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Stamp Duty Land Tax (SDLT) – Mitigation Avoidance Schemes

Apr
2011

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Stamp Duty Land Tax

Stamp duty land tax (SDLT) is payable on the purchase or transfer of land where the value of the land is above a set threshold. These thresholds vary according to whether the land is freehold or leasehold, non-residential or residential or whether the transfer is part of a larger transfer of assets.

For those companies and individuals who do have to pay SDLT, the current top rate is 4% for properties over £500,000. This is due to increase to 5% for properties over £1million with effect from April 2011. Property sales of £600,000 can therefore attract a tax of £24,000.

In common with most tax laws, whilst SDLT seems simple, the underlying regulations are complex and it is important that current rulings are followed to avoid being faced with a sizeable tax bill in years to come. One of the benefits of that complexity is that there are legal ways to mitigate SDLT. However, it is vital that a tax law specialist is used when mitigating SDLT as an incorrect interpretation of the regulations will lead to fines and back taxes.

If you are considering SDLT mitigation the first piece of good news is that the vendor doesn’t need to be involved in the mitigation process. The purchaser is also free to use their own solicitor for the transaction although it is generally advisable to use a solicitor recommended by the mitigation specialist to avoid incorrect processes being followed and the tax becoming payable.

In summary, when considering transfers of property, the mitigation of SDLT is a legal method of tax planning. However, it is important that advice is taken from tax mitigation specialists who keep abreast of legislation and HMRC opinion. Prideaux Associates prides itself in having a 100% success rate in mitigating stamp duty land tax and ensures that its mitigation strategies are kept up-to-date.

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SDLT Avoidance Scheme Succeeds

Apr
2011

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HMRC have lost the first case involving an SDLT avoidance scheme to come before the tax tribunal. Although the taxpayer will be pleased to have won and the result seems correct, the reasons given by the tribunal for its decision seem unrealistic and in some respects may be wrong. The case was also notable for the absence of any argument by HMRC that this was a tax avoidance scheme and should have been dealt with as such under case law principles of purposive interpretation such as Ramsay. Instead HMRC adopted a relentlessly literal interpretation of the relevant SDLT rules and fought (and died) on that approach.

The case, called DV3 RS Limited Partnership v the Commissioners for Her Majesty’s Revenue and Customs (SDLT) to give it its official name, involved the purchase of the Dickens and Jones store in Regent Street in 2006 for £65m. Calling the seller A and the purchaser B, B would normally have had to pay SDLT of £2.6m on its acquisition from A. However B used a sub-sale into partnership scheme to reduce the SDLT to nil. The scheme worked by B on completing its purchase from A, immediately selling the property into a partnership (“C”) of which it and some associated companies were the partners. Under the relevant SDLT rules the sale from A to B would be disregarded if it completed at the same time as the completion of the B to C sub-sale. The sub-sale from B to C took advantage of the SDLT partnership rules which can reduce the SDLT to nil where the seller or persons connected with it are partners in the partnership buying the property. Result: no SDLT on either leg of the transaction.

Counsel for HMRC took an extremely literal approach and argued that the seller in this situation was A and not B. Hence C had acquired from a non-partner and full SDLT must be due. Counsel argued that if the legislation disregarded the sale from A to B then B did not have the property to sell to C. The tribunal commented that if B had never acquired the property then it could also be said that C had never received it which was going too far.

The taxpayer’s counsel argued that the seller must have been B because it was the completion of the B to C contract under which C acquired the property.

In this and other types of A to B to C situation the SDLT legislation actually disregards both the real world A to B and B to C contracts and deems that a notional contract exists under which C is the purchaser. The SDLT legislation refers to this artificial contract as the “secondary contract”. Unfortunately the legislation is intentionally vague on whether A or B is the seller. The identity of the seller matters of course where, as here, if it was B then C pays no SDLT.

The tribunal held that the “secondary contract” was actually between A, B and C. Because B was a partner in C the tribunal said that there was nothing to prevent the partnership rules applying to C’s acquisition from B and hence no SDLT arose on C’s acquisition. This, said the tribunal, was unaffected by the fact that B had simultaneously acquired the property from A using another provision which removed the SDLT on that transaction.

