Stamp duty comes from the oldest part of HM Revenue & Customs (previously the Inland Revenue) having been around since Elizabethan times when a physical stamp (a tax stamp) had to be attached to or impressed upon the document to denote that Stamp Duty had been paid before the document was legally effective. Historically, this included the majority of legal documents including cheques; receipts; marriage licences; land transactions; etc. Since then the tax remains a tax levied on documents but it has been added to...
Stamp Duty Land Tax (SDLT) was a new transfer tax derived from Stamp Duty introduced for land transactions specifically as from 1 December 2003; therefore technically not a Stamp Duty. Whereas Stamp Duty was levied on instruments, SDLT is charged whenever ‘a notifiable transaction’ (FA 2003, s 72) takes place covering land transactions however effected with the administration and collection provisions being modelled on the income tax self assessment rules.
Unlike Stamp Duty, SDLT does not require there to be an actual document to give effect to the transaction (FA 2003, s 42(2)), but the tax returns must be made on the prescribed form within 30 days of the effective date of the transaction together with SDLT payment due (FA 2003, s 77).
Chargeable Considerations
However, similarly to Stamp Duty, SDLT is charged on ‘money or monies worth’ and what counts as ‘chargeable consideration’ is defined very widely to include consideration given directly by the purchaser, or person connected with the purchaser, i.e. the purchase price plus any additional amounts paid in the transaction towards the Seller's fees, for example, plus any VAT chargeable.
If the consideration is expressed in overseas currency then duty is calculated on the value of that money in British currency at the date of execution of the document and the conversion then applied. If the document contains a statement of the rate of exchange which the parties wish to use then that is used instead (SA 1891, s 6(2)).
Cash is obviously the commonest form of consideration, and as a general rule the market value is taken as the non-monetary consideration unless provided otherwise (in accordance with FA 2003, Sch 4, para 7), as follows:
- the release or assumption of a debt (mortgaged);
- works and services; and
- the transfer of other connected property
Release of Debt - Mortgages
Where a property is mortgaged, if it (or a share in it) is gifted to another person, they are deemed to take over their share of the mortgage; that action is ‘chargeable consideration’ for SDLT purposes.
For example, if Mr A owns a buy-to-let property worth £400,000, on which there is a mortgage of £300,000, and he gives a half share in the property to his wife, there is no CGT to pay because gifts between spouses are free of CGT, but his wife will have to pay SDLT. Having taken over half the mortgage (£150,000), she is deemed to have ’paid‘ that for her half share in the house, and SDLT at 1% (£1,500) is due.
Works and Services
By meeting the other side's costs in a transaction, this is again treated as ‘chargeable consideration’ as they would not be being paid by the buyer unless the seller was selling the property to him. Such payment, although ‘chargeable consideration’ for SDLT purposes, does not need to be quoted as part of the purchase price.
Therefore this is a warning - consider all monies paid in the transaction that could possibly relate to the SDLT payment. In a market where buyers are agreeing to meet the seller's costs this may take the ‘chargeable consideration’ of the transaction just over a threshold for SDLT purposes, producing an additional percentage of SDLT payable on the total consideration.
The usual example given is when a tenant meets estate agent's fees; these are classed as ‘chargeable consideration’ for the grant of a lease for SDLT purposes. By contrast, legal fees, which relate to negotiations and drawing up of the lease are not.
Further, in Prudential Assurance Co Ltd v IRC (1992) STC 863, a Stamp Duty case, the result applied to SDLT also. There needed to be two transactions and two contracts - one for the sale of land and the other the undertaking to carry out works on that land; Stand Duty and therefore now SDLT was paid in respect of the consideration (sale) only. However, where there is substantially one bargain, only the ‘chargeable consideration’ needs to be a just and reasonable apportionment between the land transfer element and the other element.
Transfer of Connected Property
As with Stamp Duty, the consideration for a number of linked transactions under SDLT is aggregated for the purposes of determining the tax rate to use. No discount is available if the ‘consideration’ is only payable on a contingency, although an adjustment can be made if it subsequently turns out not to be payable.
The usual example of anti-avoidance legislation which is quoted is where a house is purchased for £300,000. The SDLT will be £9,000 (at the 3% rate).
However, if the house is sold for £250,000 (SDLT at 1% of £2,500), and the garden sold separately to the spouse for £50,000 (no SDLT as it is below the threshold of £125,000); these two transactions will be deemed ‘linked’ as part of the same bargain and the two purchasers ‘connected’ with each other. The SDLT rate will be 3% on the total such that one purchaser pays £7,500 (3%) and the other £1,500 (also at 3%).
Under SDLT, FA 2003, s 46 removes any doubt by providing that the grant of an option over land not within the general charge is chargeable. Finance Act 2003, s 47 goes further providing that an exchange is taxable as two sales; accordingly, it is no longer possible to structure an exchange as a single sale of the more valuable land.
Partners and Joint Purchasers
For persons who are or will be jointly entitled to the interest acquired in a land transaction, the ‘chargeable consideration’ is that they are jointly and severally liable. In the case of a partnership it is the ‘responsible partners’ who are jointly and severally liable to 100% of the market value of the interest transferred (FA 2003, Pt 3, paras 16(3), 18 (1) and (3)).
The computation of ‘chargeable consideration’ can be quite complicated where the land was partnership property pre-the SDLT imposition date of 20 October 2003, and there are transitional provisions using the calculation below:
MV x (100 – PP)
100
*Where MV is the ‘market value’ and ‘PP’ is the ‘Purchaser’s Proportion’.
This calculation is only used when the partnership acquired the ‘relevant interest’ pre 20 October 2003, or either Stamp Duty or SDLT had previously been paid. Where any element of that calculation refers to rent then the rules do not apply, rather the NPV formula is used to the rental element.
Stamp Duty continues to apply to instruments affecting the transfer of an interest in the partnership regardless of the fact that the transfer itself may be a SDLT chargeable transaction (FA 2003, Pt 3, Para 23(1)). However, the ‘chargeable consideration’ to Stamp Duty is reduced to take account of the SDLT payable.
Practical Tip
‘Chargeable consideration’ is any consideration in money or money’s worth given directly or indirectly by the purchaser, or by a person connected with the purchaser, for the land or other subject matter of the transaction. Any VAT chargeable is normally included (FA 2004, Sch 4).
By Jennifer Adams
