All change for stamp duty

It is perhaps appropriate to describe the beginning of Stamp Duty Land Tax as its advent – on current plans and intentions, it is intended that it will come into effect on 1 December 2003. It is an early Christmas present which Scots lawyers in particular could do without, given the vast raft of other changes affecting the conveyancing system in this jurisdiction. Like many other big events, the preparation seems to be somewhat rushed – and in some ways it doesn’t feel as if everything will be ready for the big day. But despite serious attempts to suggest that its introduction should be delayed, the pressure to bring the change into effect as soon as possible seems inexorable – and unless things were to change dramatically, the new system seems certain to come into force at or around the date which has been announced.

The system is certainly new. The tax is a completely new one, despite the attempt to retain a connection with its predecessor in terms of its name. But “stamps” will no longer be involved; and the use of both “duty” and “tax” in its name seems to involve at least one charge too many. However, it will undoubtedly affect “land”. In draft, the tax was referred to as the “Land Transaction Tax”; and while much has changed since consultation began on the proposed new system, that name would have been a more accurate reflection of what has emerged.

The purpose of this article is not to go through all the details of the new tax – an impossible task in anything smaller than a book. The intention here is to draw attention to the main changes which will affect the vast majority of conveyancing transactions of whatever type – what are the main differences from that old favourite, stamp duty?

The basic source of the new law is large enough. Part 4 of Finance Act 2003 (sections 42 – 124) is devoted to Stamp Duty Land Tax, as are (even more terrifyingly) Schedules 3 – 19. This amounts to a grand total of 137 pages of legislation. Some of it will be familiar, at least to those involved with other parts of the tax system. But much is new, especially as compared to what might have been thought of as the Victorian backwater of stamp duty.

The bad news is that there will certainly be more, in the form of what may be quite substantial regulations to come into force when the new system starts. The pressure on time is such that there may not be very much at all to become aware of the contents of these regulations before they become law. And these regulations may go far beyond what one might expect from such secondary legislation, given the terms of Finance Act 2003, section 109: “The Treasury may if they consider it expedient in the public interest make provision by regulations for the variation of this Part in its application to land transactions of any description”. Although this power does have some limitations, there are others allowing for major changes to be made, even before implementation, for instance in relation to the amount of tax chargeable on rent (see section 112).

Thus this can only be an interim report. But the changes are so substantial that the sooner those required to operate them are aware of at least some of the requirements, the better. In this context, the Law Society of Scotland is running a series of seminars in conjunction with the Inland Revenue (details are available from the Update department); and a number of training events from other providers are available before the new system comes into effect.

A form and a certificate

Perhaps the most noticeable change will be that a form will be required to be completed for almost every transaction – even many where no tax is actually payable. There are a limited number of exemptions from notification, for instance where the transaction involves no chargeable consideration. In such cases, self-certification of the transaction document will be required before registration can take place. The form of this self-certification will be specified in regulations – but it should be noted that this will not be possible merely because the consideration falls below what is the (current) £60,000 nil rate threshold.

In return for the successful completion of the form, the solicitor (working on behalf of the client) will get a certificate from the Inland Revenue; and (in the vast majority of cases) it is only when that certificate has been obtained that it will become possible to register the conveyancing documentation in the appropriate register (see Finance Act 2003, section 79).

Accurate completion of this form will be essential, especially as the intention is that it will be dealt with by computer rather than by human intervention. The vast majority of the information required to complete the form will be readily available, but solicitors will need to get used to obtaining certain information not currently to hand. Perhaps the best example is the National Insurance number for individual purchasers. The basic form is six pages long (together with a payslip); but still further information will generally be required where a new lease is involved or the purchaser is a company.

The form will require to be signed by the purchaser – and in general the signature of an agent on the purchaser’s behalf will not be permitted. This requirement is of course new – and in the case of a purchaser who does not require to grant a security it marks the end of the somewhat unusual position which applies in Scotland at present, where a purchaser does not require to sign anything at all in his own name in order to obtain title to land. The practice will probably develop of having the form completed and signed in advance of settlement, as virtually all the information needed should be available before then.

