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Government closes stamp duty avoidance loophole
April 28 2011
The chancellor has clamped down on stamp duty avoidance schemes that are widely used by rich individuals buying high value residential properties as well as buyers of commercial properties.
The chancellor has clamped down on stamp duty avoidance schemes that are widely used by rich individuals buying high value residential properties as well as buyers of commercial properties. The only surprise about the clamp down is that the government left it so long before moving to close the loopholes, which took effect from 24 March.
Many of the schemes took advantage of concessions to allow Islamic purchasers to avoid paying interest, which is illegal under Sharia law, combined with other concessions. Typically a property is acquired by a company which has the right to assign the purchase to the ultimate owner. The purchase price is paid in two tranches. As long as the first tranche is less than 90% of the value, the purchase has not been ‘substantially performed' so no stamp duty is payable. Tax is only paid on the second tranche - but even then, only if the remaining 15% of the purchase price exceeds the starting point for stamp duty, currently £125,000.The rules on subsale relief have been changed to make it clear that sub-sale relief cannot be combined with any form of SDLT (stamp duty land tax) alternative finance relief.
And the government has been quite canny in its clamp down. The avoidance schemes required the co-operation of a bank or finance house. Few reputable firms wanted to be involved in blatant tax avoidance so many of the promoters channeled their business through credit brokers. However simply holding a consumer credit license will no longer be enough for a company to be able to claim SDLT alternative finance relief.
Tax avoidance would have become even more valuable from 6 April, when the top rate of stamp duty payable on properties valued at £1 million or more rises from 4% to 5%.
Another key change alters the land swap rules. Owners sought to artificially depress the value of land in order to avoid or reduce stamp duty, often by using a lease the terms of which changed making the land more valuable once the transaction had taken place. For all land swap transactions on or after 24 March 2011, SDLT will now be due on the greater of the market value of the land acquired and the ‘SDLTable'.
Georgina Fletcher, conveyancer for Leeds solicitor Grahame Stowe Bateson Commented, "We as a firm have been asked on a number of occasions to deal with the Stamp Duty Avoidance scheme but we have never wanted to become involved as it was questionable at the very least and we viewed this with extreme caution. We did explore the option of the scheme as we always try to accommodate each and every client and as you can appreciate avoiding Stamp Duty is a huge saving for anyone but in our opinion it was only ever a matter of time before it was investigated by HM Revenue and Customs."
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