Save content
Have you found this content useful? Use the button above to save it to your profile.
AIA

TaxZone Newthwire 42: Stamp Duty Land Tax

by
1st Jan 2005
Save content
Have you found this content useful? Use the button above to save it to your profile.

TaxZone Newthwire
Issue 42 - 5 January 2004
Available on subscription at:
https://www.accountingweb.co.uk/premium_content/newthwire

 

Want the Newthwire in a downloadable Word format? Click here.

NOTE. This document is password protected. To open the document choose the read-only option when prompted.

Editorial note

The subject of Stamp Duty Land Tax may be perceived as a complete 'turn off' by many practising accountants. What has it got to do with me? Surely this is something that lawyers deal with?

 

These questions may be valid up to a point, but nevertheless there are issues in the new legislation, which operated from 1 December 2003, which concern every professional, as well as many lay individuals.

Regards,
John T Newth
mailto:[email protected]

Disclaimer
No responsibility for loss occasioned to any person acting refraining from action as a result of any information in his wire is accepted by the author or AccountingWEB. In all cases, appropriate professional advice should be sought before making a decision.

Stamp Duty Land Tax
I will summarise now some reasons why the new tax should be taken seriously:

 

  • Previously stamp duty has been, to some extent, a voluntary tax. Stamp Duty Land Tax comes within the self-assessment regime, and purchases of property cannot be registered unless they are properly certified.

     

  • Because of the need for the agent of the purchaser to file a self-assessment return extending to eight pages, it is likely that solicitors' fees on property purchases will increase. Some have suggested £50 as an addition, but one suspects that the true cost will be much higher.

     

  • Many leases will be subject to Stamp Duty Land Tax on their net present value (NPV). This has relevance to the accountancy and tax professions.

     

  • The rate of stamp duty on land and buildings increases sharply from 1% to 3% for purchases in excess of £250,000. Thus the tax on a purchase at £250,000 is £2,500, whereas the tax on a purchase at £250,001 is £7,500. Well-publicised schemes have been highlighted whereby two separate purchases are entered into where the value of the property is just over £250,000.

    The suggestion has been that a value is placed on fixtures and fittings so that the property purchase retains 1% duty and the remaining contract is for fixtures and fittings. Similar considerations apply at the £500,000 point, although the increase in tax at that point is only 1% from 3% to 4%.

    While such an arrangement is perfectly legal, intending purchasers and their professional advisers should be warned that any attempt to manipulate the values fraudulently will be investigated by the Inland Revenue. The facility for enquiry is similar to that under the existing self-assessment system, and the Revenue have stated specifically that they will investigate routinely a percentage of cases where the property price is certified at just below the £250,000 mark. It should also be remembered that fraudulent evasion of tax is a money laundering offence.

     

  • The new legislation, which has been rushed through Parliament, and is extremely complex in parts, is expected to raise £5 billion in 2002/2003. It is an example of yet another 'stealth tax'.

    The legislation
    To give some idea of the complexity of Stamp Duty Land Tax, one has to refer to the new legislation in Finance Act 2003.

    The provisions are contained in sections 42-130, 195 and 215-217, Finance Act 2003. Accompanying Schedules are numbered 3-20 and 40 of the same Act.
    http://www.legislation.hmso.gov.uk/acts/acts2003/20030014.htm

    Other resources
    As the date of 1 December 2003 drew near, SDLT became the focus of many articles in the professional press. Major focuses for research are:

    Inland Revenue
    The specialised area of the Inland Revenue website relating to stamp duty can be accessed, and this includes leaflets, books and returns.
    http://www.inlandrevenue.gov.uk/so/

    The Revenue website also includes a SDLT Manual.
    http://www.inlandrevenue.gov.uk/manuals/sdltmanual/

    Other resources include:
    # A book, Stamp Duty Land Tax by Matthew Hutton and Sharon Anstey, costing a variable amount for an online version, but £99 + VAT for one user and a hard copy of the book. This price incorporates online updating up to 31 July 2004. This publication has been reviewed on TaxZone.
    https://www.accountingweb.co.uk/item/120872/786/784/785

    # TaxZone guide by Matthew Hutton, 11 August 2003
    https://www.accountingweb.co.uk/item/116299/786/784/785

    # TaxZone, 6 October 2003 ' 16 page consideration by Matthew Hutton.
    https://www.accountingweb.co.uk/item/118441/786/784/785

