HM Treasury published last month a consultation document entitled “Stamp duty land tax: ensuring fairness for all”. A copy of this document can be obtained from the HM Treasury website here.
Amongst the proposals in this document are that certain special purpose vehicles ("SPVs") which own high value residential property in the UK would be subject on transfer to a special stamp tax charge at 4% (equivalent to the highest rate of stamp duty land tax ("SDLT")). This would seem to be in addition to any stamp duty/stamp duty reserve tax (0.5%) which would be payable where the transferred SPV (if a company) is incorporated in the UK.
The key points of the proposals are as follows:
- The value of the assets held by the SPV must be £1 million or more.
- At least 75% of the SPV must be acquired in order for the charge to apply.
- The SPV must be a "limited ownership" company, meaning a company which was controlled by five or fewer persons. "Control" means a 51% controlling interest and "persons" for this purpose means individuals or companies.
- At least 90% of the SPV's assets must consist of UK residential property.
The questions raised for consultation are as follows:
- Q1 – Is SDLT a consideration in deciding whether to use an SPV to wrap a high value residential property in the UK?
- Q2 – Are there any reasons other than reducing tax liability to use an SPV to wrap a high value residential property in the UK?
- Q3 – Are there ways to prevent the avoidance of the tests which need to be satisfied for the charge to apply?
- Q4 – What are the most common features of SPVs used for avoidance of SDLT on high value residential property?
- Q5 – Are SPVs used for residential property below £1 million?
- Q6 – Do you agree that the impact on the housing market of these proposals would be minimal?
We see the proposals as having several potential areas of uncertainty and we are considering putting together a response to the consultation document. The deadline for responses is Friday, 8th February 2008. If you would like us to include or take into account any of your thoughts and comments we would be very glad to do so.
Some of the issues which occur to us are as follows:
- How would the charge be applied? Would there be a charge on the market value of the property, or rather on actual consideration paid for the shares of the SPV? In the former case, the charge would appear to be broader than the SDLT charge on real estate transfers and cause problems on (for example) the gifting of SPV shares or the transmission of SPV shares on death. This would introduce an SDLT charge where there is no immediate SDLT avoidance purpose. In the latter case, however, with a charge on actual consideration, controlling avoidance may be problematic.
- One class of investors who would be affected particularly by this proposal are non UK residents/ non domiciliaries holding UK property through SPVs. This is often done for estate tax reasons or to segregate commercial risk.
- The interaction with the normal UK stamp duty/stamp duty reserve tax rules on the transfer of shares in a UK company has not been specifically addressed. It would seem that, were the new regime to apply to the sale of shares in a UK company where the conditions are met, there would be both a 4% special charge under the new regime as well as a 0.5% stamp duty charge on the purchase of the shares. This would result in a higher burden to stamp tax than would be the case on a simple property transfer.
- It is not clear which party would bear the new tax or be liable to pay on a secondary basis.
- Although the preamble to the consultation document talks about other vehicles apart from companies (for example trusts) which the UK authorities view as being involved in perceived tax avoidance in this area, the tests then seem to focus exclusively on companies. The possible application of the rules to trusts is not addressed.
- The stated purpose of the proposals is to prevent tax avoidance. However, the tests for the regime to apply do not include any motive or avoidance tests. Accordingly, as currently proposed, the tests may catch transactions where tax avoidance is not involved.
- It should also be noted that the consultation document also proposes extending the SDLT disclosure regime, which is currently applied only to non-residential transactions above £5 million, to residential transactions above £1 million.