Despite this being the correct result there are problems with the tribunal’s reasoning. Ignoring the mistake at para 79 of the judgment which refers to a payment by B to C as escaping tax when the judge must have meant a payment by B to A, there are two fundamental concerns. (The original version of the judgment which appeared on the tribunal website contained various worrying mistakes about the identity of A, B and C but most of these were subsequently corrected apparently without any mention that an amended version of the judgment had replaced the original version).

The problems revolve around the tribunal’s decision that the secondary contract was between A, B and C. First, this finding appears to have been unnecessary in order to arrive at a decision and to fly in the face of the statutory provision in section 45(5A) (b) Finance Act 2003 which provides that the seller under the “secondary contract” shall be either A or B. In deciding that the “secondary contract” with C has both A and B as parties to it the tribunal seems to have overlooked this even though the judgment quotes the statutory provision verbatim. In fact the tribunal said that they did not find the provision to have been of any help. At the very least one would have expected some attempt to explain the apparent inconsistency but there is none.

Second, treating A and B together as parties to the “secondary contract” appears to have been unrealistic in this case. The tribunal said that in cases where there was an assignment by B to C of his contract with A or where C had agreed to pay the balance of what was owed under the A to B contract directly to A, it was intended that A be a party to the “secondary contract”. This does not seem unreasonable. However in a single sentence without any reason being given the tribunal then goes on to say: “That suggests that the same is the case in relation to a sub-sale of the type in this appeal”. Er, why? No explanation for this conclusion was given and a moment’s reflection will reveal how unrealistic it is. If this transaction followed the usual course then when A sold to B it had no knowledge of C and may well have inserted a special condition in its contract preventing a sub-sale in the sense that A could not be compelled to transfer the property to anyone but B. If this was the case then it seems strange to decide that A was a party to the “secondary contract” with C given that A had no involvement or connection with C. Surely the sensible conclusion would have been to decide that in this type of sub-sale the parties to the “secondary contract” are B and C. The tribunal could still have reached the same conclusion that C escaped tax without the unnecessary and difficult conclusion that both A and B were parties to the “second contract” with C.

Despite the flaws in the judge’s reasoning this case represents a strong win for the taxpayer. Reliance on a blatant tax avoidance scheme did not affect the literal operation of two different parts of the SDLT code when combined together to produce a nil tax result.

This transaction occurred just before the introduction of the general statutory anti-avoidance provision in section 75A FA 2003 in December, 2006. What of similar transactions undertaken post-section 75A? These were effectively exempted from section 75A until the changes made by section 55 FA 2010 from March, 2010. So transactions up until at least then are probably covered by this judgment. There are also flaws in the changes made by FA 2010 but that is a different story. HMRC may well appeal the decision and if so it remains to be seen if they stay with the same approach on appeal.

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Details of two forthcoming tax conferences

Mar
2011

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A 15 Old Square Client Seminar to be held on 30th March 2011 at One Aldwych followed by lunch in Axis restaurant at which GR Bretten QC will discuss his experiences with CGT entrepreneur’s relief and Patrick Cannon will consider current issues in SDLT litigation and enquiries: Now fully booked

The LexisNexis Commercial Property Tax and SDLT Conference 2011 to be held on 9th June 2011 and chaired by Patrick Cannon

For details and booking : http://www.conferencesandtraining.com/property-tax

and: http://www.conferencesandtraining.com/Browse-Events/Tax/Stamp-Duty-Land-Tax—Pm–Jun-11/

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Mitigate Stamp Duty Land Tax (SDLT) on Residential Land or Property

Mar
2011

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As of 6th April 2011, Stamp Duty will increase on property exceeding £1m to 5%. This means you could be liable for an SDLT bill of £50,000. If you are buying now or later this year, contact us as we could help you save money and make a property more affordable.

Reduce the cost of buying a property
Residential & Commericial Property
Mitigates 100% of Stamp Duty

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SDLT & The Budget 2011

Mar
2011

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1. HMRC has made a statement to the effect that they intend to change the relief pertaining to sub-sales under s.45 of the Finance Act 2003. This is something which HMRC has attempted to do on numerous occasions in the past, culminating in the introduction of the anti-avoidance legislation s.75a.

There is a widely held belief amongst various learned Counsel that the anti-avoidance legislation does not work; this is borne out by the fact that HMRC has chosen not to subject this legislation to a vigorous test in court. Furthermore, HMRC recently lost a landmark tribunal hearing on SDLT sub-sale relief.

