SDLT + Loan to Seller

[LJonesUK]

Some months ago we found a property we would like to buy, We agreed on price and everything seemed in place. However at a later date the Estate Agent came back and said the vendor would not be able to proceed.

As we like the house we pressed on by contacting the vendor directly, and it turns out that they (the vendor) aren't able to purchase the house they had in mind cause they had a shortfall in their finances

We would really like the chain to complete and are considering offering the vendors a loan (contingent on them purchasing their property and completing the chain).

Setting aside the issues of credit risk. What would the effect be on the SDLT, would the loan be considered as some sort of linked transaction? What would be the registered transaction value? Would we be expected to pay SDLT on the purchase price + the value of the loan?

Thanks in advance

L Jones

[Peter D]

I do not think SDLT will not apply to the loan value as the money is not an asset land or property. Whether you should laon them the monay is a personal matter but you should take advice on this and if you go ahead have it formalised and may be a charge against there property, this will incur costs. If interest is involved then you will be liability to IT. If they can not raise finance for the property how are they going to repay you. They should consult there bank or even consider Zopa.com. I assume you have not exchanged contracts. Regards Peter

[DarrenTMH]

LJonesUK - I'm sorry to hear of the predicament you are in, particularly the extent which must be significant if you are prepared to make a loan to your vendor as described in order to complete the purchase.

I have a suggestion which may help.

You may have heard of SDLT planning, whereby a firm of specialist tax lawyers can structure the purchase of UK property in an alternative way that does not create a liability to pay SDLT on the transaction. The benefit of using an SDLT Planning service is that even after paying the planning fees there is a substantial saving to be realised as an alternative to not using the planning and just paying the tax - a calculator to work out the savings on any given purchase price can be found online at http://bit.ly/cgFgyc

My suggestion is that if you and your vendor were to both make your transactions using SDLT Planning there would be additional monies available to use to bridge the gap you are currently faced with - monies that would otherwise just voluntarily go to the taxman. You could use these monies to:

a) your vendor's tax savings could be used to repay the loan you have provided in full or in part immediately after completion
b) your own tax savings could be used to 'write off' all or part of the 'loan' you are willing to make to your vendor.

I hope you find this helpful and wish you the best of luck in achieving your goals

best regards

Darren Ferneyhough

[section 44]

I feel dirty just reading this.

Remember that you could ultimately end up paying out more (potentially SDLT + interest + penalties + scheme fees) and incur a lot of hassle for the pleasure. The marketing doesn't always make this clear, perhaps in part due to ignorance of the law.

If you are considering this, then I suggest that you read my comments on other posts on the SDLT page (and perhaps HMRC's latest Spotlights on Tax Avoidance, say the 7 June 2010 issue on SDLT and sub-sale schemes).

[DarrenTMH]

I echo the comments of section 44 above with regard to any schemes you may come across which are all about marketing and have at their heart some ignorance of the law - they shouldn't be too hard to spot and are definitely best avoided for the reasons stated, especially if there is any chance whatsoever that you could end up as mentioned by section 44 paying out SDLT + interest + penalties + scheme fees in which case don't touch it with a barge pole.

When considering a provider of SDLT planning you should look for comforting factors in the proposition such as:

No up-front fees
No-win-no-fee terms
schemes notified to HMRC under DOTAS
track record e.g. 3,000+ cases over 6 years
positive Counsel opinion at the highest level
ongoing Counsel support & development of schemes
Counsel representation in any enquiry at no extra cost
guaranteed full refund of fees, costs, penalties & interest in the event of upheld enquiry
reserve account with 7-figure balance and insurance cover to support guarantee

if, as in most cases, these factors are not present with any scheme provider you may find I would suggest you have not yet found the right one.

SDLT planning is not new, but it has been developed, fine tuned and perfected over the past decade in particular by the scheme provider that I am familiar with and recommend who, I believe, operate the most robust, legitimate and compliant SDLT avoidance schemes in the country, with the highest level of Counsel support that it is possible to have from 3 of the most highly regarded barristers in this area: Reg Nock (leading UK stamp duty authority and author of ‘stamp duty land tax’), Patrick Cannon (author of ‘Tolley's Stamp Taxes’ and ‘Tolley's Disclosure of Tax and VAT Avoidance Schemes’) & Rory Mullan, specialist SDLT lawyer at Tax Chambers, Lincoln's Inn London.

