Stamp duty land tax (SDLT) is currently four per cent. It is due to be increased to five per cent. in respect of residential property transactions taking place after 6 April 2011. Without any tax planning, this would represent a substantial cost and, since SDLT was introduced, a lot of thought has been given to ways of saving it.
Normally, a taxpayer will try to save SDLT by seeking to qualify for a relief from it (for example, reliefs available under the SDLT regime applying to partnerships or sub-sale relief) or will seek to save a buyer SDLT by placing the property in a “wrapper”, the transfer of which does not attract SDLT. This would include offshore companies and property unit trusts (PUTs) although it is considered that, more recently, PUTs have been perceived by overseas investors as complicated vehicles and have proved less popular.
For some time, the Government has sought to restrict the availability of tax reliefs by the imposition of a series of anti-avoidance rules, most notably section 75A Finance Act 2003 (section 75A) which sought to identify a chain of “connected” transactions and charge SDLT on a notional transaction between the “seller” and the “buyer” of the property at either end of the chain.
Section 75A is subject to a number of anomalies and practical difficulties which have not been helped by HMRC interpreting the rules seemingly arbitrarily, sometimes very aggressively and sometimes more favourably than most advisers expected.
One scheme at which section 75A was aimed involved the transfer of property to a company which would, immediately upon acquisition of the property, distribute it to the “buyer”. The transaction would seek to avoid SDLT on the basis that sub-sale relief exempted the first transfer of the property and SDLT did not apply to a distribution.
It is understood that HMRC considered challenging this scheme even before section 75A was introduced. However, the better view is that, provided such a scheme was properly implemented before section 75A was introduced, it would not have attracted SDLT.
Even after the introduction of section 75A, some advisers have argued that this type of tax planning may still be effective. This advice is considered aggressive but, in some cases, logical. HMRC, however, disagrees. Recently, in HMRC’s “spotlight” on tax avoidance issued in June 2010, HMRC stated that it considered this type of tax planning did not work. Further, it is understood that a case may shortly go before a tax tribunal concerning this type of tax planning.
Initially, section 75A did not apply to partnerships. Hence, there was scope for saving SDLT, for example, by the buyer sub-selling a property to a partnership which it effectively economically owned and seeking to avoid SDLT by a combination of sub-sale and partnership reliefs.
Alternatively, it could have been possible to arrange for the seller to become a partner or connected with a partner in the partnership (thereby entitling it to claim partnership relief) although, in practice, the economic ownership of the property would be in the hands of an unconnected “buyer”.
HMRC sought to stop this type of tax planning by providing that section 75A applied to partnerships and, in effect, it trumped the specific SDLT rules concerning partnerships. However, no matter how widely HMRC would like to interpret section 75A, if the existing partnership rules are to have any meaning at all, this application must be subject to some limitation.
It is not considered that simply the formation of a partnership and a transfer of a property to that partnership would not trigger section 75A, otherwise it would apply to the creation of every partnership, which does not appear to be a reasonable interpretation of SDLT legislation taken as a whole.
Further, as mentioned above, for section 75A to work, there must be a series of connected steps. Hence, it may still be possible for a seller to establish a partnership structure into which a property is transferred and, at a later date unconnected with the formation of a partnership, a “buyer” could invest into the partnership without triggering section 75A or a liability under the SDLT partnership rules. As such, SDLT partnership planning possibilities remain in point.
Another common method of saving stamp duty involves using alternative finance relief. It may be used directly or in association with sub-sale relief. It is available for both residential and commercial property and can be applied in isolation or in conjunction with other aspects of tax planning, including income tax, inheritance tax and capital gains tax planning.
HMRC has extended the scheme requiring disclosure of what it perceives to be tax avoidance in relation to SDLT and so, if not already, it may soon become aware of the various types of SDLT saving ideas referred to in this article. However, recent experience has shown even where HMRC attempts to close all types of tax planning, other methods appear and so, depending on a taxpayer’s appetite for risk, there may always be methods seeking to avoid SDLT.