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Stamp Duty Reform

Author: Jillian Egner | Date Added : 13-Apr-05

COMMERCIAL PROPERTY/CONSTRUCTION

Stamp Duty Reform

Stamp Duty gets its first major overhaul since 1891!

Jillian Boyd outlines the new provisions.

Stamp Duty Reform

With the exception of a gentle sprinkling of amendments in the Finance Acts, the 1891 Stamp Duty Act has survived the industrial and technological revolutions of the 20th Century unaltered. Stamp Duty, however, in its current form ceased to exist from 1 December 2003 and was replaced with Stamp Duty Land Tax ("SDLT") which, even though its name suggests a continuation with the past, is essentially a new tax.

The Government's rationale for the introduction of this new tax is threefold:

Fairness to minimise Stamp Duty avoidance mechanisms;
E-business to support the inevitable advent of e-conveyancing; and
Modernisation to bring Stamp Duty into line with income tax and corporation tax.
Chargeable

SDLT is charged on land transactions rather than existing as a document tax. The following types of transactions will be chargeable: freehold conveyances, the grant, assignment, variation or surrender of a lease, the grant, variation or release of a right of way or any other easement or the grant, variation or release of sporting rights or any other incorporeal hereditament; the grant of an option or a right of pre-emption; and the making, varying or releasing of a covenant.

There are three exemptions, the creation of a mortgage (or similar security interest), a licence to use or occupy land and tenancies at will.

Compliance Procedure

Purchasers or tenants will face a fundamentally different compliance procedure: purchasers/tenants must pay the tax and file a self-assessment or "land transaction return" within 30 days of the "effective date" (which for the majority of transactions will be the date the purchase price is paid and the keys handed over) in a similar manner to income tax self assessment. Provided the required information and payment is submitted in full, an SDLT Certificate will be issued by the Inland Revenue to, in practice, the purchaser's or tenant's solicitor who will then bind it to the purchaser's or tenant's deed before submitting the deed for registration. The SDLT Certificate replaces the stamped impression commonly seen on deeds today.

Late returns are liable to fixed penalties and the Inland Revenue has 9 months from the date the return is delivered to launch an enquiry. A new offence of fraudulent evasion of SDLT, which carries a maximum penalty of imprisonment for 7 years, has been created.

Residential Property

The vast majority of individuals purchasing residential property will (with the exception of the compliance procedure) not be affected by the introduction of SDLT as the purchase of residential property will be charged at the same rate as Stamp Duty. SDLT is a percentage of the purchase price at the appropriate rate set by the Government.

Non-Residential/Mixed Property

Again, the SDLT payable is a percentage of the purchase price at the appropriate rate set by the Government. However, under SDLT the nil rate band has been increased to £150,000.

Leases

The tax charged on the grant of a lease at a rent is set to increase significantly, bad news for tenants. Leases will be chargeable at 1% of the "net present value" of the rental stream over the duration of the lease, ie the total rental value subject to a discount rate of 3.5 %. In addition, the first £150,000 of this net present value will be exempt equating to a £1,500 reduction - for tenant's whose lease has a net present value of less than £150,000 no tax is payable. Any premium payable under the lease will be charged at the appropriate SDLT rate and the fact that a tenant may exercise a break clause in the lease will not entitle him to a refund. Extensions will be treated as new leases (and will be taxed) and the lease element of a sale and lease back transaction will be exempt from SDLT meaning the transaction will not be taxed twice.

Reliefs

The vast majority of reliefs available under Stamp Duty will continue to be available.

It should be noted, however, that the suggested anti-avoidance measures are quite stringent and the purchasers of previously exempt property/transactions will need to be careful as effectively they could "inherit" the liability for incorrect exemptions previously granted.

In summary, the purchaser of residential property will not be greatly affected by the implementation of SDLT. However commercial tenants will see a major increase in the amount it pays under SDLT in comparison to what it paid in stamp duty.

Jillian Boyd is an Associate in the firm's Commercial Property Department. Jillian can be contacted at jillian.boyd@lestrangeandbrett.com

Quote: bad news for tenants

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Stamp Duty Reform