The Inland Revenue published a Consultative Document in April 2002 proposing radical changes to the way stamp duty is charged on land and buildings. Article by Adrian Rudd of PricewaterhouseCoopers, Tax Adviser’s representative on the Technical Committee, outlining the Institute’s response. Published in the August 2002 issue of Tax Adviser. Overview
The government has decided, as a matter of policy, that:
(1) It is no longer willing to forego duty on transactions that are allowed to ‘rest in contract’; and
(2) It is no longer prepared to accept duty at the 0.5 per cent rate where properties are transferred within a corporate vehicle.
The Institute pointed out that item (1) represents a significant extension of the tax base. The proposals amount to a new tax on property transactions, which would be more accurately named the ‘Real Estate Transfer Tax’, as it will no longer involve the affixing of stamps on documents. The decision to introduce this new tax appears to have been taken without proper research into the effects of the tax on either the residential or commercial property markets and without proper consultation on the principles involved. The Institute felt that this was most regrettable.
As regards item (2), the definition of the vehicles which will be caught will require careful consideration to ensure that the sale of a company that carries on a business is not dealt with as if it were a tax avoidance transaction.
Possible exclusions from the charge
The Consultative Document asked whether there are categories of land where specific exclusions might be appropriate. The Institute suggested that consideration should be given to the following:
- land involved in a regeneration or decontamination project;
- land on which ‘social housing’ units are constructed;
- land acquired by intermediaries, such as builders and developers who acquire it in part exchange or otherwise as trading stock;
- equitable interests;
- restrictive covenants;
- appropriation of matrimonial home by a surviving spouse in an intestacy;
- transfers between husband and wife on divorce or separation;
- distributions by a company in liquidation or otherwise; and
In the case of a surrender and re-grant of a lease, only the net value should be within the scope of the new tax.
Commercial developments may take the form of a partnership, joint venture or some other form of collaboration agreement. The rules will need to ensure that there is no multiple charge to the new tax in respect of the same development.
The value on which tax will be paid
The Institute pointed out that taxpayers may well have to incur significant costs in obtaining valuations, especially in cases where some or all of the consideration is not in money. This problem already arises under Stamp Duty Reserve Tax, but the costs are likely to be higher in the context of land and buildings. Further, the process of agreeing a valuation may be protracted.
Exchanges of property
The Consultative Document proposed that exchanges of property should be taxable. Thus if A purchases a building from B, for which A gives B £70,000 and a smaller building worth £90,000, A will be liable for stamp duty on £160,000, being the value of the purchase. B will be liable on £90,000, in respect of the effective purchase of the smaller building.
The Institute felt that the current practice, whereby duty is, in effect, chargeable only on the more valuable of the two properties comprised in the exchange, should continue. This practice is set out on the August 1995 issue of Tax Bulletin.
In relation to the pooling of interests in a development site, the imposition of a charge on exchanges will simply add to the costs of the development. The Institute could see no good reason for imposing such a charge.
Duty on leases
The Institute felt that the rationale for charging duty up front, based on a multiple of the rents, is questionable. It makes sense only in the context of a tax on documents, where the duty on a lease document has to be calculated at the time the lease is executed.
Special Purpose Vehicles (SPVs)
The Consultative Document proposed special rules for transfers of substantial interests in entities whose major activity is the ownership or exploitation of United Kingdom (UK) land and buildings, and whose assets consist primarily of UK land and buildings. Such transfers would be taxable at the rates applicable to transfers of property, rather than the rate applicable to transfers of shares.
The Institute called for studies and comparisons to be made with other jurisdictions that have similar real estate transfer taxes before reaching any conclusions.
The Institute felt that the SPV rules should exclude properties held by persons carrying on a trade, where the property is or has been used for the purposes of that trade. This would exclude pubs, hotels, leisure facilities, private hospitals and the like from unintentionally falling within the scope of the charge.
