No change except that stamp duty penalties can no longer be deferred by executing and retaining the documents offshore. A contract for the sale of land where the price including VAT, does not exceed £10m is not subject to stamp duty. Instead stamp duty is due on the transfer which completes the transaction. “Resting on contract” stamp duty saving schemes (which rely on the absence of a transfer completing the contract) continue to be effective to save stamp duty for these smaller transactions.
This is where the most significant change has occurred – in some cases the contract will be subject to stamp duty.
Following the Finance Act 2002, contracts for the sale of UK land executed after 24th July 2002 are subject to stamp duty at 4% where:
- the consideration exceeds £10m (including VAT) and
- a transfer completing the sale is not executed and stamped within 90 days of execution of the contract.
Although this measure was introduced as a response to the “resting on contract” schemes, it is not limited to situations where the parties intend to save stamp duty. It applies whenever there is a delay of more than 90 days between exchange and completion. There is a facility for the Stamp Office to extend the 90 day period as outlined in a Stamp Taxes Customer Newsletter issued by the Inland Revenue on 25th July 2002, but this will not be granted automatically and an extension cannot be given if all or substantially all of the intended consideration has already been paid. Accordingly, a vendor should consider placing an obligation on the purchaser to stamp the contract after 90 days if a transfer has not been executed and stamped by then (unless an extension has been granted by the Stamp Office), so that the vendor can rely on the contract, for example in Court.
Also, if a transfer is executed more than 90 days after the contract is signed, it is advisable that the contract is stamped and the duty denoted on the transfer. If the transfer only is stamped in this situation, this will not cancel the stamp duty liability on the contract. The stamp duty liability on the contract (plus interest and penalties) would therefore have to be paid should either party need to rely on the contract, for example where the property is tenanted, to enforce post-completion an obligation to recover and pay over arrears of rent.
The often lengthy period between contract and completion means that development agreements signed after 24 July 2002 involving the sale of land for a price exceeding £10m will become stampable after 90 days. The points mentioned in 2 above apply here also: a vendor will normally wish to protect his position by ensuring that the contract is stamped.
Until 2003, it remains the case that stamp duty on the purchase of a company which beneficially owns UK land is charged at only 0.5% of the purchase price (nil if the company is incorporated overseas).
However, if the company being sold acquired the land in the previous 2 years with the benefit of the stamp duty reliefs for intra-group sales or for reconstructions, that relief will be “clawed back” when the company is sold. Stamp duty will be charged (normally at 4%) by reference to the market value of the property at the time of the intra-group transfer or reconstruction.
It is the company which acquired the land with the benefit of the relevant relief (i.e. the company being sold) which suffers the clawback of relief. It is therefore important that a potential purchaser of a company owning land finds out through due diligence before the acquisition whether the target company will suffer a clawback of stamp duty relief when it leaves the vendor’s group and, if so, the likely amount of the clawback. The purchaser will also want to seek an indemnity from the vendor in respect of any clawback of relief suffered by the target.
Stamp duty on the purchase of property SPVs (including property-owning companies) is almost certain to increase in 2003 when further stamp duty reforms are due to be implemented (see 8: Special purposes vehicles: More changes in 2003).
Assuming the intention is to acquire the beneficial interest also, the Finance Act 2002 will impose a stamp duty charge where the VAT-inclusive price for the beneficial interest exceeds £10m. The contract to acquire the land (as opposed to the company) will be stampable at 4% unless the contract is completed within 90 days. Where the VAT inclusive price does not exceed £10m, it remains the case that the contract to acquire the land should not be liable to stamp duty.
Stamp duty on the shares in the company continues (at least until 2003 – see 8 below) to be charged at only 0.5% or nil if the company is incorporated overseas.
This option continues to be free of UK stamp duty, provided it is structured as a change of partner rather than the sale of a partnership interest.
It is still possible after Finance Act 2002 to contribute UK land to a partnership without incurring a stamp duty liability, provided the contribution does not amount to a sale of the land.
The Stamp Office published a consultation document in April 2002 which sets out radical proposals for changes to stamp duty on land transactions. The core of the new stamp duty regime is likely to be a move away from stamp duty on documents (which the Stamp Office cannot sue to collect) to stamp duty on transactions (which the Stamp Office can sue the purchaser to collect). Draft legislation is expected in autumn 2002.
The consultation document targets the concept of minimising stamp duty through SPVs (whether UK or non-UK) by proposing that stamp duty of approximately the same amount as would apply to a direct sale of the underlying land will be charged on sales of substantial interests (30% or more) in certain qualifying entities (companies, partnerships, etc.) whose major activity involves ownership or exploitation of UK land and buildings and whose assets consist primarily (for example, 70% of total gross value) of UK land and buildings.
Groups which have already put property into SPVs with a view to minimising the stamp duty by selling the SPV, should ideally aim to sell the SPV before the proposals outlined in the Consultation Document are implemented (anticipated to be mid-late 2003), provided this would not trigger a clawback of stamp duty group or reconstruction relief. If a sale by this date is not commercially desirable, the proposals in this area should be kept under review as the consultation proceeds.
© Herbert Smith 2002
The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.
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