the complete exemption for commercial property in disadvantaged areas will apply to transfers executed on or after 10 April 2003 even if pursuant to a prior contact. The position on agreements for long leases is unclear. The Revenue has also today issued Statement of Practice 1/2003 which gives useful guidance on the Revenue's views on the detailed application of the relief. Importantly it makes clear the relief will also apply to rent payable under leases.

The loophole allowing the section 42 group relief anti-avoidance legislation introduced last year to be avoided by a second hivedown will be blocked. In addition the claw-back will be extended to apply for three years. The new rules will apply to transfers executed after 14 April (unless pursuant to a pre-10 April contract).

From 1 December 2003 the existing regime governing the stamping of rent under leases will be replaced. Under the new regime tenants will pay duty at 1% on the Net Present Value of the rent due. The rate of discount for future rent will be 3.5% a year. VAT will be excluded from the calculation.

For example on a ten year lease at £10,000 a year the NPV of £100,000 rent is £83,166 producing a duty liability of £835. Under the current regime the duty liability would only be £200, a four-fold increase.

The regime is subject to consultation but clearly there will be winners and losers.

From 1 December 2003 the threshold for non-residential property will be increased to £150,000. This will apply to leases where the Net Present Value is no more than £150,000.

The new modernised regime for stamp duty will commence on 1 December 2003 and will apply to transfers and leases executed on or after that date unless the contract pre-dates Royal Assent. Transactions deriving from options executed after 16 April may also fall into the new regime. Clearly there are timing issues and opportunities.

As anticipated in the earlier consultation paper last year the new regime will make fundamental changes to the compliance regime and seeks to prevent perceived abuse, for example through the use of special purpose vehicles.

The stamp duty rules on partnerships may be amended as part of the new regime to prevent perceived abuse, but for the moment, their treatment remains unchanged.

Further details on all of these changes will be contained in the Finance Bill, to be published on 16 April.

The Government has clearly moved to stop certain stamp duty planning structures but most survive,

at least until the introduction of modernised stamp duty in December. Until then anyone involved in the property sector should both continue to consider what opportunities are available and also begin to plan for the introduction of the new regime.