    # Tax Adviser, August 2003 ' article by Patrick Cannon
    http://www.tax.org.uk/showarticle.pl?id=1894&n

    # A Chapter in the ICAEW Tax Faculty Tax Planning Review 2003/204 by Matthew Hutton.

    # Pages 89/91 of Whillan's Tax Tables 2003-04

    # Tax Journal Special Issue 3 November 2003

    # Articles in Taxation by Marc Selby, 9 October and 16 October 2003

    The Basics
    Stamp Duty has been with us in one form or another since 1694. Along the way various changes have taken place. In 1996 Stamp Duty Reserve tax was introduced. In 2000 stamp duty on intellectual property was abolished. Further abolitions were stamp duty on goodwill in 2002 and on debts in 2003.

    Now on 1 December 2003, Stamp Duty Land Tax, a compulsory self-assessed tax on land and buildings, came into operation.

    Rates of Tax
    The rates of Stamp Duty Land Tax on purchases of property are as follows:

    Residential property
    Relevant consideration
    Not more than £60,000: 0%
    More than £60,000 but not more than £250,000: 1%
    More than £250,000 but not more than £500,000: 3%
    More than £500,000: 4%

    Non-residential or mixed property
    Relevant consideration
    Not more than £150,000: 0%
    More than £150,000 but not more than £250,000: 1%
    More than £250,000 but not more than £500,000: 3%
    More than £500,000: 4%

    Leases
    In the original draft legislation there was no exempt threshold for leases. However, technical changes introduced on 20 October 2003 dealt with this, in order to put leases on the same level as property purchases.

    The tax chargeable on rents is calculated by applying a percentage to the net present value of the rent receivable under the lease (the 'relevant rental value) subject to a discount rate of 3.5% or such other rate as the Treasury may specify.

    Expert mathematicians will find para 2 of Schedule 5 to the Finance Act 2003 interesting, as it sets out the method of calculation. To those of us not versed in higher maths the calculation looks worse than Fermat's Last Theorem, but the Revenue have indicated that there will be a calculator on their website in order to make life easier.

    It should be noted that there is no Stamp Duty Land Tax on a licence, as opposed to a lease. Where the annual rent for the lease exceeds £600 there is no nil rate for a premium (which follows the Stamp Duty rule). The premium, however low, will be charged at 1% at least. Tax chargeable on a premium is in addition to tax charged on the rent.

    Stamp Duty Land Tax charged on leases is imposed as follows:

    Type of land: Residential
    Relevant Rental Value: 0 ' £60,000
    Rate: 0%

    Relevant Rental Value: More than £60,000
    Rate: 1%

    Type of land: Non-residential or mixed
    Relevant Rental Value: 0 - £150,000
    Rate: 0%

    Relevant Rental Value: More than £150,000
    Rate: 1%

    This is best illustrated by two examples, which I acknowledge as coming from the book by Matthew Hutton and Sharon Anstey and which formed part of Matthew's notes at the recent TaxAid conference.

    Example 1
    A lease of non-residential property is for an initial annual rent of £15,000 for a 10-year term. The net present value according to the calculation is £124,749. This is less than the exempt threshold of £150,000, so that no Stamp Duty Land Tax is due.

    Example 2
    Another lease of non-residential property is for an initial annual rent of £25,000 for a term of 20 years. The net present value is £355,310. The first £150,000 of this is exempt and the remaining £205,310 is charged at 1%, making SDLT payable of £2,053.

    Self-assessment
    We now turn to self-assessment and compliance. A return of the completed land transaction must be delivered to the Inland Revenue within 30 days of the effective date of the transaction. The return, which it is understood comprises eight pages, includes a self-assessment of the SDLT liability, and payment must accompany the return.

    Section 78 of and Schedule 10 to the Finance Act 2003 deal with returns, enquiries, assessments and related matters. I do not intend to discuss the provisions in detail, as they mirror the regime for income tax self-assessment very closely.

    There are provisions imposing flat rate and tax-related penalties. Also provisions for the amendment of a return by the taxpayer and correction of returns by the Revenue. Records must be preserved for six years, with a penalty for non-compliance. Inland Revenue Enquiries can be made into land transactions, up to 21 years after the transaction in the case of fraud or negligence. Determination of tax may be made in the absence of a return, and assessments made under the 'discovery' provisions where a loss of tax is suspected. Where an excessive assessment is made, appeals may be made to the General Commissioners or Special Commissioners.

