When is stamp duty not a stamp duty? When it is no longer a tax on written documents, but a tax on transactions. Lee Nuttall discusses the issues
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Key points |
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” Under new proposals, stamp duty will become a transaction-based tax ” Liability will attach to any significant payment made to satisfy a contractual obligation ” The amount of stamp duty payable on property transactions will increase dramatically if and when the Revenue implements these proposals |
The Inland Revenue’s consultative document, Modernising Stamp Duty on Land and Buildings in the UK, published on Budget day, heralds a seismic change in the stamp duty landscape. Modernisation of the regime is long overdue. The push for reform has been driven by plans to introduce a paperless conveyancing and registration system for UK land, and accelerated by the Revenue’s concern over the amount of successful (and exotic) avoidance, which represents a threat to the public purse.
The document sets out the Revenue’s proposals for a new type of stamp duty, and marks the beginning of discussions with interested parties. Provisions giving effect to the proposals will be included in the Finance Act 2003. The new regime is expected to be in force by December 2003.
Proposals
” All land and land-related transactions will continue to be subject to duty. Thus, transactions in freeholds, leaseholds, equitable interests in land and land options will continue to be caught.
” The rates of duty, the thresholds for certificates of value, and the way in which duty is calculated will remain unchanged.
” Documents will no longer be stamped. There will be a statutory requirement to give notice that a liability has arisen. In the first phase, before e-conveyancing goes online, buyers/lessees will have to notify the Revenue and pay duty on the basis of that notification. This will become unnecessary once e-conveyancing goes online, at which time the Land Registry will receive notice and collect duty as part of registration.
” Stamp duty liability will no longer attach to bits of paper, but to value passing between the parties – central to modernisation, and a radical departure from the present regime.
” Duty will be due on value passing, whether in the form of cash or moneys worth. This will affect a number of well-known exemptions from duty. For example, building services that form part of the consideration will become subject to duty. This is likely to have a significant effect on commercial property development and the way in which transactions are structured.
” Since 1994, exchanges of property have, potentially, been subject to double duty: one charge on each transfer. Where “equality” money is involved, only one tranche of stamp duty need be paid – a device formally blessed by the Stamp Office. The Revenue proposes to revoke this concession, thus causing particular dismay to housebuilders.
” The Revenue intends to bring overage payments – the amounts being contingent or unascertainable at the time of the transaction – fully within the charge to duty. The way in which it does so will depend upon the reaction to the proposals.
” The Revenue plans to bring duty payable on leases more into line with duty payable on freeholds, so that the decision as to whether to buy or to lease a property is not affected by the amount of duty to be paid.
” It is unclear whether subsale relief will survive. If A contracts to sell to B, and B (before taking a transfer) contracts to sell to C, with A conveying direct to C (at B’s direction), there should be only one charge to duty. If the new regime is based upon value passing, two different “value shifts” clearly exist, and, without relief, two separate charges will therefore arise.
” Companies that regularly deal in land might be allowed to report, and account for, stamp duty on a quarterly, rather than on a transaction-by-transaction, basis. This is likely to dovetail with the mechanics for quarterly accounting for self-assessment.
” Taxpayers have 30 days from the date upon which a document is executed to pay stamp duty. Settlements will be accelerated when e-conveyancing goes online.
Special purpose vehicles
The Revenue is clearly frustrated by the use of special purpose vehicles (SPVs) to reduce stamp duty exposure (from 4% on land transactions to 0.5% on shares in UK companies). It plans to bring within the 4% rate any transfer of a substantial interest in certain qualifying entities whose major activity includes the ownership or exploitation of UK land, and whose assets consist primarily of interests in UK land and buildings. This will catch future transactions by existing SPVs.
Comment
The current stamp duty regime requires modernisation. It will not work in a paperless, electronic regime. The Revenue has proposed some good ideas, which, if they make stamp duty administration easier and conveyancing quicker, should be supported.
But some proposals – eg those relating to SPVs – need further revision to make them workable. I see no reason why the current statutory and extra-statutory exemptions should not be available in the new regime. There is no justification for extending stamp duty to forms of consideration that are currently exempt from duty, or revoking subsale relief and subjecting land exchanges (with equality money) to double duty. The amount of stamp duty on property transactions will increase dramatically if these provisions are enacted.
The deadline for responding to the Revenue is 19 July. The property industry needs to voice its concerns loud and clear.
Visit www.inlandrevenue.gov.uk/consult_new/mod_stamp_duty.pdf for the consultative document
Lee Nuttall is a property tax partner at Wragge & Co
