Since the election of the current Labour Government every Budget has brought increases in stamp duty. The top rate of stamp duty on property transactions is now 3.5%. At this rate property owners must consider stamp duty planning in order to realise the full value of their property holding.
There are currently a number of options available, some of which, in our view, do not work and some of which do. This note gives a thumb nail sketch of what is available.
A. Those best left alone
1. A Seller exchanges (commonly) gilts for real property structured as a sale of gilts in return for real property and some cash. Based on Stamp Office practice (see Inland Revenue Tax Bulletin of August 1995) the transfer of the real property is not itself a "sale". It would be difficult to demonstrate that the real sale was of gilts rather than a sale of real property - the documentation may be regarded as a "sham". It also relies on Revenue practice which may be regarded as concessionary and subject to withdrawal in the event of avoidance.
2. Shortly before sale and by agreement with the Buyer, a Seller grants a lease to an associated company at a premium or very low rent so as to reduce the value of the freehold. The freehold is transferred subject to the lease with the Buyer paying stamp duty on a low price. The associated company surrenders its lease to the Buyer by operation of law (ie without producing a stampable document) with no stamp duty arising on the payment for the surrender. This is a scheme which was held by the courts to be ineffective in the mid-1980's. However, see below for a variation on this which may be implemented in appropriate circumstances.
B. Those that can work
1. Resting on contract - provided that the contract is properly drafted it will not be stampable. The first Buyer (eg a developer) can complete his sale by directing his Seller to transfer title to the second Buyer with stamp duty being paid only on the second sale, the first Buyer obtaining the benefit of sub-sale relief.
2. The use of a nominee company (preferably non-UK) which would hold legal title. The Seller would contract to sell the beneficial interest in the property executing and retaining the contract offshore. The shares in the nominee company are sold; without stamp duty or SDRT if the nominee is a non-UK company. Provided that the timing of the separation of the legal and beneficial interests is right, the risk of attack by the Revenue is low. Often it will not be necessary for the contract to be brought onshore. Where it is executed on or after 1st October 1999 and it becomes necessary to bring it onshore an interest charge will be payable.
3. A Seller may transfer real property to a newly incorporated subsidiary and sell the subsidiary (attracting 0.5% stamp duty). The intra-group transfer would attract stamp duty relief provided there are no arrangements in place for the disposal of the subsidiary. It is prudent to effect the intra-group transfer before a specific Buyer has been identified. If a non-UK company is used, stamp duty or SDRT may be avoided altogether. Other tax issues need to be addressed. In particular (depending on values) it may be necessary for the subsidiary to be within the Seller's stamp duty group but outside the Seller's chargeable gains group (so as to ensure that any gain arises in the Seller and that the Buyer obtains a market value base cost in the subsidiary).
4. The arrangements in A2 above can be adapted. The Seller, on acquisition of the freehold interest, grants a lease to an associated company - the difference is that at that point there is no certainty at all of a sale happening in any particular way or at all. Care needs to be taken to preserve capital allowances and neither the acquisition by the Seller nor the ultimate sale to the Buyer will attract TOGC relief for VAT purposes. To compensate, the cashflow costs can be reduced or even timed to advantage with planning.
5. Where the Seller or Purchaser are single companies or corporation tax grouping within either of their "economic groups" is not required the Seller may be grouped for stamp duty purposes with the Purchaser (or vice versa) through the issue of special shares. Advantage can then be taken of intra-group stamp duty relief for transfers between them.
6. A more complex version of B2 would be for the nominee to hold the property for partners in a (limited) partnership. A sale of the property interest can be achieved by a sale (offshore) of the partnership interest.
It can be seen from examples B2, B3 and B4 that successful stamp duty planning is best carried out by the property owner giving early consideration as to how best to package the property for sale. Whilst this means a certain amount of work to effect the change, the cost of doing so at an early stage will be more than outweighed by the saving of stamp duty by the Buyer. If the Buyer saves duty, the Seller has every chance of sharing in that saving by receiving a higher price on the sale, particularly if (as is feared) the rates go even higher in the years to come.
If you would like more information on any of these schemes, please contact Mark Nichols (Tel 0171 367 2051 e-mail [email protected]) or Richard Croker (Tel 0171 367 2149 e-mail [email protected]) of the Property Tax Team.
Social Media cookies collect information about you sharing information from our website via social media tools, or analytics to understand your browsing between social media tools or our Social Media campaigns and our own websites. We do this to optimise the mix of channels to provide you with our content. Details concerning the tools in use are in our Privacy Notice.