    Interest on SDLT runs from 30 days after the effective date of the transaction. Similarly repayment supplement may be made from the date of payment of tax where there is an overpayment of tax.

    Registration
    No Land Registry registration of a transaction is possible unless a certificate of compliance with SDLT is produced. This may be in the form of self-certification by the purchaser or a certificate by the Inland Revenue.

    Exemptions and reliefs
    There are a number of exemptions from and reliefs from SDLT, as follows:

    • Transfers to charities for use for charitable purposes.
    • Transfers to bodies established for national purposes.
    • Gifts inter vivos.
    • Land transfers with groups of companies.
    • Land transferred in exchange for shares on company reconstructions and acquisitions.
    • Certain transfers to registered social landlords.
    • Certain leases granted by registered social landlords.
    • Property transactions in disadvantaged parts of the UK designated for this purpose.

    Areas designated as disadvantaged for the purposes or relief or exemption are set out in Statutory Instrument 3747 of 2001. Transfers of non-residential property are exempt from 10 April 2003. Transfers relating to lease rentals are also exempt from that date where the net present value of rent over the term of the lease is £150,000 or less. The exemption for transfers of residential properties, and non-residential property before that date, applies to transfers up to £150,000 and lease premiums up to £150,000 (unless annual rent exceeds £600). See any Answers query on this subject below.

    Any Answers
    There have been a few queries on 'Any Answers' recently regarding stamp duty, not necessarily regarding Stamp Duty Land Tax.

    Stamp Duty avoidance
    On 24 February 2003 David Melia disclosed that he was buying a house in the UK at a price in excess of £250,000. The vendors were leaving the UK to live in Jersey. Was there any way in which the contract could be signed in Jersey, thus avoiding UK stamp duty?

    Marc Selby confirmed that this idea would not work. Section 114, Finance Act 2002, which amends section 158, Stamp Act 1891 and which applies in respect of documents executed on or after 24 July 2002, puts documents which relate to UK land which are executed overseas on the same footing as regards penalties as documents executed in the UK.
    https://www.accountingweb.co.uk/item/104108/786/784/785

    Techniques to reduce stamp duty?
    Mike G posed a query on 17 March 2003. He had purchased a property from a property developer. He now had a deal with the developer to upgrade via part-exchange. Was there any way in which stamp duty could be reduced or was the upgrade treated as a new transaction?

    Nigel Fisher suggested the 'single sale route', which would not save Mike any duty, but would benefit the developer, who might then agree to a price adjustment. He ignored the possible use of another country and the 'resting in contract' device.

    The procedure would be to buy the new property and in a single contract specify that the consideration for the new property was £xxx + the old property. Further details of this can be found in Tax Bulletin 18 or the Inland Revenue Stamp office Manual, Chapter 4, instruction 4.89.

    Marc Selby confirmed that stamp duty would be payable on the more expensive property, but that it would not be possible to avoid duty generally unless one entered into one of the more aggressive stamp duty saving schemes, with all their risks.

    However it should be possible to avoid a charge to duty on the cheaper property that is being handed back to the developer. This is done by structuring the transaction as explained by Nigel Fisher ' the purchase price being the value of the cheaper property plus a cash sum. It is important that the documentation is correctly drafted, but this should be possible with the precise guidance given in the Tax Bulletin article. If the developer is able to save stamp duty on the transfer back of the cheaper property, this saving can be factored into the financial negotiations.
    https://www.accountingweb.co.uk/item/105676/786/784/785

    Stamp Duty on house purchase
    Steve raised a query about the 'chattels' scheme in a query dated 20 March 2003. His client was purchasing a new house for £257,500, on which the duty would be £7,725. The stamp duty at £250,000 would, of course, be £2,500. No more than £5,000 could be allocated to chattels and the vendor would not accept £255,000. Did subscribers have any ideas as to how the property purchase price could be reduced to £250,000 or less?

    Sean Randall & Archie Brown of KPMG confirmed that there was nothing to prevent the client from apportioning £7,500 to the chattels provided this was bona fide. The bona fide issue was emphasised by Marc Selby, who suggested that this transaction should be approached with caution. The Stamp Office takes a very dim view of the parties to a transaction making a contrived apportionment of the sale price in order to save stamp duty.

