Anyone considering a Stamp Duty Mitigation Scheme should read this first:
The following article endeavours to present the facts in an objective and impartial manner. and it is hoped that it will better inform home buyers of the issues and very considerable risks involved in Stamp Duty Mitigation Schemes.
It should be noted that this article outlines the position of the vast majority of Conveyancing Solicitors and, tempting as it may be to disregard such advice, to do so would be akin to disregarding any other professional body’s opinion. Fridaysmove regularly advise clients considering Stamp Duty Mitigation - Call us now and we would be happy to answer any questions you have on 033 0660 0286.
Why would anyone consider avoiding Stamp Duty Land Tax (SDLT)?
With the SDLT charge now ranging from 1%-5% of the purchase price for properties over £125, 000, it is easy to see why purchasers could be tempted to explore ways to reduce or avoid paying this tax.
What is Stamp Duty Mitigation?
Stamp Duty Mitigation means Stamp Duty Avoidance. Essentially this is tax avoidance. For years buyers have sought to avoid, reduce or mitigate SDLT through a variety of methods.
A relatively common way in which purchasers may seek to reduce their SDLT payment is by paying for fixtures and fittings separately, thereby reducing the purchase price of the property itself and consequently the amount of tax payable. If, however, HMRC decides to review the transaction and finds that inflated values have been attributed to the fixtures and fittings, it may be viewed as a fraudulent attempt to avoid paying tax.
It is therefore essential that actual values are used. We would deter clients from overstating the price payable for fixtures and fittings, as the risks are high, particularly in light of the relatively small tax saving that might be achieved.
There are other more complex methods in which specialist companies may claim that they can reduce your SDLT burden. (Simply type ‘Stamp Duty Mitigation’ into a search engine and you will be confronted with an array of websites for companies making impressive claims to reduce your Stamp Duty Land Tax liability. )
For example, these might involve the insertion of various artificial steps in to the transaction, such as the transferring of property to specially created companies in order of benefit from lower tax rates, or the inclusion of sub-sales, whereby the property is transferred from the seller to the buyer in stages in attempt to avoid taxation of the full purchase price.
Specifically, by creating a nominee company to stand between the vendor and the purchaser, the company initially pays only 85% of the purchase price – as legislation stipulates that stamp duty is only chargeable on transfers of land “substantially performed”. The company then transfers the contract to the real purchaser, at which point the remaining 15% is paid to complete the purchase, which is subject to stamp duty.
Companies are often reluctant to discuss the workings of Stamp Duty Mitigation Schemes
Getting exact details on individual schemes can prove difficult as accountants and Conveyancing Solicitors that get involved in Stamp Duty Mitigation are usually reluctant to discuss the mechanics. In fact, home buyers are typically asked to sign a 'Confidentiality Clause' or 'Non Disclosure Agreement' before the workings of the schemes are revealed. Perhaps these clauses help explain why accounts of failed schemes are rarely reported?
What are the risks with Stamp Duty Mitigation?
Increasingly, legislation is being introduced to combat such schemes, and the Revenue has announced its determination to ‘relentlessly pursue’ those who deliberately bend or break the rules.
Cases concerning Stamp Duty Mitigation have gone as far as the Court of Appeal
One case involved the grant of two leases, which contained provisions included specifically with a view to mitigating stamp duty. The court found in favour of the Revenue and the full amount of tax was payable. In another case, documents had been executed abroad in an attempt to avoid stamping requirements. However, again the court found in favour of the Revenue.
Why would anyone consider Stamp Duty Mitigation?
Simple, the potential savings are enticing. The costs of moving seem to spiral endlessly higher and home buyers are willing to explore ways to save money more than ever.
Are there legitimate reasons not to pay stamp Duty?
There are certain circumstances where stamp duty is not required. At the time of writing, for example, no SDLT is due from first time buyers purchasing at or below £250, 000 from 25 March 2010 up to 24 March 2012 inclusive.
Tax legislation is subject to ongoing change and the HMRC website should be consulted for up-to-date information at a http://www.hmrc.gov.uk/sdlt/intro/rates-thresholds.htm.
10 reasons to avoid Stamp Duty Mitigation:
- The Government is determined to put an end to what it considers to be stamp duty avoidance, and consequently this area is heavily regulated. Yet more legislative changes were introduced by the Finance Bill 2011. This means that any potential loopholes are closing quickly. The fact that a mitigation scheme was successful once does not mean that it will be successful now.
- HMRC has considerable weapons at its disposal if it considers that a scheme is in breach of the law. It may charge interest on sums owed, and can impose penalties. In addition, those who choose to use these schemes risk expensive and protracted litigation.
- If the Inland Revenue do challenge (and they can do this for up to 6 years) then they will of course crawl through not only this, but all of your tax affairs.
- Some Stamp Duty Mitigation companies offer to only charge fees if the scheme is successful and you end up paying no Stamp Duty. Typically the scheme will be contractually deemed a success if the HMRC do not query the transaction within 9 months of completion. However, this still leaves a full 6 years for the transaction to be challenged by HMRC and, if successful, 'The Revenue' can expect you to pay the SDLT in full, plus interest and potentially a fine of up to 100% of the Stamp Duty amount. This of course would need be added to any fees that you have paid the company that set it up in the first place.
- Some companies may offer to indemnify you against future HMRC 'clawbacks'. Even in these circumstances, however, you are still reliant upon the indemnifying company being in business should you need to make a claim and, given the speed at which the government are closing the loopholes, this may be unlikely.
- Should you ever be found to be evading tax then the Inland Revenue have stated that you will be subjected to an enhanced level of scrutiny for up to 5 years http://www.bbc.co.uk/news/business-12544069
- The specialist companies usually claim a significant proportion of the tax saved. It is common for these companies to charge around half of the tax saving back (+VAT) in fees, meaning the actual net tax might be less than half. Bearing in mind the potential risk of interest, penalties and litigation if the scheme is later deemed to fail, opting to use one of these schemes may be a gamble with the odds stacked against you and a lesser prize than you might initially think.
- If the buyer is obtaining a mortgage then the scheme will have to be disclosed to the lender by the Conveyancing Solicitor. Many lenders will not accept such a structure. Banks including Coutts, Barclays Wealth and SG Hambros have said they will not lend if a mitigation scheme is used (according to the FT).
- Conveyancing Solicitors will have to disclose the use of schemes to avoid stamp duty for purchases of homes over £1m under new measures introduced by the government last year.
- Conveyancing fees asked by Solicitors willing to handle the transactions will be considerably higher due to the added complexity and risk. This will further reduce any saving, and that's still only if the scheme is successful.
Always ensure you are dealing with a reputable firm of Solicitors. There is a risk that if you choose your Solicitor merely due to its claims of stamp duty mitigation success, they may not prove to be the most proficient Conveyancers, which could ultimately turn out to be very costly. Remember that all the usual risks associated with buying a property, such as bad titles, lack of planning permission or unauthorised alterations etc, still apply, and will require a competent Conveyancing Solicitor to resolve.
Given the tough economic times we are all facing, Solicitors are having to broaden their offerings to preserve incoming work volumes. Nevertheless, the majority of Conveyancing Solicitors still won’t go anywhere near Stamp Duty Mitigation.
Do Fridaysmove offer Stamp Duty Mitigation?
No. Neither Fridaysmove, nor its partner firms, are prepared to handle the Conveyancing for Stamp Duty Mitigation Schemes.