You have decided a buy a hotel and budgeted on avoiding stamp duty by adopting commonly used avoidance schemes. You have learnt that the rules have changed in the 2002 Budget and you are worried that the full rigours of stamp duty will now be payable, possibly at 4% of the purchase price.
Following on from his last Budget statement, the chancellor has introduced new laws to restrict some commonly used schemes to avoid stamp duty on property transfers.
For instance, it had become common practice for valuable properties to be transferred into new subsidiary companies of the owner - often called "SPVs" (Single Purpose [corporate] Vehicles).
Transfers between companies in the same group are free of stamp duty provided the transfer is not made in contemplation of a sale. Stamp duty on the transfer of shares is charged at only 0.5% of the value of transactions, whereas the direct sale of the underlying land and buildings is charged at:
\* 4% of the purchase price (grossed up with any VAT) if the value of the transaction is more than £500,000.
\* 3% if the value is £250,001-£500,000.
\* 1% between £60,000 and £250,000.
There is no stamp duty for a transaction with a value of less than £60,000.
To avoid stamp duty at the highest rates in the past, the owner, having decided to sell his hotel or restaurant, sold to his buyer all the shares in the new subsidiary company, or SPV. By acquiring the SPV, the buyer also acquired the underlying asset. Accordingly, on a sale valued at £5m the buyer would pay £25,000 in stamp duty rather than £200,000.
Under the new law, the transfer of shares in the SPV is still charged at 0.5%, but there is a clawback charged against the buyer equivalent to the full rate of stamp duty that would have been chargeable if the transaction had been structured as a pure property sale. It will make no difference if the sale also involves other aspects of the hotel, restaurant or business - the property aspect will still be liable for clawback. Stamp duty clawback is chargeable if a sale such as that outlined above occurs within two years of the initial transfer to the new company.
The chancellor has also now closed the "split interest" schemes, which exploited the nature of stamp duty as a tax on documents. The idea of these schemes was to create a structure that avoids or substantially delays the creation of a document that must be stamped. These schemes can no longer be used for transactions of more than £10m.
On the plus side, the chancellor has abolished stamp duty on the transfer of goodwill. Think carefully before loading value on goodwill, however, as this may have adverse consequences that outweigh the benefit of any savings on stamp duty.
With a headline rate of stamp duty potentially more than 4%, some forward planning is important for those who anticipate selling valuable assets. If duty can be saved or substantially reduced, your asset may be more valuable or at least more marketable.
Accordingly, it is important to take advice as early as possible. Buyers may also benefit from advice at the earliest stage.
\* Does the value of the transaction justify the cost of tax planning?
\* Consider acquiring assets in an SPV.
\* Keep SPVs clean and easy to sell.
\* Plan your structure before going to the market.
\* Consider value of stamp duty saving to a buyer.
While primarily payable by the buyer, clawback tax together with interest and penalties can also be collected from the seller company, and against directors of the seller company even though the directors were not in office at the date of the transaction. The Government plans a complete overhaul of stamp duty by next summer, and it is anticipated that the tax will become a charge on transactions rather than on documents with a view to closing still further lawful avoidance techniques.
Tel: 020 7405 2000
For Government guidelines on stamp duty, see: http://www.inlandrevenue.gov.uk/so/
By Tarlo Lyons