    Marc suggested one avenue of hope. If the construction works have not yet been completed, it might be possible to save duty, and to render the transfer of the property eligible for the incorporation of a certificate of value for £250,000 by complying with the requirements of Inland Revenue Statement of Practice SP8/93 in respect of 'new buildings'. However, one of the conditions of this statement is that the purchaser makes a transfer of a partly completed building. Having regard to the amount of stamp duty at stake, the client might not regard this as worthwhile.

    I would add two points to the excellent comments. If this transaction was to take place after 1 December 2003, then the Stamp Duty Land Tax would come within the self-assessment regime, with all its potential for enquiry, penalties and interest. In addition, any fraudulent attempt to manipulate values would be a reportable offence under the money laundering regulations.
    https://www.accountingweb.co.uk/item/105999/786/784/785

    Stamp Duty on Inter-Spouse Property Transfer
    A husband owns a property (which is mortgaged) individually. He is looking to transfer the property into joint names (he and his wife). Is stamp duty chargeable, asked Gary on 29 August 2003?

    There were a number of replies to this query. Brian Clarke observed that if the share of the property is being gifted to the wife, then the transaction is exempt from stamp duty as it falls within Category L, as specified under the 1987 Regulations.

    M Smith referred to the liability under the mortgage passing under the transfer. It if doesn't exceed £60,000, then stamp duty can be avoided. If the liability exceeds £60,000 then the possibility of a series of unassociated gifts should be considered.

    David Whiscombe confirmed that there is no exemption for transfers between husband and wife. However all depends on the terms of the transfer of interest. If liability for part of the mortgage is assumed by the wife, then that amount will count as consideration. If not, there is no consideration and no duty is due. If the conveyance is silent on this point it is assumed that liability has been transferred and duty will be due if the consideration exceeds £60,000.
    https://www.accountingweb.co.uk/item/117118/786/784/785

    Stamp Duty on concessionary sale of residential property
    Lee Pryor queried stamp duty on a sale at undervalue on 9 October 2003. Daughter and boyfriend are buying at a concessionary price of £69,000 from the daughter's mother, the market value of the property being circa £185,000. Were there any other tax implications?

    Both Dave and Alastair Johnston considered that stamp duty would only be imposed on the actual price of £69,000, with Dave observing that it was a pity that a figure of £60,000 had not been agreed. If the house had previously been the PPR of the mother then no CGT issue arises. For IHT the discount of £116,000 is a potentially exempt transfer.
    https://www.accountingweb.co.uk/item/118607/786/784/785

    Stamp duty on death estate
    John asked, on 24 November 2003, whether stamp duty is payable on property bequeathed in an estate. Jeremy Newman confirmed that transfers on death are exempt from Stamp Duty and Stamp Duty Land Tax.
    https://www.accountingweb.co.uk/item/120202/786/784/785

    Stamp Duty in Hackney
    Valerie mentioned that a client had been told by an estate agent that properties in Hackney are now exempt from stamp duty for values up to £150,000, in her query of 25 November 2003. Is this correct and where does find details of this scheme?

    Michael Haig suggested the link to http:www.inlandrevenue.gov.uk/so/pcode.search.htm. This concerns exemption from stamp taxes within a designated disadvantaged area. One needs to enter the postcode of the individual property on the Internet site in order to check eligibility.
    https://www.accountingweb.co.uk/item/120221/786/784/785

    Conclusion
    The contents of this wire are a bare outline of SDLT, and are a gross simplification of some very complex legislation. Issues such as sub-sales and transfers of rights have not been dealt with. Nevertheless it is hoped that the text will give practitioners a 'taste' of the new regime.

    What is quite certain is that SDLT will hit expensive leases very hard in its application.

    Ask a question
    Readers with a current case should post their query in Any Answers.

    JOHN T NEWTH
    https://www.accountingweb.co.uk/premium_content/newthwire

    Subscription Information
    Update your subscriptions by visiting the Profile page and
    selecting the "My Services" link.
    https://www.accountingweb.co.uk/profile

    Copyright (C) 2004 TaxZone. All rights reserved.

    TaxZone, 100 Victoria Street, Bristol, BS1 6HZ
    Tel:+44 117 915 9600 Fax:+44 117 915 9630
    http://www.taxzone.co.uk

Tags:

Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.