Time to pay closer attention to Stamp Duty

United Kingdom
Stamp duty has rarely been regarded as a "serious" tax and comparatively little effort has gone into mitigating it.

This is likely to change following the introduction in the Budget of the 2% charge for transfers of property over £500,000 (11/2 % for transfers over £250,000). Property includes not only real estate but also any other property, the title to which cannot pass by delivery (eg goodwill, intellectual property and book debts). The 1/2 % rate is, however, retained for shares.

Whilst these rates are not as high as some of our European partners, this could represent the first step towards a comparable rate, which in some member states is in double figures. It is an attractive target for the Government because it is a cheap tax to collect.

Stamp duty is a tax on documents not transactions. We may see more transactions completed without bringing into existence a written contract or transfer. For example, one party may make a written offer, the acceptance of which is effected by the other's conduct. This can work for book debts but will not work for registrable items such as real property or intellectual property rights.

Decision to stamp

We may also see more documents simply not being stamped. Stamp duty in this respect is different from any other tax. The Inland Revenue cannot force a person to stamp a document that is required to be stamped. The reason why certain documents must be stamped is because certain bodies will not effect a registration unless they are properly stamped. For example, the Land Registry and the Patents Office will not effect transfers of title to land or patents unless the document transferring title is properly stamped. The sanction for not stamping documents that do not need to be registered is that they may not be adduced in evidence should the need arise to sue on the document. Where this eventuality arises, it may be stamped late on the payment of a penalty.

The decision to stamp or not to stamp rests on balancing the likelihood of the document having to be produced in a court of law against the level of penalties that may be payable if the document has to be stamped.

Offshore documents

Executing documents offshore may become more common. A liability to stamp duty does not arise until 30 days after a document executed offshore is brought into the UK. In certain cases there may never be a need to bring a document into the UK. The Court of Appeal is due to hear the Parinv case at the end of the year or early next year. This case involved a buyer of UK real estate entering into an agreement with the seller which was completed by the seller executing a declaration of trust, declaring that the seller holds the real estate as bare trustee (nominee) for the buyer. These documents were executed offshore and would not be liable to stamp duty so long as they remained there. Subsequently the buyer directed the seller to execute a Land Registry transfer of the real estate and submitted the transfer for stamping on the basis of it being a transfer between a bare trustee and the beneficial or "real" owner (the buyer). If correct, it would attract stamp duty of 50p only. The High Court ruled that the documents retained offshore could not be used in evidence because they had not been stamped and that therefore the court could conclude that the transfer by the bare trustee to the beneficial owner was in fact the document transferring the whole of the economic interest in the property so that full stamp duty was payable.

Even if the Revenue are ultimately successful in Parinv that will not stop the flow of alternative schemes. These include:

  • the "offshore option route" (under which most of the value of the property is paid on the grant of an option which is executed offshore)

  • the "wayleave scheme" (a variation on the offshore option route)

  • the use of an offshore company to package UK real property the transfer of which is not subject to stamp duty

Historically, clients have rightly felt a little embarrassed at using what are quite blatant tax avoidance schemes. However, the doubling of the stamp duty rate must now knock down the last bricks of prejudice and lead to much more widespread use of schemes.

We as a firm are ready to assist in appropriate cases. It is our view that pure schemes have their place but it must be preferable for a client if the scheme can have foundation in reality and further, or at least, fit the goals of the client.