Following the Chancellor's "morally repugnant" remark in relation to SDLT avoidance during his Budget speech, SDLT is now very much in the news.
The Chancellor clearly had in mind the perceived avoidance of SDLT on high value residential properties acquired by individuals via a corporate 'envelope' and went on to announce an immediate increase (to 15%) to the SDLT charge on all residential properties worth over £2m purchased by companies and certain other 'non-natural persons'. The only exclusion available is for property development businesses with a two-year track record. Consequently, this measure goes way beyond the mischief that it was intended to address and catches genuine, commercial situations where no avoidance is present.
This was just one of a raft of developments affecting owners of residential properties over the last few months.
- In addition to the new 15% charge, the Government raised the rate of SDLT on residential properties acquired by individuals to 7% with effect from March 2012.
- To complement the 15% charge, there is a proposal to introduce an annual charge on high value residential properties held by non-natural persons: a 'mansion tax' by another name. Consultation is ongoing with a view to bringing in the new charge from April 2013. The proposed rate will start at £15,000 and go up to £140,000 for properties worth more than £20m. The consultation indicates the scope for this charge will mirror that for the 15% charge. This will, therefore, again catch many innocent and genuinely commercial situations and is causing consternation among landed estates and farming businesses, among others. A further proposal to apply capital gains tax to certain disposals of high value residential properties by certain non-natural, non-resident persons is also under consideration.
- There is also consultation on amending the sub-sale rules.
Sub-sale relief has been at the heart of most of the avoidance that
has taken place in recent years, so some tightening up is not
surprising. However it does serve a useful purpose in commercial
transactions and so it is to be hoped that it will not be abolished
altogether. Encouragingly, HMRC does seem to recognise that it is
needed for genuine commercial circumstances.
In any event the effectiveness of planning that has relied on sub-sale relief has been thrown into doubt by a very recent decision of the Tax Tribunal in the case of Vardy. Although the decision itself was on a very narrow point, comments made by the Tribunal have implications for all the variants of sub-sale planning that have been used to avoid SDLT altogether. The case will certainly encourage HMRC in its view that it can successfully challenge such planning. - The disclosure rules (DOTAS) have been amended to remove some of the exclusions which previously applied to SDLT. Going forward, any SDLT avoidance scheme that is developed will almost certainly have to be disclosed, meaning that HMRC will be in a position to close them down much faster.
- The General Anti Abuse Rule is expected to come in next year and will, it has been confirmed, include SDLT in its ambit. This will complement an existing broad scope anti-avoidance provision in the SDLT legislation.
- Under the banking code of practice, banks have explicitly undertaken not to engage in aggressive tax avoidance. Some banks have used this to justify a refusal to lend on property transactions where SDLT avoidance is involved.
- The Solicitors Regulation Authority has issued a warning notice to solicitors that acting where SDLT avoidance is involved could constitute misconduct. Disciplinary proceedings have been taken against two solicitors. The ICAEW has recently issued a 'help sheet' to accountants in a similar vein.
In his Budget speech the Chancellor gave a clear warning that the Government will not tolerate avoidance activity in respect of SDLT, and will not hesitate to counter this with retrospective legislation if needs be.
So where does this leave us in terms of SDLT planning? The landscape has undoubtedly altered profoundly over recent months, but that does not mean that legitimate planning is not possible. It is all about using the reliefs and provisions within the legislation for the purpose for which they were intended. As is the case with tax planning generally, SDLT planning will need to have a sound commercial rationale if it is to be successful.
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