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Stamp Duty Land Tax: A Beginner's Guide

Taxation by Matthew Hutton MA (Oxon) FTII AIIT TEP

Matthew Hutton summarises the new Stamp Duty Land Tax regime, to take effect on 1 December 2003. As from 1 December 2003 the face of stamp duty as first introduced in 1694 and as developed and revised since then (especially in the years 1997-2002) is to be changed for ever. In summary:

• What was a (voluntary, since not directly enforceable) duty on documents transferring rights and interests in property for value is to become a transactions tax on transfers of UK land and buildings.

• The existing stamp duty regime will continue to apply to documents transferring stocks and marketable securities, the issue of bearer instruments and transfers of land into or out of partnerships by partners or former partners and acquisitions of an interest in a partnership which holds UK land. That regime will also apply to transactions completed and leases granted on or after 1 December 2003 where those conveyances or grants fulfil contracts or agreements entered into before the day after Royal Assent of Finance Bill 2003 (provided they have not been varied since that date). As for transfers of other property (including debts), for contracts made on or after 1 December 2003, stamp duty will cease to apply.

• For agreements to transfer ‘chargeable securities’, ie whether or not oral and whether or not followed by a document of transfer, stamp duty reserve tax of course continues to apply.

Stamp duty land tax (‘SDLT’) in a nutshell

Section 42(1), FA 2003 states ‘A tax (to be known as ‘stamp duty land tax’) shall be charged in accordance with this Part on land transactions.’ Sections 42 to 124, and Schedules 3 to 19, detail the new tax: even if its name suggests a continuation with the past, we will have in reality a tax on land transactions.

Although the scope of the tax is restricted to land in the UK (section 48(1)(a)), it does not matter whether any party to the transaction is present or resident in the UK nor indeed, if there is an instrument (ie a document) effecting the transaction, whether any such instrument is executed in the UK (section 42(2)). What we will have as from 1 December 2003 is a self assessed, ‘modernised’ tax on transactions involving transfers of interests in UK land and buildings.

The abolition of stamp duty on property other than UK land and buildings and shares provides some relief to those acquiring unincorporated businesses. The removal in 2000 of stamp duty on transfers of intellectual property, in 2002 on goodwill and in 2003 on debts is obviously welcome. It will be interesting to see, say in the first year of SDLT, how much the Exchequer earns from the new tax (as compared with just over £4 bn of stamp duty). Although the rates of duty have for the time being at least been frozen, the new calculation of lease duty discussed below is going to mean much greater charges for the grantees of new leases.

Land transactions

The impetus for the introduction of SDLT has been provided in part by the advent of electronic conveyancing, just as paperless trading in stocks and shares through CREST in 1996 had been heralded by the introduction of stamp duty reserve tax in 1986. But e-conveyancing is not expected in Scotland and in England and Wales for at least a couple of years yet. The principal impetus therefore is the perceived large scale avoidance of stamp duty by, in particular, the ‘resting on contract’ arrangement, using a split legal and beneficial ownership structure. Admittedly, the ability to rest on contract was prevented by section 115, Finance Act 2002 in cases where the consideration exceeds £10 million with effect from 25 July 2002. There is also the fact that, while collecting substantial sums for the Exchequer at minimum administrative cost, it was perceived that the tax needed to be brought in line with self assessment ideals, to include both strict self assessment compliance and payment procedures.

The expression ‘land transaction’ is defined by section 43(1) to mean any acquisition of a ‘chargeable interest’, itself defined in section 48. The creation, surrender or release or variation of a chargeable interest will also not surprisingly trigger the tax as an acquisition. Those acquiring and disposing of the subject-matter of the transaction are called respectively the ‘purchaser’ and ‘vendor’, even if there is no consideration.

Chargeable interests

So what is a ‘chargeable interest’? The expression is defined by section 48(1) to mean:

(a) an estate, interest, right or power in or over land in the United Kingdom, or
(b) the benefit of an obligation, restriction or condition affecting the value of any such estate, interest, right or power,
other than an exempt interest’.

The definition therefore goes fairly wide. Exempt interests are ‘security interests’ which include a mortgage and (most importantly) a licence to use or occupy the land or a tenancy at will. Given the heavy charge to SDLT on leases, the distinction between licences and leases will become crucial. The Treasury Notes on the clause confirm that a licence to occupy would not be an estate, interest or right over land in any event but rather a personal right and that ‘the usual rules’ distinguishing leases from licences will apply. The question in practice will be whether a person proposing to take occupation of any land is prepared to have his rights ‘down-graded’ to those of a licensee in terms of reduced security, as a price of the SDLT saving.

