Is it possible to avoid stamp duty on land and property?
A lot has been made recently in the press about buyers of some of the UK's most expensive homes avoiding stamp duty land tax (SDLT) by purchasing their home through a company.
Much of the furore has been fuelled by the introduction in April 2011 of a SDLT rate of 5 percent for residential property purchases exceeding £1 million, but is it really possible to avoid SDLT when purchasing a home or land?
SDLT is a tax on land transactions and arises on, among other things, the acquisition of a freehold or leasehold interest in a property. SDLT is payable by the purchaser on the amount paid for the land or property irrespective of whether that is in the form of cash, the provision of services, or any other consideration in kind.
Currently, the top rate of SDLT on residential property is 5 percent where the sale price exceeds £1 million. On non-residential and mixed property purchases (for example, a farm with a mix of residential and non-residential elements) SDLT is charged at 4 percent where the sale price exceeds £500,000.
It is therefore perhaps not surprising that more and more people are looking at ways to avoid paying SDLT. And it is perhaps not also surprising that HMRC is taking an ever keener interest in many of the avoidance schemes being touted on the internet. Given the potential costs, an easy option to avoid SDLT would be attractive.
There is much confusion over potential ways to avoid SDLT, but two of the more commonly mentioned involve either the use of a sub-sale scheme or creating a company, often based offshore, to purchase the property.
Sub-sale schemes are often advertised as a viable and legal SDLT planning tool. Many of these schemes take advantage of provisions in the SDLT rules commonly known as ‘sub-sale relief’. Sub-sale relief in itself is not an aggressive SDLT planning tool, but many people over the years have sought to use it to exploit loopholes in the SDLT rules to reduce or completely avoid paying SDLT on the full purchase price for a property.
At its most basic level, sub-sale relief involves A agreeing to sell a property to B who in turn agrees to sub-sell the same property to C. It typically works by relieving the transfer from A to B from SDLT, so that SDLT is paid only once on the full amount paid for the property by the person who ultimately acquires it.
Many sub-sale schemes are artificially structured so that the SDLT paid is less than that due on the full amount paid for the property (sometimes it is reduced to zero). Prior to the introduction of certain anti-avoidance rules in 2007, many people felt that such sub-sale schemes worked, but since then general consensus is that they do not. In 2011, HMRC brought its first SDLT avoidance case to the tribunal and has confirmed on a number of occasions that it is actively challenging SDLT avoidance in this area. Individuals opting for this route are effectively relying on HMRC not noticing and this is a very risky strategy.
The use of a company, whether based in the UK or offshore to purchase the property, is altogether more interesting and does offer potential benefits, but not on the initial purchase.
If a UK or offshore company is used to purchase a property, it will still pay SDLT on the purchase price at the same rate as an individual would if he/she purchased the property direct. There is no immediate SDLT saving on purchase.
An SDLT saving may arise however when the time comes to sell the property. Rather than selling the property, it is possible to sell the shares in the company thus transferring ownership of the property. This means that the new purchaser (and any future purchaser of the shares) pays stamp duty at 0.5 percent (provided it is a UK company) or no stamp duty (if an offshore company is used) on the purchase price of the shares rather than SDLT at 4 percent or 5 percent on the purchase price of the property. On a residential property valued at £2 million, subsequent purchasers could save £90,000 from purchasing the shares in a UK company as opposed to purchasing the property direct.
There are also benefits for the seller, as it may be possible to negotiate a higher purchase price for the shares so that the SDLT saving is basically split between the parties.
It should be noted however that using a company to purchase a residential property and the directors of that company then living in that property may in certain circumstances give rise to significant income tax charges which would likely outweigh any SDLT savings.
For those not wishing to choose the ‘company’ route, it is possible to reduce exposure to SDLT by taking advantage of one or more of the reliefs and/or exemptions contained within the rules. It may be possible to reduce the purchase price of a property subject to SDLT by attributing part of the purchase price to chattels and any other assets not liable to the tax, as long as the amount attributed to these assets does not exceed their real value.
HMRC is now a lot more able and willing to challenge SDLT avoidance and has beefed up the number of anti-avoidance rules contained in the legislation to specifically catch many tax saving schemes and arrangements being promoted. It is possible to reduce exposure to SDLT through the reliefs and exemptions within the legislation or by purchasing shares in a property holding company rather than the property direct. However, it is not generally possible to avoid SDLT on the straight forward purchase of property in the UK without taking on a significant, and in my opinion, and unreasonable amount of risk.
This article was first published in Money Observer.