Tax law

Stamp duty alert - Budget changes

The stamp duty changes announced in the Budget will affect vendors and purchasers of land and buildings at all levels of the market.

This article only deals with the changes in the Finance Bill 2002.

The changes in the Finance Bill are largely measures pending the wholesale changes to stamp duty that will be introduced by the Finance Act 2003, which will, among other things, transform stamp duty into an assessable tax on which the Revenue is consulting.

First, conveyancers will be aware of the exemption for transfers and leases of land under the value of 150,000 in 2,000 less affluent wards throughout the UK.

The Stamp Office provides an on-line postcode checker.

If the European Commission approves the state aid application, this relief will be extended to include all transfers of land which are not residential property, so commercial properties in these areas can be purchased free of stamp duty.

Residential property broadly means dwellings, land and gardens forming part of the dwellings, and any interest therein.

Second, there is a new claw-back on relief claimed under section 42 of the Finance Act 1930 and section 76 of the Finance Act 1986.

These changes have already taken effect for documents executed after 23 April 2002 (unless pursuant to a contract entered into before17 April).

Section 76 provides a reduced rate of duty (0.5%) on a transfer of property where the acquiring company - typically a special purpose vehicle (SPV) - acquires the whole or part of the undertaking of a company in return for the issue of shares.

This section has historically been used for internal reorganisations, but has recently been used to save stamp duty on purchases of land by an identified purchaser.

Land could be transferred into a SPV at 0.5% stamp duty cost, which could then be sold attracting an additional 0.5% stamp duty, thereby triggering a total stamp duty cost of 1% as opposed to 4%.

The relief will not now be available if immediately before the transfer to the SPV there is an arrangement with a purchaser to acquire the shares issued as a consideration.

Furthermore, there will be a claw-back of the relief if, within two years of the execution of the land transfer, there is a change of control of the SPV.

Change of control will not include any change arising from an exempt transfer, or a transfer within the stamp duty group, of the shares in the acquiring company.

An exempt transfer includes an assent on the death of a major shareholder in the acquiring company, within the exempt instruments regulations.

Section 42 of the Finance Act 1930 provides an exemption from stamp duty for transfers of property within a stamp duty group.

Owing to historic anti-avoidance legislation, it is only available where there is no arrangement, including non-binding arrangements, for the transferee to leave the stamp duty group at the time of the transfer.

Now, if the transferee leaves the stamp duty group within two years of a transfer of land the stamp duty charge will be reinstated with retrospective interest.

The Inland Revenue says this provision will be operated strictly, and could apply in innocent situations, for example, liquidation of the transferee.

Both of the claw-back provisions will be enforced and assessed in a similar way to stamp duty reserve tax.

The Revenue will have wide powers to collect the tax from any director of the transferee company or a company having control of the transferee at the time of the transfer within the stamp duty group.

Before the Budget, single purpose companies seemed to be an attractive way of holding properties.

However, the new stamp duty arrangements will make it uneconomic to hive down a property into an SPV for onward sale within two years.

Furthermore, subject to consultation, when the new stamp duty regime is introduced, the purchase of property-owning companies will attract the same rate of stamp duty as the underlying land.

Third, there is a new exemption for documents which transfer goodwill after 23 April 2002.

Stamp duty will still be payable on the purchase of debts and choses in action, although this is intended to be abolished next year.

Fourth, from Royal Assent to the Finance Act 2002, contracts for the purchase of land for a price exceeding 10 million (including VAT) will themselves become stampable, if a transfer is not executed and stamped within 90 days.

Duty paid on such contracts can be denoted against duty due on the transfer, or will be repaid if the contract is rescinded.

The Stamp Office can extend the 90- day period if the price has not been paid.

This is important, because only a properly stamped document can be relied on, for example, in litigation.

It is not yet clear whether a vendor would be able to rely on an unstamped contract.

A transaction cannot be reduced to a number of contracts, because the rule applies to a series of transactions and parts of a larger transaction.

The Revenue has promised to issue a statement of practice indicating how it will interpret this provision, and grant extensions, for example, in the context of the buyer waiting for planning permission, and how the change will interact with subsale relief.

This rule was introduced to counter tax avoidance achieved by the popular split title scheme, which relied on the parties to a transaction resting on contract.

The scheme is still possible for properties of less than 10 million, and for contracts entered into before Royal Assent although care is required.

Fifth, the Finance Bill 2002 widens the penalty regime, so that documents relating to and executed outside the UK will become liable to penalties if not stamped within 30 days of execution.

The clause is widely drafted, and could theoretically catch offshore transfers of shares in foreign companies which own UK land, although in reality it is unlikely that the purchaser would ever have to rely on that transfer in the UK.

In conclusion, stamp duty on land and property is in a period of flux, pending the progress of the consultation process for the major structural changes in 2003, and care is needed with structuring the holding of properties.

By Peter Young, Nicholson Graham & Jones, London