Who is the purchaser?

Part of the importance of defining the purchaser is that it is the purchaser who is expressly made liable for compliance and payment obligations for SDLT. This contrasts with the rather curious position under stamp duty that, except in certain cases, it is not expressly provided who is liable to pay the duty. A person can be a purchaser even where there is no consideration.

Contract and conveyance

Most (though not all) land transactions will be completed by deed pursuant to a preceding contract, which must also usually be in writing. For stamp duty purposes it is generally the completion document which is stampable. This principle has led to the ‘resting on contract’ device. The contract would be stampable (under paragraph 7, Schedule 13, Finance Act 1999) only if it failed to deal with the whole of the vendor’s interest in the property, as in the well-known case of Peter Bone Ltd v IRC [1995] STC 921 where a contract was stampable because it dealt only with the equitable or beneficial interest of the vendors and not also their legal interests. Under the new regime, both resting in contract (which since 25 July 2002 has been available only where the consideration did not exceed £10 million) and sub-sale relief under section 58(4), Stamp Act 1891 effectively go, except perhaps in relation to sub-sales (see below) with large developments, a subject for consultation.

Substantial performance

Under the new regime where there is both contract and subsequent completion by a conveyance, SDLT will be charged only once (as indeed is stamp duty under the current regime), though it may be charged on either contract or completion, whichever provides the ‘effective date’. The date of the contract will be the effective date if the contract is ‘substantially performed’ without having being completed. Substantial performance means possession by the purchaser of the whole or substantially the whole of the subject matter of the contract or payment or provision of a substantial amount of the consideration (section 44(4)). Taking possession would include ‘obtaining the keys to the door’ or, if the building is let, receiving the rents. It does not matter that the contract is conditional, for example the assignee of a lease taking occupation pending the landlord consenting to the assignment. If the condition is not satisfied, the SDLT paid can be reclaimed, as indeed also if the contract is subsequently rescinded or annulled. It might be unusual that the purchaser takes possession of the property without at the same time paying a substantial amount for consideration. But it could happen, for example in a family transaction.

The 30 day period for returning and paying the liability is triggered by taking possession even if no consideration is paid and this needs to be borne in mind. What is a ‘substantial’ amount for consideration is not defined, though clearly it will be rather more than the customary 10% deposit.

Sub-sales

The transfer of rights under a contract (including, though not limited to, sub-sales) will be charged to SDLT. This means that the general relief on sub-sales goes, though we are told that the Government is consulting on possible targeted replacements for this relief. The new rules apply where there is a contract for a land transaction (the ‘original contract’) and then an assignment by way of sub-sale or other transaction (relating to all or part of the subject matter of the original contract) under which someone other than the original purchaser can call for a conveyance to him. This is what is called a transfer of rights (section 45).

Section 44 (contract and conveyance) continues to apply to the original contract, that is, it will trigger SDLT only in so far as the contract is substantially performed. The transfer of rights becomes a deemed contract for a land transaction, with the purchaser being the transferee and the consideration being so much of the consideration under the original contract as refers to the subject-matter of the transferred rights and remains to be paid, plus the consideration for the transfer of rights itself. There may be more than one transfer of rights and section 45 will apply to each such transfer.

Options and pre-emption rights

Under the present regime, an agreement which grants an option to buy land attracts ad valorem duty as a conveyance on sale (Wimpey (George) & Co Ltd v IRC [1975] STC 248). If the option is exercised, stamp duty is payable on the price for the land. Although stampable in theory it is probably comparatively rare that option agreements are in fact stamped in practice. There is the possibility of reducing stamp duty liability on an acquisition of land through an increase of the price payable on grant of the option and a corresponding decrease of the price payable on exercise (though the Stamp Taxes Bulletin Issue 3 on 22 October 2002 questioned the common technical analysis).

Under the new regime the acquisition of either an option (binding the grantor to enter into a land transaction) or a right of pre-emption (preventing the grantor from entering into or restricting his right to enter into a land transaction) is itself a land transaction, as distinct from any land transaction which may result from the exercise of the option or right (section 46). The effective date of the transaction is the date on which the option or right is acquired.

Exchanges of land

Ever since 8 December 1993 the exchange of one piece of land for another has, in strict law, attracted a stamp duty liability on each side of the transaction (section 241, Finance Act 1994). That strict effect was ameliorated, most surprisingly, by advice given by the Inland Revenue on 18 April 1994 that stamp duty need be paid on one side only of an exchange provided that the transaction could fairly be structured as a sale not an exchange. This now becomes a thing of the past.

