Encouraging Tax Avoidance
Stamp duty on commercial property and asset sales used to be regarded as a transactional cost - painful but bearable.
The increases in the last two Budgets bringing stamp duty from 1 per cent to 3 per cent on large transactions have changed perceptions. Stamp duty is now a tax worth avoiding (as opposed to evading which is illegal).
It is ironic that a government which has clearly got the tax avoidance industry in its sights (for example a general anti-avoidance rule is promised) should have provoked an interest in tax avoidance.
In fact there is a prospect that the Government will receive less revenue from some businesses as they adopt structures to reduce their stamp duty liability - measures they would not have considered had rates not risen so sharply.
Stamp duty is payable by anyone who buys a property, patent right or shares and wants to register their ownership at the Land Registry, Patent Office or with the company.
The tax raises some pounds 400 million a year for the government without there even being a statutory duty to pay.
When the latest stamp duty rise to 3 per cent was imposed in the March Budget, many people assumed the increase only applied to expensive houses.
This is not the case. The new rates apply to the purchase of all forms of property where title cannot and does not pass by delivery including land, goodwill, so-called intellectual property (patents, trademarks, copy rights, design rights and so on), fix ed plant and machinery and most form of debt, making the stamp duty costs on the sale of businesses as well as properties very expensive.
However, the stamp duty payable on the purchase of shares remains at 0.5 per cent.
These increases have resulted in a growing trend for businesses and property companies to consider structures which mitigate the effect of the new rates.
However, the Stamp Office has been increasingly active in challenging any perceived artificial avoidance schemes, the most popular of which has been to execute documents offshore, typically the Channel Islands, to take advantage of the rule that document s executed outside the UK are not subject to stamp duty until they are brought into the UK.
This method of avoiding tax has in recent years been successfully challenged by the Inland Revenue and is now less effective than it used to be.
For example, the Stamp Office has successfully challenged in the courts schemes to execute property agreements offshore and still obtain property title at the Land Registry.
Importantly, the Stamp Office has also announced that the Inland Revenue may in the future refuse to allow purchasers to make claims for tax relief based on assets acquired under unstamped agreements.
Artificial schemes will, where possible, be challenged by the Stamp Office increasingly by looking at the substance of a transaction rather than its form. However, given the structured nature of stamp duty effective planning is still possible with care. …