Therefore, until such times as the detail of any amendments to the legislation are made public, or a legal precedent is achieved in a court of law, we are confident that our planning is effective and will continue to make it available to our clients. Undertakings pertaining to insurance and ‘no win/no fee’ will remain in place.

2. Mention was also made of the Alternative Property Finance relief pertaining to the Sharia Law exemptions, namely s.71a and 73b. Whilst we do have options and step plans on these arrangements, we have never deployed it. Therefore, these changes will have no effect on our ability to deliver robust tax planning solutions to our client base.

3. Other comments were also made about the “sale of lessors anti-avoidance legislation. ” This is a technique we have neither used nor have any intention of using or developing as a product offering.

4. Similarly the reference to “degrouping charge rules affecting corporate gains” is not a relief we take advantage of as the target market for this is relatively niche. This is essentially a statutory exemption and therefore far easier for HMRC to attack than some of the other more complex and far reaching legislation.

Therefore, until either a legal precedent is established in a court of law and/or we have clarity on the proposed changes to sub-sale relief, our stance is that we will continue to liaise with Tax Counsel and offer planning until such time as the aforementioned changes – if they are ever implemented by HMRC – force us to re-engineer the planning.

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Stamp Duty Land Tax (SDLT) Mitigation

Mar
2011

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Stamp Duty Land Tax (SDLT) is generally payable on the purchase or transfer of property or land in the UK where the amount paid is above a certain threshold.

Our SDLT mitigation scheme eliminates the SDLT payable when purchasing either commercial or residential property. The entry level for the scheme is £250,000. SDLT mitigation is deemed to be very low risk and non-aggressive, below £1,000,000 SDLT mitigation planning is not notifiable to HMRC.

Our SDLT mitigation is carried out in-house, based on our original counsel.

A worked example

Residential property, purchase price	£750,000
SDLT payable at 4%:	£30,000
Fee for SDLT mitigation is 40%:	£12,000 (of the SDLT payable)
VAT (at 20%):	£2,400

Overall saving:	£15,600

This scheme takes account of legislation changes made in the pre budget of December 2006 and in particular s75A Finance Act

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Budget 2011: Market predictions

Mar
2011

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Market pre-Budget predictions ahead of Chancellor George Osborne’s announcement on Wednesday.

The Chancellor of the Exchequer will make his Budget Statement to the House of Commons on Wednesday 23 March 2011 at 12.30pm.

Pre-Budget comment from Alan Robinson, of estate agents Robinson Jackson:

“We would like to see more done to encourage first-time buyers into the marketplace. Most importantly, the Government needs to encourage lenders release more 90% and above mortgages, as these are virtually the only way first-time buyers can get on the property ladder.

“It’s such a shame as there’s some great affordable housing stock out there but no means for first-time buyers to finance a purchase.”

“Stamp duty also remains an issue. Although first-time buyers are exempt from paying stamp duty on a property purchases under £250,000, this ‘holiday’ is due to expire on 24th March 2012. We’d like the coalition to pledge to keep this beneficial arrangement until at least 2013.

“Across the Robinson Jackson group we have 1,182 properties for sale under the 1% stamp duty threshold, and we want first-time buyers to have maximum time to take advantage of these affordable properties. If we see some 95% mortgages becoming more widely available and the stamp duty holiday extended, the Government has a real opportunity to inject new vigour into the property market.

“At the bare minimum, we would like the current stamp duty arrangement to remain in place and not be scrapped – first-time buyers are the lifeblood of the property market so they need every reason to get on the property ladder.

“We also wait to see if the 1% threshold is changed from £250,000 to something lower. We know stamp duty is a great revenue generator but the property industry is a vital part of the UK’s economy so it must be protected and encouraged to flourish.”

Pre-Budget comment from property portal FabricProperty:

“The biggest issue in the forthcoming Budget, where property is concerned, is the new 5% Stamp Duty Land Tax on all homes sold over £1 million. This new tax is due to be introduced on 6th April 2011 and was instigated by the previous Labour Government.

“This new Stamp Duty tax band is a great revenue generator, and in this harsh financial climate it would be a total shock if the coalition decided to abolish it. Plus, as many of the buyers of multi million pound properties are foreign nationals, the coalition won’t be too bothered about alienating those affected after 6th April, as the minority won’t be the UK’s voting public.

