Tax special: Questions of duty

Neil Cohen

This year’s Finance Bill introduces a new form of stamp duty, to be known as “stamp duty land tax”. The SDLT regime is expected to replace stamp duty on 1 December 2003. Unlike stamp duty, SDLT is not voluntary. The purchaser (including a lessee or tenant) will be liable for the tax and must submit to the Inland Revenue a “land transaction return” – a self-assessment of SDLT – within 30 days of the transaction. Once the tax has been paid, a certificate will be issued that will enable registration at the Land Registry to take place. Stamp duty is a tax on documents. But this is not how SDLT will work. It will be a tax on “land transactions”, so an SDLT liability can arise even if there are no documents, although existing property legislation will still require a written contract in many cases. The present rates of 1%, 3% and 4% for stamp duty will be carried forward to the SDLT regime, although from 1 December 2003 the nil rate for non-residential property will be raised from £60,000 to £150,000. It is intended that SDLT will complement electronic conveyancing, although e-conveyancing is not expected to be activated for a while yet. There are a number of provisions in the new regime that will be of interest to registered social landlords. Charities relief
This is to be continued, although in a modified form that may sometimes result in the relief not being available even though the RSL in question is a charity. The RSL must intend to hold the land for qualifying charitable purposes – that is, for use in furtherance of its charitable purposes (or those of another charity) or as an investment from which the profits are applied to the RSL’s charitable purposes. It is not entirely clear yet what the words “investment” and “profit” mean in this context. Also, the transaction must not have been entered into for the purposes of avoiding SDLT. However, the charities relief will be withdrawn if, within three years of the transaction, the RSL ceases to be a charity or the land is used for purposes other than those set out above. Relief may also be lost if these events occur after the three-year period but pursuant to arrangements made during the three year period. If the relief is withdrawn then the charitable RSL will be liable to pay the SDLT what it would have paid had the charities exemption not been available. There will be a partial clawback if only part of the land in question is subject to the withdrawal of charities relief. Publicly subsidised acquisitions
The current stamp duty relief for publicly subsidised acquisitions is to be continued unchanged under the SDLT regime. This will be of interest to non-charitable RSLs who would otherwise be liable to stamp duty/SDLT. Properties in disadvantaged areas
As from 10 April 2003, all non-residential property transactions in disadvantaged areas will be exempt from stamp duty and SDLT no matter how much the consideration. For residential properties in disadvantaged areas the exemption applies if the consideration is not more than £150,000. In addition, from 1 December 2003, all non-residential property transactions, wherever the property is situated, will be exempt from stamp duty provided the consideration is not more than £150,000. However, note that if a single contract covers six or more residential properties, they will qualify as “non-residential” for the above purposes. For mixed-use properties, it will be necessary to apportion the price “on a just and reasonable basis”. The Stamp Taxes Office has indicated that it would consider apportionment on the basis of the percentage area quoted in planning applications where appropriate, or alternatively of floor space relating to the respective uses. Housing the homeless
A back-dated exemption is to be introduced to exempt from stamp duty/SDLT certain leases granted by RSLs under agreements with local authorities to house temporarily the homeless. This will apply to properties leased to the RSL for a term of five years or less and which the RSL agrees with a local authority to provide, for local authority nominees, temporary rented accommodation. The above exemption will apply to instruments executed after the date of royal assent of the Finance Act 2003, which should happen some time in July/August 2003. However, there is also provision for repayment of stamp duty where the agreement was executed between 1 January 2000 and royal assent of the Finance Act 2003 (this back-dating also applies to effectively exempt from stamp duty agreements that have not already been stamped). The claim for stamp duty repayment must be made before 1 January 2004. RSLs and all other property owners will need to be familiar with the new SDLT regime so as to be aware of the potential tax cost and, if possible, mitigate such cost. Neil Cohen is a partner in the tax and VAT division of solicitor Trowers & Hamlins

David Golten

On 1 July, during the third reading of the finance bill, Paul Boateng, chief secretary to the Treasury, said: “Recognising the valuable role played by registered social landlords, we do not believe that it is appropriate now to seek stamp duty on the many lease agreements currently in place, not least because under current stamp duty provisions, it is unclear whether the liability should be met by those RSLs or their tenants.” Boateng’s statement, which recommends an amendment to the bill that will exempt RSL tenancy agreements going back to 1 January 1990 from stamp duty, vindicates the energetic lobbying by the National Housing Federation and the decision of New Charter Housing Trust to challenge the imposition of stamp duty on RSL tenancies. As the solicitor advising the NHF and New Charter, I watched with interest how the attitude of the Treasury changed once the implications of the proposed litigation became clear. The government’s difficulties started when it became known that, just as courts up and down the country were starting to throw out possession cases where tenancy agreements had not been stamped, the chancellor announced sweeping exemptions for commercial property investors in designated deprived areas. It was unfortunate for the government that these “deprived” areas included such prestigious developments as Canary Wharf in east London. Aside from the strong legal arguments, it soon became clear to the government that the publicity generated by the legal challenge, which would highlight the prospect of commercial property speculators being given a tax exemption not extended to social housing providers, would be embarrassing, to say the least. At first the government remained opposed to our proposal, although the chancellor did announce a partial exemption going back to 1 January 2000 for RSL tenancies entered into with local authorities under the homelessness legislation. As welcome as this was, it merely scratched the surface of the problem faced by RSLs, which was estimated to cost the sector up to £2m a year. At that stage, we decided to press ahead with the legal challenge and New Charter agreed to put its head above the parapet. Such was the sector’s dismay at the government’s position, Danny McLoughlin of New Charter obtained moral and financial support from the NHF and 25 other RSLs. The effect of the challenge, if successful, would have been to exempt all periodic tenancies from stamp duty (including those used by local authorities and private landlords) and the exemption would have been retrospective without limit. At the same time, we – rather cheekily – prepared our own amendment to the finance bill. The amendment was straightforward and sought simply to extend the exemption proposed by the government to all RSL tenancies. The first we knew that the government had become sympathetic to our case was the day of the second reading of the finance bill. An hour before Boateng was due to stand up in the House of Commons, we were sent a fax of a proposed government amendment. It was essentially a redraft of the amendment we had prepared but was sufficiently altered that, on a literal construction, it would have excluded council tenancies transferred to RSLs. So, we agreed to withdraw our amendment on the basis of a promise that the government version would be redrafted to include transfers. The redrafting took place in June during the Chartered Institute of Housing conference in Harrogate. The new amendment was faxed to me, with a request from a Treasury official to confirm that the new amendment covered leases of the type used in New Charter’s legal challenge. The amendment gave us everything we could have hoped for. The effect of the new law is very simple: all tenancies going back to 1 January 1990, where the landlord has at any time been an RSL and where the annual rent does not exceed £5000, will be exempt from stamp duty. The new law also provides a mechanism for repayment of duty where it has been paid. Going forward, stamp duty on tenancy agreements (and on other transfers of land) is abolished and replaced with a new tax called stamp duty land tax. A victory for common sense and the efforts of all of us involved. David Golten is a solicitor in the property litigation department at Trowers & Hamlins