UK: Stamp Duty Developments

Last Updated: 22 March 1999
There have been a couple of recent developments in the area of stamp duty which may have significant practical consequences for anyone acquiring assets which attract stamp duty in the UK. Both of these developments may be seen as evidence of an increasingly focused enthusiasm on the part of the Government and the Inland Revenue to target what they regard as abuses of the stamp duty system.

Stamp Duty Group Relief

On 13 October 1998, the Inland Revenue published a Statement of Practice regarding stamp duty and group relief.

The subject of this Statement of Practice is Section 42 of the Finance Act 1930, which gives relief from stamp duty for transfers of property between members of the same group of companies. The Statement of Practice is also concerned with Section 151 of the Finance Act 1995, which gives a similar relief from duty on the grant of a lease between members of the same group.

These sections are subject to anti-avoidance legislation which is designed to prevent the use of group relief to avoid stamp duty when property, or an economic interest in it, passes out of the group.

The anti-avoidance legislation provides that relief is not given if the transfer was made in pursuance of, or in connection with, an arrangement under which:-

  • all or part of the consideration for the transfer was to be provided or received, directly or indirectly, by a person outside the group; or
  • the interest being transferred was previously transferred by a person outside the group; or
  • (in certain circumstances) where the seller and buyer were no longer to be part of the same group.

When the relevant document is sent to the Stamp Office for adjudication, the onus of satisfying the Stamp Office that the intra-group transaction has not been carried out in pursuance of, or in connection with, an arrangement of a kind which disqualifies the transaction from relief falls upon the person claiming the relief.

In large part, the Statement sets out the law regarding stamp duty and group relief as it was already generally understood by practitioners. However, the Statement provides a useful clarification of a number of points of practice in relation to which, in certain instances, the emphasis has changed in the recent past. In addition, the Statement is helpful in highlighting situations that the Stamp Office will scrutinise particularly carefully.

The Statement emphasises that when the legislation refers to an "arrangement", the arrangement concerned need not be based in contract. The intra-group transaction may be the first bi-lateral step by which legal rights and obligations are created in pursuance of the arrangement. If there is an expectation that a qualifying event will happen in accordance with the arrangement, and no likelihood in practice that it will not, relief will be refused.

The Statement also provides useful clarification on the question of the provision of loan finance from outside the group in order to complete a transaction. The Stamp Office states that these provisions will be interpreted in the light of their general purpose of denying relief where the intra-group transaction is the means of saving stamp duty when the property, or an interest in it, moves out of the group. In particular, the Statement confirms that a transaction will not be disqualified merely because the purchaser obtains a specific loan for the purchase of the asset, or the loan is secured on the asset, or arrangements are made to replace or novate an existing charge on the property transferred. This indicates a welcome relaxation, as previously the Stamp Office had sought to deny relief in such circumstances. Practitioners who work in this area have noticed this change of practice in the course of the last 12 to 18 months, but this is the first time that this change in practice has been published.

The Statement also sets out the circumstances under which the Stamp Office will scrutinise the arrangements in place particularly carefully. It states that the intra-group transaction may not benefit from group relief where the transaction involves or is followed by:-

  • the creation or transfer of loan stock or equity capital;
  • a capital reorganisation of the transferee;
  • a guarantee by a third party not associated with the group;
  • the creation of a new charge or financial arrangement whereby title to the property is, or may be, vested in the lender otherwise than in satisfaction of all or part of the debt; or
  • the assignment of the freehold reversion or the intra-group lease to a person outside the group.

Similarly, transactions will be very carefully scrutinised where:

  • all or part of the consideration for the transaction is to remain outstanding or is represented by intra-group debt, (as the aim and effect may be to reduce the value of the purchasing company on a possible future sale outside the group); or
  • the existing shareholders of the purchasing company include shareholders outside the group and the transaction is to be followed by the declaration of a dividend in specie, or by the liquidation of the purchasing company.

Further, any transaction involving an intra-group transfer of property into a subsidiary which may be disposed of shortly thereafter is likely to be subject to close scrutiny. In general, the Stamp Office will apply the anti-avoidance provisions so as to preclude group relief if there is evidence of a plan or scheme to dispose of the subsidiary and there is no practical likelihood that the scheme will not be carried through. It will not be regarded as sufficient for the claimant to contend that such an arrangement which is less than contractual may possibly be frustrated by unforeseen events or unlikely occurrences.

Stricter Compliance

In November of last year, shortly after the publication of the Statement described above, the Chancellor delivered his pre-Budget Statement in which he announced that the Government is considering additional measures in the area of stamp duty compliance.

Stamp duty is commonly referred to as a "voluntary" tax. What this means is that it is essentially a tax on documents and that if a document is not presented for stamping, then stamp duty (with the notable exception of stamp duty reserve tax, which applies in the case of shares/securities) will not be assessed by the Inland Revenue on either party to the transaction. This means that in certain situations, it may be open to a person who is a party to a document to decide whether or not he wishes to submit that document for stamping. The basic sanctions for non-payment of stamp duty are the inability to use the document concerned as evidence in a court of law or to register title to the assets (eg land or trade marks) passing under the document. As enforceability and registration are commonly the concern of the purchaser, so it is that it is generally the purchaser who will have the greater interest in ensuring that a document is properly stamped.

Penalties and interest for late stamping run from the date that is thirty days after the date of execution of the document, except where the document has been executed and held off-shore, in which case the thirty day period starts to run from the date that the document is brought into the UK.

These rules have allowed purchasers of assets (other than shares/securities) to defer the payment of stamp duty in some situations until such time as it becomes clear that there is a need to enforce the document in question. If the document has been executed and held off-shore until that time, then penalties and interest can be avoided.

The pre-Budget Statement indicates the Government's view that the interest and penalty provisions intended to deal with stamp duty non-compliance are out of date and that the next Finance Bill will therefore include a compliance package. Further details have not yet been forthcoming, but it is anticipated that this package may contain provisions intended to make it unattractive (or impossible) for a purchaser to choose not to stamp documents in the circumstances described above.

Anyone intending to effect an intra-group transfer of assets or who is considering the implementation of any steps intended to defer the payment of stamp duty should seek professional advice at an early stage to determine how these developments may affect them.

We are now on the brink of a Budget in which it is rumoured that stamp duty on property transfers may be increased to four or five per cent. Stamp duty planning is increasingly becoming a major factor in property transactions.

For further information please contact Fiona Sutherland, e-mail: Click Contact Link , 7 Devonshire Square, Cutlers Gardens, London EC2M 4YH, UK, Tel: + 44 171 655 1000

This article was first published in the Spring 1999 Hammond Suddards Tax Newsletter Update

The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.

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