Stamp duty: contracts for the sale of land

Section 115 Finance Act 2002, brings within the charge to stamp duty certain contracts for the sale of UK land and buildings. This note outlines the scope of the provisions and addresses a number of practical issues concerning its operation.

Section 115 Finance Act 2002

Agreements for the sale of UK land where the price exceeds £10m or it forms part of a larger transaction or a series of transactions for which the aggregate amount exceeds £10m are now chargeable to stamp duty unless a transfer made pursuant to the agreement is presented for stamping within 90 days (or such longer period as the Revenue agree) of the execution of the agreement.

The purpose behind this provision is to hinder the use of stamp duty avoidance schemes that employ the technique of "resting on contract", i.e. where the price is paid by the purchaser but the purchaser does not take a transfer but instead "rests on contract" (with the purchaser usually taking a transfer of shares in the company or companies holding the bare legal title to obtain control over the whole interest in the property).

Contracts not within the scope of Section 115

• Contracts for the sale of the equitable interest only are not within s115. These are subject to duty already;
• Contracts where the price is £10m or less. It is the VAT inclusive sum that determines whether the agreement falls within section 115 or not. Accordingly, if VAT is payable then this will be taken into account. If a sale takes place at £10m(or less) exclusive of VAT but transfer of a business as a going concern relief is available then the agreement should be outside Section 115;
• Contracts executed on or before 24 July 2002.

Contracts within Section 115

• Contracts executed after 24 July 2002 where the price exceeds £10m (including any VAT payable) and where a transfer made pursuant to the contract is not presented for stamping within 90 days of the execution of the contract (or such longer time as the Revenue agree). Conditional contracts are not excluded (see further below). Extending the 90 day period The legislation contains machinery for the Revenue to extend the 90-day period. This gives the Revenue considerable discretion as well as providing that the Revenue must not extend the 90-day period if it appears to them that the whole, or substantially the whole, of the intended consideration has been paid or transferred. What factors will the Stamp Office have regard to in deciding whether to extend the 90 day period? It is thought that the Revenue will look at two broad factors. First, if significantly more than the usual deposit is paid on entering into the contract then it is unlikely that an extension will be granted. Second, even if no more than the usual 10% deposit is paid then an extension will not be granted if the Revenue believes "avoidance" is involved. However, we believe that it is unlikely that the Revenue will deny an extension where no more than the usual deposit is paid provided that it can be demonstrated that completion will not take place within the 90-day period because of the commercial realities of the transaction. Nevertheless, the Revenue does have a broad discretion and we will therefore have to wait and see how it is exercised. If an extension is granted how long will it be for and can further extensions be applied for? The published guidance gives no indication of this other than to emphasise that the Revenue have a wide discretion whether to grant an extension. An application will need to explain why a transfer is unlikely to be executed during the 90-day period, highlighting the commercial nature of the arrangements. It will be for the applicant to specify the length of the extension that he requires. If it becomes apparent that the extension that has been granted will not be sufficient then a further application can be made (there is no limit to the number of extensions that may be granted). What is involved in making an application? A dedicated unit ("The Stamp Taxes Contracts Unit" based in Manchester Stamp Office) has been established which will have sole responsibility for section 115. All applications for an extension of the 90-day period must be made to that unit. Applications to extend the 90-day period must be made in writing and include specific information about the seller, purchaser and the transaction. The application must contain details of any relief (for example, intra-group relief) that is claimed in respect of the transaction. A responsible officer of the purchaser or solicitor or accountant acting for the purchaser must make the application. If an application is to be made, when should it be made? The Stamp Taxes Contracts Unit will endeavour to process applications within 30 days of receipt and recommend that agreements be lodged with them no later than 60 days after the agreement is executed. That said, penalties and interest would only start to run 30 days after the end of the 90-day period. Nevertheless, where agreements are clearly not going to be completed within the 90-day period it is desirable for an application to be made expeditiously. Difficult cases A buyer needs to consider whether the contract he is entering into could fall within section 115 (see above). Where the contract is conditional and completion is likely to take place after the 90-day period it is desirable that an application to extend the 90-day period is made soon after execution. The application of section 115 to sub-sales that are not completed within the 90-day period may create particular difficulties. For example, consider a simple sub-sale where A contracts with B and B contracts with C. B and C need to consider whether they need to have contractual provisions that protect their respective stamp duty positions. Section 115 operates by requiring C to pay duty on the B/C contract to the extent that the duty payable on the price paid under the B/C contract exceeds the duty paid by B on the A/B contract. From B's perspective, if B has paid duty on the A/B contract then B will require C to reimburse B so as to preserve the principle that C should be solely responsible for paying the duty on the price C pays. To do this C would need to know (and B would need to disclose) the price B pays under the A/B contract. C would also need to know the duty B has paid in order to offer to the Revenue the correct amount of duty payable on the B/C contract. Further, where there are sub-sales of part (eg. in a residential development) the duty paid by each ultimate purchaser (if it is paid at a lower rate) may trigger an entitlement to a repayment on the earlier contract or contracts. If B becomes entitled to a repayment (and the repayment will only be made to the person who has paid the duty) then C (who under the B/C contract has reimbursed B for the duty B has paid) will wish to reclaim the repayment from B. B will wish to include a contractual obligation on the part of C that C will present the transfer for stamping as soon after execution of the transfer as is reasonably practicable. This will be of particular importance where it is envisaged that all contracts will be completed within the 90-day period (or such longer period as the Revenue may have agreed) because it is only the presentation of the transfer (and not execution of the transfer) that stops the clock running for stamping the A/B contract. Accordingly if C takes a transfer but does not stamp it within 30 days of the expiry of the 90-day period (or the agreed longer period) the A/B contract becomes liable to duty. There are clearly some difficult issues that may arise on sub-sales that are not completed within the 90-day period. Both intermediate sellers and purchasers will need to consider their positions in the context of the specific transaction. For further information, please contact: Richard Croker Corporate tax partner Phone: + 44 (0)20 7367 2149 Email: [email protected] Michael Boutell Professional support lawyer Phone: + 44 (0)20 7367 2218 Email: [email protected]