There were also incidentally anti-avoidance rules enacted in 2000 which prevented the arrangement of transfers of land or buildings in consideration of other forms of property viz exempt gilts, in such a way as would avoid a conveyance on sale of the land or buildings (section 118, Finance Act 2000). Also, anti-avoidance rules prevented the transfer of land to a company with which the transferor is connected in consideration for securities worth less than the land, where hitherto stamp duty had been charged only on the value of the securities (section 119, Finance Act 2000). The effect of these rules continues under the new regime (see below).

The rule under the new regime (section 47) is that where a land transaction involves an exchange of land, the parties are treated for SDLT as if they had entered into two separate land transactions. This is subject to a relief under section 58 which applies where a house-building company acquires a dwelling in part exchange of the disposal of a newly constructed dwelling. Provided that the individual acquiring the new dwelling does so as his only or main residence, and has owned the old dwelling as such immediately before the acquisition, the chargeable consideration is treated as nil.

Chargeable consideration

The meaning of chargeable interest in section 48 was discussed above. Among the exemptions from SDLT will be certain transactions which are exempted from charge under Schedule 3, which is divided into five categories, including

• cases where there is no chargeable consideration for the transaction; and
• the grant of a lease either for an indefinite term or terminable by notice of a month or less where the lease is granted by a registered social landlord to one or more individuals.

Section 50 and Schedule 4 specify the nature of chargeable consideration. Broadly speaking, consideration for SDLT purposes comprises anything given in return for the land which is money or has money’s worth. That adopts the stamp duty reserve tax principle and goes more widely than the present stamp duty rules. This might include the release or assumption of a debt (as now), the carrying out of works or services and the transfer of other property. Among the 16 specific rules in Schedule 4:

• the chargeable consideration is any consideration given in money or money’s worth both directly or indirectly by the purchaser or (within the meaning of section 839, Taxes Act 1988) a person connected with him;
• any VAT is included within the consideration, following the existing rule. However, unlike the existing rule, if, especially under a new lease the vendor has the option to charge VAT but has not elected to do so by the effective date of the transaction, any VAT which subsequently becomes payable does not count as chargeable consideration;
• any consideration payable after the effective date (postponed consideration) is included, with no discount for the delay in payment.

Uncertain consideration

The existing rather complex rules relating to contingent, uncertain and unascertainable consideration are replaced by defined principles in section 51 as follows:

1. where all or part of a chargeable consideration is contingent, the contingency is ignored;
2. where all or part of a chargeable consideration is uncertain or unascertained, its amount or value is determined on the basis of a ‘reasonable estimate’.

Market value rule

For connected company transactions, section 53 follows the provisions of section 119, Finance Act 2000 mentioned above. The rules apply where the purchaser is a company and the vendor is connected with the company or some or all of the consideration for the transaction consists of the issue or transfer of shares in any company with which the vendor is connected. In such a case the consideration is no less than the market value of the land at the effective date of the transaction. The test for connected persons follows that in section 839, Taxes Act 1988. This rule will still apply if there is no chargeable consideration at all, though otherwise will be subject to the exceptions provided in section 54, which follow the spirit though not the precise detail of the exemptions in section 120, Finance Act 2000.

Chargeable amount

The tax charge follows the stamp duty rules in adopting the so-called ‘slab system’, viz that where the consideration exceeds a particular threshold the higher rate applies to the total consideration. For the first time, different rates are provided for residential and non-residential property. Also, as a radical departure from the previous position, different rules apply to the rental element of a new lease (see below).

The general rule is that the tax payable is a percentage of the chargeable consideration for the transaction, apparently abandoning the scheme under Finance Act 1999 of rounding up to the nearest £5. However, happily, the rates of 0%, 1%, 3% and 4% remain the same (as against some pre-Budget speculation, that the Chancellor might see an increase in stamp duty rates as ‘easy money’ to help plug a growing Budget deficit), the rates remain the same, at least for the time being. It was said following the issue of the 2002 Consultation Document that rates would remain the same until the new system had been given a chance of ‘bedding down’. Therefore no guarantee can be given that we will not see SDLT rates rising above 4% in future.

Section 55 provides two rate tables, the one Table A residential (with the present regime thresholds) and the other Table B non-residential or mixed:

Table A: Residential

Relevant consideration

not more than £60,000 – 0%
more than £60,000 but not more than £250,000 - 1%
more than £250,000 but not more than £500,000 - 3%
more than £500,000 – 4%

Table B: Non-residential or mixed

Relevant consideration

not more than £150,000 – 0%
more than £150,000 but not more than £250,000 – 1%
more than £250,000 but not more than £500,000 – 3%
more than £500,000 – 4%

• Table B will apply where the subject matter of the land transaction either consists of or includes land which is not residential property. For this purpose the ‘relevant land’ is that an interest in which is the main subject-matter of the transaction. If the transaction is one of a number of ‘linked transactions’, the relevant land is any land an interest in which is the main subject-matter of any of those transactions. This expression is defined by clause 108 and carries into SDLT the spirit of the stamp duty ‘certificate of value’ rules.

