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Government closes stamp duty avoidance loophole

The chancellor has finally clamped down on stamp duty avoidance schemes widely used by rich individuals buying high value residential properties as well as buyers of commercial properties.

 
Government closes stamp duty avoidance loophole

The chancellor has clamped down on stamp duty avoidance schemes that are widely used by rich individuals buying high value residential properties as well as buyers of commercial properties. The changes take immediate effect as from 24 March so anything that wasn’t completed by Budget day last Wednesday will not get through the net.

The only surprise about the Budget clamp down is that government left it so long before moving to close the loopholes. All the schemes are highly artificial but have proved lucrative for promoters as the fee is often as high as half the stamp duty saved. 

Many of the schemes take advantage of concessions to allow Islamic purchasers to avoid paying interest, which is illegal under Sharia law, combined with other concessions. Typically a property is acquired by a company which has the right to assign the purchase to the ultimate owner. The purchase price is paid in two tranches. As long as the first tranche is less than 90% of the value, the purchase has not been ‘substantially performed’ so no stamp duty is payable. Tax is only paid on the second tranche – but even then, only if the remaining 15% of the purchase price exceeds the starting point for stamp duty, currently £125,000.

‘The rules on subsale relief have been changed to make it clear that sub-sale relief cannot be combined with any form of SDLT (stamp duty land tax) alternative finance relief  – a relief for transactions that comply with Islamic financing principles,’ explains Neal Todd, tax partner at lawyers Berwin Leighton Paisner. ‘This blocks a well known SDLT avoidance structure which has typically been used on residential purchases.’ He confirms, however, that legitimate Islamic purchases under Sharia law will still be allowed. 

And the government has been quite canny in its clamp down. The avoidance schemes require the co-operation of a bank or finance house. Few reputable firms wanted to be involved in blatant tax avoidance so many of the promoters channelled their business through  credit brokers. ‘In addition, simply holding a consumer credit licence will no longer be enough for a company to be able to claim SDLT alternative finance relief. This blocks another SDLT avoidance structure mainly used on commercial properties,’  Todd explains. It is likely that from now on banks will be directly involved – and they are in no mood to incur the chancellor’s wrath with dubious tax avoidance schemes.

Tax avoidance would have become even more valuable from 6 April, the new tax year, when the top rate of stamp duty payable on properties valued at £1 million or more rises from 4% to 5%. On the purchase of a £2 million property, a value fairly commonplace in London and the south east, stamp duty avoided would be £80,000-£100,000 after 6 April – and well worth avoiding, even if the fee charged is £40,000 or £50,000.

Another key change alters the land swap rules. Owners sought to artificially depress the value of land in order to avoid or reduce stamp duty, often by using a lease the terms of which changed making the land more valuable once the transaction had taken place. For all land swap transactions on or after 24 March 2011, SDLT will now be due on the greater of the market value of the land acquired and the ‘SDLTable’. ‘The second limb is new,’ explains Todd. ‘The old regime only taxed the market value of the land acquired. This change blocks SDLT structures using contrived land swaps in order to pay SDLT by reference to market values which have been artificially reduced.’
 
But he points out that these changes may have unintended consequences. ‘The new rules effectively increase the SDLT rate on many innocent land swaps including most sale and leaseback transactions.’ 

But will these changes finally put a stop to stamp duty avoidance? ‘It is always very difficult to say what will come next. As long as we keep a tax code that is very, very, complicated there will be opportunities for the well advised and we will probably continue to see planning in this space,’ says Todd.

9 comments so far. Why not have your say?

Jonathan

Mar 25, 2011 at 18:14

oooops, looks like million pound houses have just devalued by 5% overnight.

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Anonymous 1 needed this 'off the record'

Mar 25, 2011 at 19:12

What has sharia law got to do with British Law??!!

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Anonymous 2 needed this 'off the record'

Mar 25, 2011 at 20:49

one rule for all british law

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Anonymous 3 needed this 'off the record'

Mar 26, 2011 at 08:00

Only one law should be observed. British law. If I move to a new country I have to follow their laws.

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Philip Thomas

Mar 26, 2011 at 12:03

What a pathetic move by Osborne. Why didn't he deal with the problem of thresholds, where the whole purchase price is subject to the higher rate of stamp duty. Why didn't he change who pays the stam[p duty, so that the purchaser has to pay from the profits made. And why do Muslims have a better deal than Christian's? If Muslims want to have Sharia law implemented on ANYTHING in England, then don't come here. There countries certainly won't allow English law to be implemented. So stop grovelling Osborne. Do a proper job on stamp duty refrom.

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Philip Thomas

Mar 26, 2011 at 12:05

I also find it shamful that commentaries posted here seem to believe that they had better be anonymous in case of nasty things happening to them if the comment of the unfairness of Sharia law to all others

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john

Mar 26, 2011 at 18:11

Why doesnt Osborne have the political courage to deal with the grossly abused benefit system and imigration ? Instead of petty rubbish like this ?

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George Porter

Mar 27, 2011 at 00:09

There was no necessity to be a Muslim in order to exploit this loophole, as far as I know. So there was no unfairness to non-muslims. It is very likely that most of those exploiting it were non-muslims.

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Anonymous 4 needed this 'off the record'

Apr 18, 2011 at 15:34

Most of the people who exploited this loophole were weathly individuals who very most non-muslim.

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