Once completed and signed, the form must be sent to a central Inland Revenue processing centre, in Netherton, along with payment of the tax due, although there will be a range of options available by which payment can be made; and it is thought that forms of electronic submission will soon be available, (even if this seems unlikely by 1 December). Only the form should be submitted to the Revenue, although a plan may be required in a limited number of cases. All then being well, a land transaction return certificate can then be issued and the transaction can proceed to registration.

Immediate registration

There will be occasions when immediate registration is required. Originally, there were no provisions for this to be permitted, but under some pressure from the Law Society of Scotland, the Inland Revenue has agreed to provide an exceptional mechanism whereby “same day” registration can take place, following what will be in effect a personal presentation at the Edinburgh Stamp office. This represents the equivalent of having documents stamped over the counter under the current rules. It is expected that it will not be necessary to use this other than in a small number of high risk cases – but it is necessary to have the mechanism available to ensure that a purchasing client’s title can be registered as soon as possible.

Consequences of a tax return

As the need for personal execution indicates, the form to be completed is a tax return. In common with so many other parts of the tax system, there is also a requirement that the return includes a self-assessment of the amount of tax due; and as already indicated, payment will generally have to accompany submission of the return. The return has to be completed within 30 days of the effective date of the transaction (see below), although in the vast majority of cases it will be completed and submitted very shortly after settlement.

The consequences of the form being a tax return can be seen in the full panoply of administrative provisions now attached to SDLT compliance. Thus there are penalties for failing to complete the return and for incorrect returns; and for failure to preserve records (for six years after the effective date of the transaction). The Revenue can enquire into returns (generally for up to nine months after the filing date) and can demand, in various ways, access to relevant documents. If no return is made, the Revenue can make a determination of the tax chargeable; and can make assessments if a loss of tax is discovered. There are standard tax appeal procedures provided; and proceedings available for recovery of SDLT by the Inland Revenue in appropriate circumstances.

Perhaps the most serious aspect of bringing SDLT into line with other taxes lies in section 96 of Finance Act 2003. This provides for a penalty for “a person who assists in or induces the preparation or delivery of any information, return or other document that (a) he knows will be… used for any purpose of tax and (b) he knows to be incorrect”. Apart from the penalty aspect itself, the imposition of it allows the Revenue to obtain access to papers in relation to any client. While such provisions are familiar to those who advise on tax specifically, they will not be in the general compass of most conveyancing solicitors. Of course, those solicitors who assist clients in relation to their SDLT return will have no intention to commit any such offence – but there are real dangers here. This is especially the case as many aspects of the new regime will call for judgements and apportionments to be made. The administrative aspects of the new regime will require a great deal of attention.
Taxing transactions not documents

It is a given of stamp duty that it is a tax on documents, not on transactions. This is not the case with SDLT – it is unequivocally a tax on land transactions and applies whether or not there exists any instrument to effect the transaction; whether or not any instrument is executed in the UK; and whether or not any party to the transaction is present or even resident in the UK (see section 42(2)).

A land transaction means any acquisition of a chargeable interest. A chargeable interest is very widely defined in Finance Act 2003, section 48 and includes almost all rights affecting land. And “acquisition” is also very widely defined (section 43), going far beyond obtaining ownership. It is made clear that it is the purchaser (which is again widely defined as being the person who acquires the subject matter of the transaction) who is liable for the tax – a simple point which is currently not explicit in relation to stamp duty.

The fact that we are now dealing with a tax on transactions is emphasised by provisions which make it clear that liability will arise where there is substantial performance of a contract in advance or instead of it being completed or settled (see section 44 – this is intended to tackle a stamp duty avoidance device of particular use in England and Wales, where parties can to a greater extent than in Scotland “rest in contract”.)

The practical effect of the emphasis being shifted to transactions rather than documents will be to focus attention on the need for compliance in situations which at the moment would not give rise to stamp duty. Substantial performance will occur where a purchaser takes possession of the subjects or where a substantial amount of consideration is paid – either of which may in exceptional circumstances occur before what is currently thought of as the date of settlement.

