7 October 2002
This has increased the importance of stamp duty considerably in relation to individual property transactions, and also for the Government, since it is expected to raise £8.2bn this year for the Treasury. And yet stamp duty is an antiquated tax, based on principles first set out in the late 17th century and requiring the physical application of (specially formulated ink) stamps onto documents.
It has been very easy to structure transactions to reduce or avoid a stamp duty charge. This is partly because it is a tax on documents and partly because it is a voluntary tax (there are currently no penalties for failing to pay stamp duty unless it is necessary to rely upon the document for some form of registration or in court). To preserve the tax base, bring stamp duty in line with more modern taxes and create a regime which supports the Government's e-business agenda (in particular the introduction of electronic conveyancing systems), the Government has announced the modernisation of stamp duty.
This decision was announced in this year's Budget and commenced with a consultation document upon which comments were invited by 19 July. This was the start of a genuine effort by the Inland Revenue to consult with the very wide stakeholder audience and has seen the setting up of seven committees with representatives from the Law Society, the Royal Institute of Chartered Surveyors and the Confederation of British Industry as well as a host of tax and property specialists. This wide level of consultation is necessary because the proposed modernised form of stamp duty (MSD) is a completely different tax to the current stamp duty and must be able to operate in conjunction with electronic conveyancing. Such a comprehensive change to taxation could not be successfully introduced without the widespread involvement of the property industry, and there is a lot of concern that the new tax will have a dramatic impact on property transactions.
MSD is to be based on two principles which make it fundamentally different to current stamp duty. The first is that MSD would be triggered by the transfer or grant of (or agreement to transfer or grant) a relevant right in UK land, in return for value. The second is that the purchaser in the transaction will become the "liable person" and will be required to provide details of a chargeable transaction to the Revenue and pay the appropriate amount of MSD. These two changes in themselves will alter the way that many property deals are structured.
For example, property developments will be affected. Developers often structure deals so that either they enter into an agreement to purchase land, develop the land and then sell it on by way of sub-sale, or they enter into options or agreements for lease which are not stamped unless the development is pursued. If the development goes ahead stamp duty is payable on the sub-sale, exercise of option or grant of lease. It is proposed that MSD will give rise to an obligation to pay tax on options, agreements for lease and in circumstances where sub-sale currently applies. This will significantly increase stamp duty payable on development projects (including those which never go ahead) and will affect the viability of a development project. The Revenue estimates that MSD will raise an additional £450m of tax and that 5 per cent of transactions which take place under the current regime will not be viable in the future. The impact may be far greater on developments than other types of transactions.
There are also radical proposals in relation to leases. These are on the basis that as the value of a freehold depends upon the total price paid for that freehold, so the value of a lease depends upon the total premium plus rent payable under the lease. However, the relationship between the value of a leasehold interest and the value of a freehold interest is not straightforward. For example, if a company buys a freehold for £2m it is reflected in the accounts of the company at that value and could be sold on for value. However, if the same company pays £2m in market rent, then it does not acquire an asset with a market value of £2m. It could not be sold on for any significant value and may not be shown in the accounts as having any value. There is no financial benefit to a tenant in having a lease granted at market rent for, say, 30 years compared with market rent for five years. It therefore seems inappropriate to charge stamp duty on aggregated rental payments at the commencement of a lease as if they were a premium.
There are two issues in relation to stamp duty that are not proposed to be changed but which, at the moment, give rise to very unfair consequences. Apparently, the Government intends to keep the existing rate structure for stamp duty. The 'slab' system currently used gives rise to the strange phenomenon whereby an increase in the consideration by £1 (from £250,000 to £250,001) can more than treble the amount of duty payable on that transaction. This leads to distortion of the property market around each of the threshold boundaries with few properties being marketed for sums only slightly in excess of each threshold. The other issue is that stamp duty is charged on the VAT-inclusive price. Therefore, both the amount of duty and the rate of duty can depend upon whether or not the seller of property is charging VAT. The introduction of MSD will be the ideal time to deal with these two anomalies.
There are many other matters that have been raised with the Revenue and both these and the Revenue's responses are to be published in the near future.
The Revenue recognises the huge training commitment that the introduction of MSD will entail and has commenced training within the Revenue already. Effectively more than 200 stamp taxes employees will need to become familiar with both the detail and the principles of an entirely new tax. This is not a tinkering with stamp duty, this is a new tax based upon entirely different concepts and the Revenue is already beginning to introduce the new principles that will need to be understood by Revenue officers.
Outside the Revenue there will also be a huge need for training. Not only within firms of solicitors and for in-house lawyers but also banks and financial institutions and many parts of the property industry. There is no doubt that a change to stamp duty is long overdue but for many people it will not be welcomed. However, it is good to see the way in which the Revenue is involving the property industry and tax professionals.
This article has been written with the help of the Inland Revenue Stamp Taxes but does not necessarily reflect the Inland Revenue's views.
Robert Jones is a tax partner at Eversheds