| Irish businesses and individuals are major investors in the UK. Investments are made both in property and in shares and securities. It is no longer safe to assume that UK stamp duty is minimal, or resembles Irish stamp duty. |
<Major UK changes
The UK has made major changes to its stamp duty regime over the last two Finance Acts.
* The top stamp duty rate has been significantly increased, to 4%. Relative to Ireland's top rate of 9%, it looks like bargain basement but it is radically higher than the 1% rate the UK was accustomed to only some years ago.
* Most intangible assets and intellectual property have been dropped from the stamp duty net. Stamp duty (in its several guises) is now confined to shares and marketable securities, and to UK land.
* Stamp duty reserve tax (SDRT) is charged at the rate of 1/2% on shares and marketable securities transferred without use of a share transfer form, and certain bearer instruments and unit trusts.
* Stamp duty is charged at 0.5% on certain shares and marketable securities transferred by use of a share transfer form, and at rates up to 4% on transfers of partnership interests and partnership land transactions, and on the issue of bearer instruments.
* Stamp duty land tax (SDLT) is applied at rates of between 1% and 4% on land transactions other than those involving partnerships.
* Lease duty is charged at the rate of 1% on the net present value of total rent reserved in property leases, discounted according to a formula.
* As was done in Ireland, stamp duty is being transformed into a self-assessment compulsory tax on a pay and file basis. Interest and penalties will apply to late filing.
Land and property
The most radical changes will impact on the purchase of land and buildings in the UK. These changes have been legislated for and will take effect for contracts entered into after 10 July 2003 and completed post 1 December 2003.
Whereas in Ireland stamp duty is charged on a document (as it was in the UK), this will no longer necessarily be the case in the UK. Stamp duty will become a charge on a transaction whether or not a document is used in relation to the transaction. That in itself cuts out many planning possibilities. For most transactions, the trigger for the tax has shifted from the actual conveyance of legal title to a de facto performance of a contract for sale of the property eg handing over possession and payment.
One consequence, which will impact property developers in particular, is that it will no longer be possible to defer the payment of stamp duty by "resting on contract". "Resting on contract" is what occurs where payment is made for a property, and possession is yielded, but the transfer of legal title is deferred until a later date. In Ireland the transfer of title will usually (but not in all cases) be the occasion for the payment of stamp duty. In the UK it is more likely in the future that it will be the yielding of possession that will trigger the stamp duty charge rather than solely the conveyance of title.
A further consequence of this change is that subsale relief will disappear. Subsale relief is availed of where a purchaser of property (typically intending to develop it) pays for it, takes possession, but does not take a transfer of legal title immediately. Rather, once he has lined up an ultimate purchaser for the property after it has been developed by him, he arranges for the original vendor to convey the title directly to the ultimate purchaser, thus avoiding one whole occasion of charge to stamp duty. With the move of focus of stamp duty from the conveyance document to the actual transaction (ie the purchase) two charges will arise where previously there might only have been one. This could add significantly to the costs of property developers if they do not take advice and exploit alterative structures to avoid the double charge.
Charge on leases
At the present time in the UK, significant stamp duty arises on a lease only where a substantial premium is paid for the lease. There is also a charge of stamp duty on the rent reserved under the lease, but it is not particularly significant.
In future in the UK leases will attract a stamp duty charge that will prove costly to the tenant. Broadly the charge will be 1% of the net present value of all rents reserved over the life of the lease. In arriving at the net present value a discount factor of 3.5% will be used. This proposal is subject to ongoing consultation and is expected to impact in particular on the retail and leisure sector. To take an example, where annual rent reserved is StgĀ£1.5m per annum, and the lease is for a period of 25 years, the total stamp duty payable on signing the lease would amount to StgĀ£247,223.
Not all bad news
Most of the changes which have been made will have a simple effect, and probably have a simple purpose ie to increase revenue from stamp duties. However there have been some positive aspects, from the viewpoint of taxpayers, although they are minor relative to the increased costs.
The proposal that stamp duty land tax will be charged not only on transactions relating to land, but also to transactions on shares deriving their value from land, has been put on the back burner for the present. It has not gone away, but it might be considered to be "on cease fire". It was a proposal bound to have practical problems in its implementation, but the UK Chancellor's pressing need for funds may yet bring this proposal to the forefront again.
Stamp duty land tax (which is the only stamp duty which will be applied to sales of land ) will be confined to land in the UK. This brings to an end one of the oldest traps in stamp duty, and one which still exists in Ireland. This is the charge to stamp duty on a document which relates to "something to be done in" the State. In the case of IRC v Maple & Co (Paris) Limited, the UK courts back in 1908 held that UK stamp duty was payable on a transfer of French land because the consideration for the land consisted of shares in a UK registered company. The transfer of the shares in the share register of the company was "something to be done in the UK" and therefore the entire transaction, including the document transferring the French land, was held to be within the scope of UK stamp duty. The current changes sweep away that venerable case in the UK although it still lingers on in Ireland.
The abolition of stamp duty on transfers of assets other than land, and on shares and marketable securities from 1 December 2003 is also an extension of the stamp duty relief introduced in recent Finance Acts. Transfers of debt will be freed from the burden of stamp duty , and this compliments stamp duty free transfers of patents and trade-marks, transfers of goodwill, transfers of film distribution rights and rights to literary works, to name but a few. These changes certainly make the UK a more business friendly environment.
Conclusion
The UK and Ireland have had stamp duty since the reign of Charles II in the mid-17th Century. For more than two and a half centuries our systems were almost identical. This can lull Irish investors into assuming that the stamp duty landscape they are familiar with in Ireland, and the long-standing reliefs which used to be available in the UK, still apply. This would be a mistake. If an investor in UK shares or property now wishes to minimise his up-front tax cost it is imperative that he takes professional advice on the transaction at an early stage.
Those who have existing transactions in the pipeline in particular need to take stock of their position as we move towards the transition date of 1 December 2003, when the major moves between the old system and the new system will take place. |
Eamonn Donaghy is a Tax Partner in KPMGs Belfast Office, specialising in UK taxation.
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| Article appeared in the October 2003 issue.
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