New Stamp Duty rules examined by Robin Godman LLM FTII, Senior Tax Adviser with a large multi-national oil company. Article published in the June 2002 issue of Tax Adviser.
This year's Budget is important for Stamp Duty for two reasons. The first is that Gordon Brown announced a number of significant changes to the existing regime, and the second is that a consultative document (condoc) has been issued with the aim of modernisation that proposes the abolition of Stamp Duty on everything except land and buildings, and shares.
The Budget changes to the existing rules are mainly aimed at countering what the government sees as avoidance devices. These include transferring property within a group of companies and then selling the recipient company; ‘Section 76’ schemes; holding documents abroad; and uncompleted purchase contract schemes. The Inland Revenue have said that these are also part of the plan for modernisation, but that they were necessary to implement sooner rather than later because of the current level of avoidance, particularly with regard to commercial property transactions.
Stamp duty ‘clawed back’
If a group of companies transfers property from one group company to another, it can claim relief from the stamp duty payable on the transaction (currently one per cent, three per cent or four per cent, depending on value and half a per cent on shares) under Finance Act 1930 (FA 1930), s. 42. Property, for these purposes, includes land and buildings, shares, and chattels. Subject to some existing restrictions, the group could then sell the shares in the receiving company to a buyer outside the group, and the buyer would only have to pay duty at the rate of half a per cent on the shares, which was a significant saving. But now, so far as land and buildings is concerned, if the receiving company leaves the group within two years of the intra group transfer document being signed, Stamp Duty is payable on that transfer; in other words the relief is ‘clawed back’, to use the words of the Budget statement.
The duty payable will be based on the market value of the asset at the time it was passed between the group members, rather than the later sale to beyond the group. In addition, interest will be payable, and will run from 30 days after the transfer. The Revenue will be given powers to collect the duty as if it were Stamp Duty Reserve Tax (SDRT), and also demand payment from any company that was a member of the transferees group at the time of the intra group transfer, or from individual directors, if the duty is not paid within six months of the statutory payment date.
Of some comfort is the news that the new rules do not apply to intra group transaction documents executed on or before 23 April, or documents which give effect to contracts made on or before 17 April 2002. And the Revenue have confirmed to the author that the new rules do not apply to chattels or shares.
In a s. 76 scheme again savings in stamp duty could be made. Finance Act 1986 s. 76 allowed a company that acquired the whole or part of another company’s business, in exchange for shares issued in the buyer, to pay stamp duty at only half a per cent on the shares, instead of up to four per cent on the property concerned. Two types of the scheme were popular. The first required the buyer to form a subsidiary. The property concerned was then transferred into the new subsidiary, in exchange for new shares in that subsidiary. The seller then sold these new shares back to the buyer.
But now this has been ended by charging Stamp Duty at the full rate on transfers to a company which is under the control of either the buyer or another third party at the time. In the second, the seller incorporated the new subsidiary. The property concerned was then transferred into that subsidiary in exchange for shares. The seller then sold the shares to the buyer. This has been hit on the head by clawing back the relief if the subsidiary is sold or there is a change of control within two years of the transfer. Both new rules affect transfers executed after 23 April, except for transfers executed pursuant to contracts made on or before 17 April 2002.
Another valuable and popular method of avoiding Stamp Duty takes the form of executing and keeping documents abroad. In the past, where documents were signed outside the United Kingdom (UK) and not brought back, Stamp Duty could not be applied. In very high value transactions substantial savings were made. The only circumstances where it is necessary to return the documents is in legal proceedings. To be admissible in a British Court, and for the registration of land, documents have to be stamped. Originally, even under these circumstances, the parties had simply to pay the duty when the documents arrived. In an attempt to counter this, the Treasury applied interest to run 30 days from execution, payable in addition to the stamp duty itself, should the documents be returned to this country.
Finance Act 2002
But with effect from the enactment of the Finance Act 2002, which is likely to be in the middle of July, penalties will be applied as well as interest and the duty itself, running from the date of execution, wherever that took place. The sting here of course is in the penalty, because that can be as much as the duty itself.