Leases

The provisions of section 56 of and Schedule 5 to the Finance Act 2003 produce a significant difference from the system of charging leases to stamp duty under the present regime. We were warned by the Consultation Document that there could be dramatic changes, as indeed have occurred, assuming that no better proposals are made and accepted before 1 December 2003 (section 112). The background to this is perceived avoidance of stamp duty through use of leases. The rate of SDLT in both residential and commercial cases is just 1%, with the nil-rate threshold being £60,000 for residential and £150,000 for commercial property. Where the annual rent for the lease exceeds £600 there is no nil rate for the premium (following the present rules). The ‘sting’, however, is the amount to which the 1% charge is applied, viz subject to the relevant nil-rate band threshold, the ‘net present value’ of the rent to be received under the lease, applying a discount rate of just 3.5% (or such other rate as the Treasury may specify).

Rent payable is defined by paragraph 4 of Schedule 5. The sum payable in respect of rent is treated as such even if it is said to include other items such as service charges unless these are separately identified. If rent is uncertain or contingent the test in section 51 applies (see above) except where paragraph 5 provides otherwise, as in the case of rent reviews. No application can be made to defer payment under section 90. Where the starting rent is to be adjusted for inflation, the rent payable is the starting rent.

The effect of a provision for a market rent review is provided by paragraph 5. In a case where rent reviews are scheduled during the first two years of the lease term, the consideration will be deemed to take this into effect and will therefore be unascertained for purposes of section 51. In a case where a rent review is not scheduled until after the expiry of two years, the possibility that the rent may be adjusted on review is disregarded for purposes of determining the chargeable consideration.

The term of the lease is the shorter of:

(a) that specified in the lease and
(b) the period from the effective date of the grant until the end of the contractual term.

Where there is a prior contract or agreement for the lease, the lease begins on the date of substantial performance of that contract or agreement. Where a lease renews a previous lease the term runs from the date of expiry of the previous lease. Break clauses and renewal clauses are disregarded for the purposes of defining the term (paragraph 6). Under paragraph 7 a lease for an indefinite term is treated as a lease for twelve years. A tenancy at will is exempt under section 48(2)(c).

Where the annual rent exceeds £600 the premium, however low, cannot be charged at less than 1%. Tax chargeable on premium (at up to 4%) is in addition to any tax on rent. Where a lease is one of a number of ‘linked transactions’ only the premium is taken into account in determining the relevant consideration for purposes of section 55 (paragraph 9).

Where there is an increase in the rent payable under a lease, that increase is treated as the consideration for grant of a new lease (paragraph 10), unless provided under the terms of the lease, eg a scheduled rent review.

Reliefs

These include disadvantaged areas (section 57 and Schedule 6), relocation relief (section 59) and land transfers within groups of companies and on company reconstructions and acquisitions where interests in land are transferred in exchange for shares (section 62 and Schedule 7).

Compliance

Notifiable transactions

The following land transactions are notifiable:

the grant of a lease if

(a) for seven years or more or if the consideration is such that tax is due or would be due had a relief not been claimed;
(b) for less than seven years, if either the premium or the rent is charged to SDLT at 1% or more; and

the acquisition of any other ‘major interest’ in the land unless exempt under Schedule 3. The expression is defined by section 117 as:

(a) in England and Wales, any freehold or leasehold estate, whether legal or equitable;
(b) in Scotland, the interest of an owner of land or the right of tenant over property subject to a lease;
(c) in Northern Ireland, any freehold or leasehold estate, whether legal or equitable.

Other transactions are notifiable only if SDLT is due or would be due were it not for a relief.

Land transaction return

For every notifiable transaction a completed land transaction return must be delivered to the Inland Revenue within 30 days of the effective date of the transaction. This delivery must include a self assessment of liability and payment of the SDLT due (section 76).

Registration of land transactions

No document effecting a land transaction may (unless exempt from certification) be registered at any of the UK land registers without a certificate as to compliance with SDLT. The certificate will be issued either by the Revenue or by the purchaser (self-certification). This rule applies to every land transaction except (section 79(2)):

• those exempt from charge under section 48;
• those exempt or relieved from charge under any other provision which do not involve a ‘major interest’ in land (see section 117);
• contracts which are land transactions by virtue of having been substantially performed under section 44 or being a transfer of rights under section 45.