Full details of rates were set out in last month’s Journal. For purchases and other transactions apart from those involving the rental element of leases, the rates for residential properties are as they have been since March 2000, with the 0% limit set at £60,000, the 1% limit set at £250,000, the 3% limit set at £500,000 and 4% payable above that limit. While these limits also apply to non-residential property in relation to stamp duty, the 0% limit will rise to £150,000 for SDLT for such property from 1 December 2003. These limits are of course different in relation to the substantial amount of property located in so-called “disadvantaged areas” (see below).

Although rounding of the tax will still take place under the new regime, it will now be down to the nearest whole £1, rather than up to the nearest multiple of £5.

A halt to linked transactions

The existence of thresholds makes it attractive to have a number of transactions, each below a particular limit. There are stronger provisions to prevent this than exist at present, which will mean that “linked transactions” will be charged at the rate appropriate to the total consideration for all of the linked transactions. Transactions are defined as being linked (section 108) “if they form part of a single scheme, arrangement or series of transactions between the same vendor and purchaser or, in either case, persons connected with them.” It is clear that much remains to be explored in the meaning of these provisions.

SDLT will apply to all types of consideration, not merely cash. This may require obtaining the market value of a number of assets or interests, which may not be easy. There are also special rules dealing with situations where the consideration is wholly or partially contingent on factors which may be uncertain at the time when the transaction settles in whole or in part. We await (with somewhat bated breath) effective guidance on such difficult issues.

Leases: “net present value”

The basis on which the rental element of leases will be charged is not yet finally fixed, although there is a scheme set out in Schedule 5 to the Finance Act 2003. It seems likely that the fundamentals of this scheme will come into effect, although details may change. The basis involves working out a “net present value” of the total rent payable under the lease. This net present value, calculated by using a discount for future rents, will then be charged at a percentage rate. The system is thus more akin to that which applies to purchases; but working out the net present value of a lease will involve at least some complications – the use of a spreadsheet incorporating the relevant formula would seem to be necessary, although the Revenue intend to publish (at least electronically) a helpful table.

There are perhaps more potential complications with SDLT on rents than exist elsewhere. This is especially the case with increasingly common leases, which do not have a fixed rent, or even a fixed rent with standard terms for its review. Rents may alter depending on turnover or a whole range of future uncertain factors, and the appropriate means of dealing with such situations remains to be seen.

As long as the full details of the duty on lease rentals remain to be fixed, it is difficult to provide definitive advice. But it does seem likely that for many leases other than for those with relatively small rents, SDLT after 1 December will produce a greater charge than currently exists under stamp duty.

Exemptions and reliefs

Most (but not all) reliefs and exemptions applicable to stamp duty remain under SDLT. There is an important exception in relation to sub-sales; and a current practical method of avoiding a double charge on exchanges of property will no longer be available. But there can be no doubt that even with most explicit reliefs preserved, the imposition of SDLT may well be more demanding than that of stamp duty in practice.

This will make the reliefs which remain (and a few new ones created under the new regime, such as in connection with the crofting community right to buy) all the more important. Perhaps the most important relief will be for land in disadvantaged areas. This already applies the 0% rate to residential property of a value up to £150,000; and exempts non-residential property entirely. To correct what may have been a misconception in last month’s Journal, the exemption for non-residential property applies (already) to the rental element of leases, as well as to purchase prices and premiums.

A change in procedures needed

The move to SDLT will require virtually all property lawyers to change their procedures. Apart from administrative requirements, the changes for standard house purchases and sales are relatively limited. But for any property transaction more complex than that (and there is a great deal more to the new regime than space permits me to cover in this article), it may well be necessary to analyse the effects of the new tax with some care. Meeting its requirements will be difficult enough; avoiding its nastier effects may well be impossible in many cases. As with all big events in December, some preparation now may save a great deal of trouble further down the line.

ALAN BARR, Legal Practice Unit,  The University of Edinburgh. Partner, Brodies