An uncompleted purchase contract scheme can save duty by drafting the contract in such a way that the contracts can be exchanged, but never completed, facilitated by legal and beneficial ownership being split. Briefly, the seller set up two nominee companies and transferred the legal title to them. Only £5 stamp duty was payable on this step. The seller then agreed to sell the beneficial interest in the land to the buyer, the completion date being in the remote future. The seller then sold the shares in the nominees to the buyer, who paid just £5 stamp duty for each transfer of shares. This was the end of the chain, with the effect that the buyer held not only the beneficial interest in the land, but also the shares in the company that held the legal title, with a Stamp Duty bill amounting to little more than small change. The government now intends that with effect from Royal Assent contracts with a market value (MV) of over £10m will be stampable, but contracts valued at under £10m will escape.
In line with the recognition that the taxation of intellectual property should be modernised, Stamp Duty was abolished on goodwill from 23 April 2002.
End of the stamp presses
The government’s future plans for Stamp Duty are set out in the condoc, with an eye on Budget Day 2003. They appear to be very keen to encourage participation, although the deadline for comments is 12 July, which may be a little tight for such fundamental reforms they propose, but consultation is likely to continue beyond that date. It should be noted that the Revenue have said that this is not a forum to discuss the rates of duty. The condoc envisages Stamp Duty no longer being a tax on documents, and anticipates a physically impressed stamp on submitted documents coming to an end, which means the end for the quaint stamp presses that have pounded away since 1891.
Instead, the tax would be on transactions confined to transfers of land and buildings, and shares. Since shares are already catered for under the SDRT rules, the proposals are therefore aimed at residential transactions and commercial property deals, with the latter being perceived by the Revenue as being the most open to duty avoidance schemes.
In addition to Ministerial anxieties over avoidance, there are a number of reasons why changes have to come, not the least of which is the advent of electronic conveyancing – because the Land Registry plans to have introduced electronic registration of land in two to three years’ time. The efficient collection of the tax will require stamp duty to be able to converge with the introduction of e-conveyancing. This will be a tricky job as there are a number of questions that have arisen already. For example, although the condoc proposes that the tax will fall due when money or money’s worth is given by (or on behalf of) the person liable to pay duty, the Revenue have said that they do not want payment of a deposit to trigger a charge for residential purposes.
There is also likely to be difficulty about payment by instalments after completion. The Revenue have also said that they want Stamp Duty to end up looking like a modern tax. This is likely to mean that it will be self assessed, and controlled by enquires based on risk assessment after the duty has been paid, instead of the Stamp Office examining each document that the taxpayer thinks ought to be stamped. They intend to move to a standard form to be completed, and whilst they intend to use powers to address non disclosure and non payment, it is expected that appeal procedures will be available at each stage. It is also expected that overpaid duty will be repayable with interest, in the same way as most other taxes. Organisations with very large volumes of stampable transactions might be able to move to a quarterly reporting procedure.
SPVs under scrutiny
Thought is also being given to pre- or post transaction rulings. Special Purpose Vehicles (SPVs) are under particular scrutiny, and the Revenue have asked the property industry to talk to them in a ‘mature and sensible’ way so that they can define which SPVs should be caught, and which are designed for proper commercial purposes. Lease duty is also being looked at because the Revenue are not content with the existing charging structure for new leases, although they say that they have ruled out valuation based or annual charges, indicating that their preferred option is a formulaic approach approximating to net present value of predicted payments. The residual £5 duty is to go, and duty on the transfer of debt is to be abolished too, although the draftsman will have to give careful thought to a suitable definition of debt.
A criticism of the condoc is that in an era of evidence-based policy making it seems rather thin on detail, such as its statistics, and who are likely to be the losers, and who winners, if anybody. It is also clear that commercial property transactions are likely to be where most of the new yield will come from, and that is why the focus is on this area.
Last year Stamp Duty yielded £8 billion, which was more than capital gains, inheritance tax and petroleum revenue tax combined. It was seen as having a number of loopholes and was regarded as somewhat archaic. What cannot be in doubt now is that Stamp Duty is here to stay, despite speculation at one time to the contrary. And the Revenue are likely to be more assertive than they have been in the past, because as they have said, the more creative taxpayers get, the more the Revenue will strive to get them to pay what they see as the right amount of tax.
End of the press gang? Not likely.
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June 2002 by