Other compliance provisions

Most of the following is based upon Taxes Management Act 1970 provisions carried over into the SDLT regime, viz:

The liability for SDLT

As a departure from stamp duty the purchaser is expressly made liable to pay the tax (section 85), within 30 days of the transaction or of a determination or assessment liability for interest running from that 30 day period (section 87). Interest is payable on the late payment of penalties (section 88). Interest will be paid on the repayment of overpaid tax (section 89). Payment by cheque is treated as made on the day on which it was received as long as honoured by the bank (section 92).

Partnerships

SDLT does not apply to transactions where land is transferred to a partnership by a partner, where a partnership interest is acquired, or where land is removed from a partnership by a partner or former partner in return for the release of all or part of his partnership share: stamp duty continues to apply to such transactions. Otherwise, section 104 and Schedule 15 set out the responsibilities of partners and how SDLT applies to the acquisition of interests in land by partners or partnerships. Whether or not a partnership has legal personality or is a body corporate, the assets of the partnership are treated as held by the partners, that is the partnership is transparent for SDLT purposes. It is not to be regarded as either a unit trust scheme or an open-ended investment company. The responsible partners are jointly and severally liable for SDLT though a representative partner may act instead. The responsible partners are those who are partners at the effective date of the transaction or who became partners later.

Further consultation

Four areas have been identified for further consultation during the summer of 2003, as follows:

• lease duty, to see whether Government could in consultation with interested parties come up with a viable alternative to the Finance Bill proposals for ‘a structure which minimises potential scope for avoidance’;
• complex commercial transactions, that is in particular the treatment of large developments including sub-sales and successive transfers, PFI deals and finance raising packages such as sale and lease back deals and securitisations;
• partnerships, to consider the transfer of land into and out of a partnership by a partner and the transfer of interests in partnerships which hold UK land (presently excluded from SDLT and remaining within the charge to stamp duty);
• regulations governing the land transaction return and various other forms, rules and procedures.

Clearly all the regulations have to be up and running by 1 December 2003. Draft regulations are to be published on the Internet as they are prepared, for comment by the end of September. As to the complex commercial transactions, the aim is to report to ministers in September to see whether if action is desirable it could be in time for implementation on 1 December 2003 or alternatively as part of Finance Bill 2004. As to partnerships, the intention is that following Royal Assent to Finance Bill 2003 there will be consultation followed by draft clauses with a view to implementation in Finance Bill 2004. The Revenue warn that if there is evidence of avoidance using partnerships anti-avoidance measures could be introduced at an earlier stage.

Conclusion

It is obviously conveyancing lawyers who will be most directly affected by the new SDLT. However, all professional advisers dealing with transactions which involve real property clearly need to understand the new regime. There are likely to be further developments following Royal Assent, specifically, but perhaps not restricted to, the matters for consultation identified above.

It is interesting in particular that the proposals for so-called ‘special purpose vehicles’ or SPV’s in the 2002 Consultative Document seem to have been put on the back burner for the time being. Specifically the proposal was that transfers of ‘substantial interests’ (30% or more) in entities such as companies owning ‘primarily’ (at least 70%) UK land would be charged as if the transfer was of the underlying land rather than the shares, so as to prevent the avoidance of stamp duty through the use of such vehicles. It was said that the new rules would apply to transactions in SPVs whenever established and whether or not registered in the UK. It may be that the Inland Revenue has to date at least found the exercise of translating very wide anti-avoidance proposals into draft legislation simply too taxing.

This article was published in two parts in Taxation of 5 June and 12 June 2003 and is reproduced with acknowledgment to Lexis Nexis UK.

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Mark McLaughlin is TaxationWeb's Co-Founder, Director and Technical Editor. He is a Fellow of the Chartered Institute of Taxation and a member of the Association of Taxation Technicians and the Society of Trust and Estate Practitioners. He lectures on tax subjects, is co-author of Tottel's IHT Annual and Ray & McLaughlin's IHT Planning, and Editor of Tottel's Tax Planning and Annual series. Mark's work has also been published in Taxation, Tax Adviser, Tolley's Practical Tax, Tax Journal and Simon's Weekly Tax Intelligence.

Since January 1998, Mark has been a consultant in his own tax practice, Mark McLaughlin Associates, which provides tax consultancy and support services to professional firms. He publishes a regular 'Tax Update' e-Newsletter for clients and other professional firms. To receive future copies, contact Mark via his website.

Article Added Friday, 25 July 2003

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