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Stamp duty land tax – is avoidance a realistic option?
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The circumstances in which the Rt Hon Alistair Darling delivered his Budget Report on 24 March dictated that this was always likely to be a relatively unexciting affair - the state of the public finances would prevent any largesse on the part of the Chancellor, whilst equally the proximity of a general election would lead to the deferral of any painful tax increases.
Not all of the announcements made in the Budget will necessarily become law - some of the measures were enacted in the Finance Act 2010, which received Royal Assent on 8 April 2010, whilst others have been deferred to the next Parliament and, depending upon the results of the general election may never make it on to the statute books.
Two measures which were enacted in the Finance Act 2010 and also neatly illustrate the opposing influences of the state of public finances and impending general election, are those announced in relation to stamp duty land tax (SDLT).
In a measure aimed at stimulating the housing market, the threshold at which SDLT becomes payable by first-time buyers has been doubled from £125,000 to £250,000 with immediate effect. At the other end of the spectrum, a new top rate of SDLT of 5% will be imposed on purchases of residential property costing over £1 million.
The new exemption for first-time buyers, whilst apparently a generous relief, is hedged with restrictions:
- The relief will only be available for two years (applying to transactions with an effective date between 25 March 2010 and 24 March 2012 inclusive)
- A first time buyer is defined as one who has not previously acquired a freehold or leasehold (other than a lease of less than 21 years) interest in residential property in the UK or the equivalent worldwide
- Perhaps most onerously, where there are joint-buyers both must qualify for the relief
Presumably it is partly to offset any loss in tax revenue from the first-time buyer's relief that the new top rate of 5% is to be imposed on residential property transactions exceeding £1 million - though rather curiously, the increased rate does not come into effect immediately, but will apply where the effective date of the transaction is on or after 6 April 2011.
An obvious consequence of the new top rate of SDLT will be to increase the appetite of purchasers to consider using tax mitigation schemes to reduce their SDLT tax liability. It is therefore perhaps unsurprising that the Budget also contained a raft of anti-avoidance measures, some of which directly targeted reasonably well-known avoidance schemes, and also included a further requirement in relation to the disclosure regime including extending it to residential property acquisitions exceeding £1 million.
Human nature being what it is, it is probably a fair assumption to believe that the new tax rate will result in a greater number of tax payers using mitigation schemes than previously, rather than leading to a decrease in the number of schemes due to the anti-avoidance related measures being introduced. However, a cautionary note should be sounded both to purchaser's and their advisers about the use of mitigation schemes: whilst few like to pay tax it has to be appreciated that there is a very real risk involved in using schemes designed to reduce tax. The risks involved range from simply having to deal with queries from HM Revenue & Customs (which to be fair are usually dealt with by the scheme advisors), to protracted and costly litigation or to interest and penalties being imposed in excess of what would have been the original liability if the scheme is ultimately deemed to fail.
The danger is that in a heavily commoditised residential property market, there is a temptation for mitigation schemes to be bolted on to a transaction as a ready-made optional extra in the same way one might choose metallic paint for a new car.
Such "pre-packed" arrangements could lead to an increase in the contrived/artificial nature of the whole transaction - something the anti-avoidance regime is acutely sensitive to and seeks to defeat.
This is not to say that property-buyers should never contemplate using mitigation schemes - carefully planned and executed arrangements clearly have their place for those taxpayers who are fully aware of the ramifications involved.
Anyone considering using an SDLT mitigation scheme should bear in mind the following:
- Sufficient details of the arrangement should be disclosed to HM Revenue & Customs - if they are not HM Revenue & Customs could challenge the arrangement up to 6 years (and in exceptional circumstances 21 years) later
- The nature of the mitigation scheme industry and the anti-avoidance regime is that the law is constantly evolving and schemes can have a very short shelf life - any scheme which is marketed as having successfully operated for a substantial period of time should be treated with caution
- Claims that any scheme has HM Revenue & Customs "approval" or "clearance" should be questioned
- If a mitigation scheme has been "signed off" by a QC or other senior barrister the advice should be obtained and scrutinised
- As with gambling - you should not get involved with mitigation schemes if you cannot afford the consequences should the arrangement fail
- Given the potential tax and fees involved, it is always worth considering having the scheme reviewed by somebody other than the person marketing it
If you would like to discuss any matter arising from this article or indeed any other tax matter, please contact Simon on 0161 909 4192 or by e-mail email@example.com or your usual contact at Pannone.