Stamp duty land tax is something that most people are aware of, if only because of having to pay it when moving home. However, it has suddenly become very high profile.
Judicious leaking pre-Budget led us to believe that wealthy foreigners were engaging in avoidance of SDLT on a massive scale on high-end residential property, particularly in London, by 'enveloping' the property in an offshore company. This has led to the imposition of a penal 15% charge where a residential property valued at more than £2m is acquired by a company, whether UK or offshore, (other than certain developers) and a proposed annual charge on such properties already held in companies (which could be up to £140,000 pa).
Ironically, the press coverage missed the fact that such structures did not avoid SDLT and were used by non-UK domiciliaries to keep their UK properties outside the inheritance tax net. What this actually did was focus attention on the avoidance of SDLT.
Stamp duty in the spotlight
For most people, SDLT is seen as a given – if you buy a property, you have to pay the tax. The fact is that for some years avoidance of SDLT on expensive residential and commercial properties has been relatively commonplace. This had been kept under the radar but it is now very much in the spotlight. The planning that has typically been used involved a combination of sub-sale relief together with 'something else' – the most recent manifestation involved the grant of an option – with the purported end result being that the SDLT is lost altogether. Many boutique firms were proactively offering such planning. It has to be said that the quality of implementation and the technical analysis was patchy; some were very good, others poor. HMRC, having kept its head down for a long time, is now actively challenging such planning and opening enquiries wherever it finds evidence of such avoidance. Litigation is likely to follow.
At the same time, a number of other factors have combined which will make SDLT planning much more difficult going forward.
- The disclosure (DOTAS) rules will be changed with effect from Royal Assent of the Finance Bill such that most SDLT planning will have to be disclosed. Previously any schemes that relied on planning which was substantially the same as what was made available before April 2010, were 'grandfathered' i.e. disclosure was not required. This covered all the variants of the sub-sale planning referred to above. This grandfathering will go. In addition, the generous valuation thresholds for disclosure (£5m for non-residential, £1m for residential) will also go. Hence most new planning will have to be disclosed and so HMRC will be able to counter new avoidance schemes much more quickly.
- The proposed General Anti Abuse Rule (GAAR), will, it has been confirmed, extend to SDLT. This is likely to come in next year.
- The legislation contains, at section 75A Finance Act 2003, an attempt at a statutory general anti-avoidance provision for SDLT. HMRC has been very reluctant to invoke this, probably because it was unclear itself what it did and did not catch. Rumour has it that HMRC will, henceforth, be much more disposed to use section 75A and it is likely that litigation will reach the appeals tribunal soon to test its ambit.
- A consultation exercise will be launched on the sub-sale relief provisions. As noted, these rules have been at the heart of most avoidance. It is unlikely that, even if sub-sale survives, it will be in a form that lends itself to avoidance in the way that is has previously.
- Under the Banking Code of Practice, banks have committed not to engage in aggressive tax avoidance. It has become very difficult to find a bank willing to lend if they are aware that SDLT planning is being adopted. One suspects that pressure has been applied behind the scenes.
- In a similar vein, the Solicitors Regulation Authority have issued a warning notice to solicitors to the effect that acting where SDLT avoidance is involved could constitute misconduct. Indeed, two solicitors have been disciplined for so acting. It is very difficult to acquire a property if you cannot find a lawyer to act for you. Again, this may be the result of behind the scenes pressure.
- If that was not enough, the Chancellor made clear in his Budget speech that he would not hesitate to use retrospective legislation if he became aware of new attempts to circumvent the rules.
What you need to know
So where does that leave us? Some providers are still active in the market place with 'solutions' as if nothing has changed. Even where the planning might, in theory, still work (and this is a big 'if ') the threat of retrospective legislation must make even the most bullish acquirer pause for thought. This does not, however, mean that there is nothing that can be done. Legitimate planning will still have a place. While it is a matter of opinion as to what is or is not legitimate, anything that makes use of the rules in the ways intended is unlikely to attract opprobrium.
- Are you aware that, when six or more dwellings are acquired in a single transaction, it is treated as if it were a commercial acquisition rather than residential? This can reduce the rate from 7% to 4%. (this will not disapply the 15% rate where this is relevant to an individual property).
- Multiple residence relief can be very useful. If more than one dwelling is being acquired the rate of tax will not be based on the total consideration, as would normally be the case for linked transactions, but on the average per dwelling. This can pull the rate down significantly (again, this will not disapply the 15% rate where relevant).
- The special rules for partnerships in Schedule 15 Finance Act 2003 are fiercely complex but, in the right circumstances, can be very useful.
- If you are buying land and having a new building constructed on the land, make sure the contracts for the land and the build are independent contracts. The principle established in the Prudential case in 1992 makes clear that, even where it is the same person who is putting up the building as is selling you the land, provided that the contracts are not inter-dependent, you will only pay SDLT on the price paid for the land. This will be much less than having the developer construct the building and sell you the completed development.
SDLT is a complex tax. As a tax on transactions, its provisions are highly technical. Property law necessarily impacts on how it applies to particular transactions. It is, therefore, key that, on any high value property deal, expert SDLT (and not just general tax) advice is taken.
How we can help
Smith & Williamson is experienced in advising on all aspects of property transactions including SDLT. We can advise on:
- corporate reorganisations
- demergers of property investment companies
- acquisitions of high-end London commercial property by an offshore investor
- property holding structures involving LLPs.
Our expert approach to SDLT is to identify any opportunities to mitigate the liability through our knowledge of the relevant legal provisions. In doing so, we always take into account our client's attitude to risk. Often it is possible to save SDLT by restructuring a transaction in a slightly different way. This is not aggressive planning and our experience can pay dividends in spotting these opportunities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Specific Questions relating to this article should be addressed directly to the author.