Patrick Cannon

Introduction

In the PBR on 9th October 2007 HM Treasury signalled that they wished to examine the possibility of imposing an SDLT charge on the transfer of an interest in a SPV owning land. In the April 2002 Condoc on SDLT, Ruth Kelly had described the use of property owning special purpose vehicles or ‘SPVs’ as “a major threat to the Exchequer” and promised that a special “land-rich” SPV charge would be included within the new SDLT when it replaced Stamp Duty (on 1st December, 2003). In the event, this charge was quietly dropped and the failure of Ruth Kelly to follow through on something that she thought was “a major threat to the Exchequer” was never explained by HMRC.
 
That was four years ago and since then the London Evening Standard and its sister publication, the Daily Mail have from time to time taunted the Chancellor with articles about how wealthy persons (usually non-doms to rub it in) can buy expensive London homes and country estates without paying SDLT through the simple device of buying the shares in an SPV which owns the property in question rather than the property itself. Although this is described as tax avoidance it is of course not so. The fact that no SDLT arises on the purchase of shares in a “land-rich” company is simply because there is no such tax charge. Indeed, the absence of such a charge is the  result of Ruth Kelly’s failure to impose such a charge.
 
In the years that have passed since the introduction of SDLT ministers and civil servants have come and gone. HM Treasury have now decided to revisit the “land-rich” SDLT charge although it is not clear if those now in charge are aware of the previous attempt and how it ended. A Condoc was issued in December, 2007 entitled “Stamp duty land tax: ensuring fairness for all”. This time they are only going after residential property worth £1m or more. There is as yet no suggestion that SPVs owning commercial property are under threat although if the attack on residential SPVs is deemed to have been a success an attack on commercial SPVs may not be far behind.

The Proposal

The Condoc is surprisingly short for such a difficult subject and its proposals can be summarised succinctly. The new charge would be called the ‘Indirect Charge’ and would apply SDLT to the transfer of an interest in the SPV at the same rate as if an interest in the property owned by the SPV had been purchased directly. There would be three tests as follows:

Test 1: Substantial Interest Test

At lest 75% of the SPV would have to be acquired before the new charge could apply. Anti-avoidance rules will be needed to prevent taxpayers fragmenting the purchase or taking other steps to outflank the 75% test.

Test 2: Limited Ownership Test

The SPV would have to be controlled (i.e. a 51% ownership test) by five or fewer persons.

Test 3: Property Company Test

90% of the assets of the SPV (excluding cash and marketable securities) would have to consist of UK residential property. This test would be based on the market value of the gross assets of the SPV at the time a substantial acquisition of the shares in the SPV occurred.

Criticisms of the Proposal

Certain criticisms of the Treasury’s proposals come immediately to mind:

(1) The title of the Condoc refers to “ensuring fairness for all” – this is blatant rubbish given that only residential property is being singled out for attack and those owning commercial property through SPVs will have a clear tax advantage – what is fair about that?

(2) The Condoc at 2.14 says that by adopting the existing SDLT return to accommodate an indirect charge on “land-rich” SPVs this “will help keep the administrative burden on business [sic] to a minimum”. What has this got to do with businesses given that the proposal is directed at residential properties?

(3) No figures are produced in the Condoc relating to how extensive the use of residential SPVs might be. Indeed at 2.13 all that is said is that “The Government believes that only a small fraction of these [ie residential sales of properties worth £1m or more] will make use of SPVs. The Government is therefore of the view that introduction of the charge would have very little impact on the residential property market”. If that is so then why bother with the charge at all? Pages and pages of anti-avoidance legislation will be required to prevent avoidance of this anti-avoidance measure for something we are told will have very little impact on the market. In any event, the risk of an income tax benefit in kind charge on directors and shadow directors of such SPVs in relation to the beneficial use of residential property owned by the SPV has significantly reduced the popularity of such SPVs in recent years.

(4) Ease of avoidance – even with extensive use of anti-avoidance rules  to protect this new anti-avoidance measure, how is HMRC going to police the dealing in interests in an SPV owning UK residential property? This problem will be acute where the SPV owning UK residential property is managed offshore and is owned by a nominee or a settlement and dealings in interests in the SPV take place offshore behind the nominee or the trustees. Is the nominee or the trustee going to (1) be aware of the SDLT charge, and (2) insist on an SDLT1 being filed with HMRC and the relevant tax paid?

(5) Partial Impact Assessment (“PIA”) – this accompanied the Condoc and contains two basic flaws. First, in assessing the annual costs of the new measure should it be introduced the PIA states that these will be negligible and that “This measure will primarily affect the compliance costs of currently non-compliant individuals”. It is sinister for a branch of HM Government to describe purchasers of shares in property owning SPVs as “non-compliant” when there is currently no SDLT charge on such transitions to comply with. One can only wonder in which parallel linguistic universe do those who wrote and signed off this Condoc exist. The second flaw relates to the self-directed question contained within the PIA, “What is the geographic coverage of the policy/option?” and the answer supplied, “United Kingdom”. This is insincere. Given that the Indirect Charge is about taxing the interest in an SPV rather than the residential property inside the SPV, the charge will apply to any SPV wherever it is incorporated, resident or situated. Although this will give rise to insurmountable enforcement and collection problems the reality is that this is a tax charge which can and will apply to foreign property transferred outside the UK ie shares in an offshore incorporated company transferred overseas. How can this charge be said to be limited geographically to the UK when the trigger giving rise to the charge is the transfer of foreign property carried out overseas?

Conclusion

While the concept of a “land-rich” SPV SDLT charge is in principle a sound one and will bring the UK into line with other jurisdictions with a transfer tax on land, the quality of the argument in favour of the introduction of such a charge and the analysis of the challenges involved set out in the Condoc is very disappointing. It contains a highly politicised half-baked analysis of the position and has the appearance of having been written by someone with a tenuous grasp of the subject. Its raison d’etre is a bogus appeal to “fairness for all” and is yet further confirmation of the intellectual and linguistic depths into which the Treasury and HMRC have sunk.

The above article is reproduced with the kind permission of the author, who retains the copyright. This article and other commentary on SDLT can be found on Patrick Cannon's website (http://www.patrickcannon.net/). 

Article Added Saturday, 26 January 2008 | 3557 Hits

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