The Institute also thought that large listed property companies need special consideration. Under the proposals, anyone making a bid for such a company would find it has a four per cent charge whilst anyone dealing in the shares on the Stock Market would only suffer a 0.5 per cent charge. Possibly there could be an exclusion for acquisitions by way of public offer.
There have been many attempts over the last few years to increase liquidity in the property market by use of securitisation vehicles, property unit trusts, limited partnerships and the like.
The government has failed to respond to any of the proposals or initiatives, particularly those led by the British Property Federation. The Institute warned that the proposed new tax on transfers of interests in such vehicles would be a fatal blow to any such regime. This is particularly alarming when one considers that regimes for tax transparent property holding vehicles are available in most European Union countries. Liquidity is a major problem in the commercial property sector and the proposals will do nothing to help it.
The proposed new tax is levied at four per cent of the capital value of a property regardless of profit. This means that if a property is sold on within a 12-month period, it is unlikely that any profit will arise after taking the new tax into account. This will clearly lead to some stagnation in the market.
Charges and other debts of the SPV
At present, duty is charged on the consideration for the shares. This will reflect the net asset value of the company, that is the value of the company’s assets less the value of its liabilities. Such liabilities may include loans and other debts charged against the company’s property. If the new tax on a transfer of the shares of an SPV is charged on the full value of its assets without any deduction for liabilities, then the tax payable could easily exceed the consideration for the shares. The Institute felt that the value of such debts should be deducted from the value of the property and duty should be charged only on the net amount.
Crystallising the charge
The current rules effectively result in duty becoming payable by reference to completion. In general, the Institute proposed that no duty should be payable on exchange of contracts, except where a non-refundable deposit exceeding ten per cent of the purchase consideration is paid.
The Institute called for rules to deal with conditional contracts, for example where an acquisition that is conditional on planning consent being obtained for a specified development. The general rule should be that the relevant date is the date on which all conditions are satisfied, as under the capital gains tax (CGT) rules in Taxation of Chargeable Gains Act 1992 (TCGA 1992), s. 28. This will normally be the date by reference to which the consideration is payable.
Similarly, rules will be required to deal with options over interests in land. In this case the Institute suggested that duty should be payable only where an option is exercised, since it is only then that a transaction in land occurs.
Where an agent (e.g. a solicitor) acts in relation to a dutiable transaction, he/she should not be made liable for the duty except to the extent that the principal has made available to him/her the funds necessary to discharge that liability.
The Institute thought that it would be useful to have a procedure for pre-transaction rulings in cases where a large amount of duty is at stake and the transaction is either complex or unusual. However, applications would have to be dealt with speedily, otherwise transactions may have to be deferred or may simply not proceed.
The Consultative Document asked how payments by instalments and contingent payments should be taxed, and set out two options:
(1) to make an initial payment of duty based on an estimate of the total consideration, and make adjustments as refunds are made or further instalments become payable; or
(2) to make payments of duty as each instalment or contingent amount is actually paid.
The Institute thought that the second option would be the most sensible way to proceed. The question then arises as to what rate should apply, whether the rate at the time the transaction was entered into or the rate at the time the payment was made. The Institute would prefer to look at the time when the payment is made.
The government asked for views on the scope of the existing reliefs.
The Institute felt that reconstruction relief should be available on the same basis as applies for CGT purposes. In this connection, it is encouraging that Finance Act 2002 (FA 2002) will effectively enact SP 5/85, following the decision of the High Court in Fallon & Anor (Executors of NC Morgan dec’d) v Fellows (HM Inspector of Taxes).  BTC 438. The existing stamp duty reconstruction relief is far too restrictive.
The Institute also called for the retention of sub-sale relief under Stamp Act 1891 (SA 1891), s. 58(4), and also the relief under SA 1891, s. 77.
The Institute called for an exemption for the incorporation of a trade as a going concern, along the same lines as the Capital Gains Tax rollover relief in TCGA 1992, s. 162 and s. 165.
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