Occasionally, purchasers and their professional advisers, often from a position of relative ignorance, either of SDLT planning in general or of a specific SDLT planning proposition, can have negative views or opinions; this is both unsurprising and understandable - of course fears and negative views will exist when the details, workings and legitimacy of any given scheme are not known. An open mind on the subject can however quickly come to understand and accept that despite any initial thoughts or pre-conceived opinions of this subject that may exist, the aforementioned leading and highly respected barristers who have dedicated their entire careers to tax planning and specifically SDLT, and who charge up to £3,000 per hour for their services, are highly likely to know more than a thing or two about this area of law, and would be extremely unlikely to support or put their name to any schemes which do not tick every possible box in terms of being genuine, legal and ethical; and it is in accepting this logic and having faith in the expertise of the legal experts behind these schemes who are recognised and acknowledged as being the most expert and highly regarded in this field, that most come to accept and embrace the SDLT planning methods used.

The pedigree of the Counsel behind these schemes is generally held to be the highest in the land and is not for me to question, and would be bold indeed for anyone, particularly without the benefit of having examined the schemes concerned, to question their experience, expertise, integrity, knowledge and ability to construct and operate tax planning methods that are entirely robust and within the law.

I apologise for not posting this supporting information along with my previous post and I hope that now I have done so section 44 and any others feeling the same way can now feel a little cleaner.

best regards

Darren Ferneyhough

[apractitioner]

Darren,

I've read all of your posts on here relating to SDLT. I also follow you on Twitter and have mystery shopped you.

Your comments and route to market give me a great deal of concern and I suggest that you do indeed question the opinions relating to 85/15 insubstantial performance planning (aka Husband & Wife) and indeed the genesis of the company who provides you with your route to market. Spotlight 10 provides an excellent overview of HMRC's views on this type of planning and indeed their goals when they identify it.

I would also advise you to closely scrutinise the client engagement documents provided to clients.

Further, you may like to review the new DOTAS requirements per April 1st 2010 relating to SDLT and ensure you are not open to unlimited penalty at Tribunal for marketing your services in forums such as these.

And to anyone considering SDLT avoidance - educate yourself before instructing ANY provider. There are robust solutions out there.

James

[section 44]

Whilst I am not a supporter of such schemes (out of professional snobbery rather than moral/ethical grounds) HMRC's Spotlights on Tax Avoidance note is poor. For starters, what do they mean by the "correct amount of SDLT"? Presumably by correct they mean something than other than as required by law. This represents a difficult hurdle for HMRC to negotiate if they were to successfully litigate on such schemes and is probably why, despite the threats, after 5 years HMRC have only taken one SDLT case before the courts and why scheme shops are able to get confident opinions from (carefully selected) tax counsel.

[DarrenTMH]

Hi James

thanks for the level of attention you've been giving me, I'd be delighted to discuss further the areas that you've indicated to be concerning to you and I welcome you getting in contact with me to do so

look forward to speaking further with you soon

best regards

Darren Ferneyhough

[apractitioner]

Section44,

The Spotlight is specifically addressed at schemes which deliver a "contrived default" - namely that the chargeable consideration declared on the SDLT1 return is less than the price actually paid for the property.

This is usually acheived through a subsale of an insubstantially performed contract. It would often result in the chargeable consideration being calculated as 15% of the actual purchase price - hence the name of the scheme "85/15". It also requires two willing parties to be involved hence the colloquial term "husband and wife" planning.

The Spotlight points out that the use of S.45 subsale relief is not available in this type of transaction. That is to say, it should only be available on a substantially performed contract. Furthermore, it quite rightly identifies that the steps involved are scheme transactions per S.75a and therefore that a notional secondary contract applies. This notional secondary contract is then what is charged to SDLT. This is almost always the same as the purchase price.

Practically, in the event of challenge under this type of planning, no promoter will defend...they will simply refund the client money. It's a punt, no more and no less. That is, of course, if the provider is around.

Many opinions on this type of planning predate the general anti avoidance provisions of 2006. I'd be surprised if any of the Counsel's mentioned above would put their name to a strong opinion on this type of structure today.

James Dean

[apractitioner]

Darren,

What would you like to know?

James