Duty-bound

Seldom a day goes by without a new stamp duty structure being pitched to a client. Over the last few years, real estate lawyers have become familiar with selling real estate through various corporate forms. This was only because the Government has increased rates of stamp duty on sales of property from 1 per cent to 4 per cent. As a direct result of these rate increases, various structures were adopted to mitigate this up-front cost.
The most popular routes were to sell the company that owned the property, the shares only being subject to duty at 0.5 per cent; another option was the more elaborate 'split schemes', where the legal title was transferred through a nominee company and the beneficial property interest passed through an uncompleted contract. In both cases, property lawyers had to grapple with either share purchase agreements or their corporate colleagues to carry out transactions that previously would have just involved straightforward property documents.
The recent budget, though, has signalled an end to all this. The Government has announced two broad initiatives to deal with what it perceives as this unfair avoidance of the tax by certain sections of the property industry.
First, the Government has introduced various reforms to the current stamp duty regime. The main reform will effectively apply stamp duty to split schemes where these are exchanged following royal assent of the Finance Bill, which is expected some time towards the end of July. Also, if real estate was put into a company after 23 April and an exemption or reduced rate of duty was claimed, then the future sale of that company within two years will now trigger a 4 per cent stamp duty charge, which is based on the market value of the property when it was transferred to the company. Finally, from royal assent, there will no longer be any advantage in executing and holding various real estate documents outside the UK – from that date, interest and penalties will run on documents relating to land just as if they had been executed in the UK.
Although these changes will have a significant impact on the way in which real estate deals are effected, real estate lawyers will still have to deal with corporate transactions because sales of pre-budget special purpose vehicles will still work and split schemes will still be undertaken up until royal assent in July. Property lawyers can probably expect a rash of such deals before then, with the real estate market taking a breather in August.
The change does not stop here.
Second – and more significantly for the long term – the Government is planning to introduce a completely new tax to apply to the transfer and leases of UK land. This is based on stamp duty reserve tax, which currently only applies to shares. The new tax – a stamp duty land tax (SDLT) – will have a much broader base and will apply not only to transfers or leases of UK real estate, but also to any transfer value in relation to such real estate. The tax, which will be at the same rate of 4 per cent, will therefore apply to a much wider range of transactions than before, such as variations of leases and surrender of rights. The Government has produced a consultative document outlining its vision of SDLT, but is seeking the industry's comments and suggestions on its proposals. (See box for some of the most significant aspects of the proposed tax.)
The one thing that is clear from the consultative document is that the Government is determined to stop all the various ways in which the tax has previously been avoided on property deals.
While the Government is looking for consultation on how the new tax should work and be applied, it is not at the moment interested in any debate on the level of the rate of duty in the commercial sector.
It is to be hoped that, provided the consultation process works well, the property industry, including real estate lawyers, can then lobby the Government effectively to introduce lower rates of stamp duty on property transactions in the future so that this important market, for both clients and lawyers, can continue to operate efficiently and with the same degree of liquidity.
Jonathan Evans is a partner at Linklaters

Stamp Duty – what to expect

• Stamp Duty will no longer be applied to documents but will instead relate to transactions and be due generally when a payment of money is made rather than when a document is produced. In future, real estate lawyers will have to fill in a form and arrange for the tax to be paid, probably based on an estimate of the consideration rather than a submission of the documents for stamping to the Stamp Office before having them registered.
Eventually, when e-conveyancing is introduced (no earlier than 2005), stamp duty will be collected through the e-conveyancing process. Clients will in future be under an obligation to report a taxable transaction and so the tax will no longer be voluntary, as it is now.
• A stamp duty land tax (SDLT) may be levied not only on the price, premium or rent paid for a piece of real estate, but also on certain services provided in exchange. Currently, the value of such services is not subject to stamp duty. These could cover the value of development or building services and other services associated with real estate. If SDLT taxes these services, then it may have a severe impact on some developments and many PFI or outsourcing-type deals, where often real estate is transferred to the developer/service provider in return for a range of services, and not just accommodation.
• The Government seems determined to reduce the length of leases in the commercial property market. Instead of legislating for this, it is proposing that duty should be paid on a new lease by adding up all the rent due under the lease and charging it at the rate of 4 per cent. This would certainly reduce lease lengths and would be a hard burden on major occupiers in retail and in other sectors.
• Most controversial is the Government's plan to levy stamp duty at 4 per cent on transfers of property special purpose vehicles. It envisages SDLT applying only where a substantial interest in such a vehicle is made (it suggests 30 per cent). The vehicle must be 'property rich'.
However, SDLT will apply not just to transfer of interests in companies, but also to partnerships, trusts and similar vehicles formed overseas that hold UK land and to transfer of interests in existing vehicles after SDLT has been introduced.
There is no suggestion as to how the tax will be collected on overseas purchasers of such vehicles, but presumably there will be a duty to report such transactions and it may be that some obligations will fall on lawyers in the UK advising on these deals. While the Inland Revenue has said it does not envisage this tax applying to the takeover of a publicly listed property company, it does not seem inclined to allow a blanket exemption for listed vehicles.