“Here at FabricProperty where many of the homes listed on our website are priced at above £1 million - we’re more concerned that the coalition will take austerity measures even further and increase the new 5% tax to something higher, maybe even 10%.”

Pre-Budget comment from Penny Shepherd MBE, UKSIF chief executive:

“Today, the UK is widely recognised as a global leader in green financial services. There is a real risk that our international competitiveness in this growing market will be seriously damaged if we are not seen to recognise the urgency of financing our own low carbon transition.

“The Green Investment Bank must have a clear and rapid timetable for large-scale bond issuance both to support the UK’s continued leadership in this important sector of financial services and to enable the broader UK economy to benefit from green growth.”

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Halifax reveals 500% rise in homes hit for Stamp Duty

Mar
2011

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A 140% rise in house prices in the last 10 years has resulted in a five-fold increase in the number of homeowners qualifying for Stamp Duty, according to new research from Halifax.

Some 26% of UK homes were valued at over £250,000 last year, and so qualified for the minimum Stamp Duty rate of 3%, which is over five times the 5% of homes sold for more than £250,000 in 2000.

The lender estimates that there are now around five million UK homes valued above the £250,000 threshold – which the government made the lowest threshold last March in a bid to help first-time buyers – which compares with 875,000 in 2000.

Stamp Duty for homes valued at £1m, which was increased from 4% to 5%, will take effect next month.

The top thresholds of £250,000 and £500,000 have been unchanged since July 1997, despite a 140% increase in house prices over the period to January 2011. Halifax claims that the £250,000 threshold would now be £600,000 and the £500,000 band £1.2m if the government had increased them in line with house price inflation since July 1997.

The lender’s research, which comes ahead of the chancellor’s 2011 budget next Wednesday, also claims that revenue generated from Stamp Duty has risen by 12% from £2.9bn in 2008/09 to £3.3bn in 2009/10, but has more than halved since its peak of £6.7bn in 2007/08 due to the decline in both prices and transactions.

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Permanent Exemption From Stamp Duty

Mar
2011

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The Building Societies Association is calling on the government to make the exemption from Stamp Duty for first-time buyers on properties under £250,000 permanent.

Ahead of the chancellor’s Budget Report on March 23, the trade body is urging the coalition to take action to help savers and borrowers and promote competitive and equitable financial markets.

Adrian Coles, director-general of the BSA, says: “Obtaining a mortgage remains very challenging for first-time buyers, who must raise a large deposit. Transaction costs act as a further barrier to house purchase, so we call on the government to make permanent the exemption from Stamp Duty for first-time buyers on properties under £250,000. -

“The government should also go a step further and look at reforming the current slab structure of the tax – it’s time Stamp Duty for all buyers was reviewed.”

He praised the government for its commitment to the continuation of Mortgage Rescue and the 12-month extension to the Support for Mortgage Interest criteria.

But Coles adds: “We would, however, urge the government to consider paying SMI at the same rate as the borrower’s mortgage to ensure that vulnerable borrowers continue to receive adequate support.”

He says the BSA also welcomes the coalition’s commitment to foster diversity, promote mutuals and create a more competitive banking industry, adding it would be good for competition to keep a reformed Northern Rock independent of the big banks.

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CML calls for Stamp Duty overhaul

Mar
2011

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The Council of Mortgage Lenders has called for a shake up of the Stamp Duty system after criticising the inconsistencies of current taxation policy.

In its News and Views newsletter today, the trade body says the introduction of a higher rate of Stamp Duty on residential property purchases of more than £1m in next week’s Budget may be seen as an innocuous tax on the rich but is in fact by no means trivial from an overall fiscal perspective.

The newsletter says: “Unfortunately, perhaps the greater significance of the move is that it exposes both the increasingly arbitrary nature of residential property taxation and the increasing reliance of the government on the yield coming from higher-value property transactions.”

The CML argues there is a strong case for reforming Stamp Duty, because it is quite possible residential property transaction volumes will not recover strongly over the next few years, and government revenues from Stamp Duty will therefore be disappointing.

It says: “In particular, a switch away from the ‘slab’ structure to a marginal rate system similar to income tax would create fewer disincentives to purchase properties near tax thresholds, improve the liquidity of housing and labour markets and deliver a more stable tax base over time.

“It would also allow the government to articulate a more credible, coherent and longer-term policy in relation to first-time buyers and home-ownership.”

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