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Monday, 15th April 2024
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Property stamp duty proposals need reconsideration Back  
Stamp duty provisions relating to resting on contract, licences and agreements for lease were introduced in the late stages of the Finance Act. These provisions, if implemented, will be damaging to the interests of parties involved in property development transactions. The industry now needs to make urgent representations in this regard.
Backdrop
Stamp duty has been the major tax talking point in the political arena in recent months. This is not surprising given that the top rate of 9p.c., which was introduced in an attempt to 'cool' the market, is distinctly at odds with our European counterparts. Promises of a reduction in the burden for house buyers are coming from various political parties. To date, the Minister for Finance has not entertained such proposals, expressing the view that such changes may only serve to destabilise the market.
Brian Daly


However the Department has, without consultation, issued draft legislation whose penal effects may have an adverse impact on property development activity, if brought into operation. The proposed changes only surfaced in the final stages of the Finance Act. Although the Revenue had signalled their interest in the area when they issued a questionnaire on stamp duty and development land in October 2006, they did not consult with the industry in relation to any proposed changes. No economic analysis of the expected consequences has been published.
The Government seems to have bowed to pressure from opposition parties' claims of avoidance of stamp duty by developers through use of various 'arrangements'. The Minister has referred to closure of a 'loophole'. Yet, he has stated clearly that where a property is purchased, stamp duty is charged on the conveyance effecting a change in legal ownership of the property concerned and that if there is no conveyance, there is no stamp duty. This is the case. So, where is the loophole? A loophole may exist if, for example, a piece of badly drafted legislation was being exploited in a questionable manner to produce an unintended result. Here, legislation is being used legitimately for the purpose for which it was originally enacted, to provide relief from multiple layers of stamp duty on commercial transactions. Reliefs such as sub-sale relief were enacted with deliberate intent for good reason and should not be endangered in this manner.
Fortunately, the changes have not taken effect with the passing of the Act but are subject to Ministerial Order. We hope that, following representations, the Department will take on board the industry's concerns.

Measures
In the context of land transactions, stamp duty is payable mainly on the execution of documents that convey legal title. The concern appears to be that arrangements were being put in place in multi-party transactions such that legal title was being conveyed from the initial owner to the final purchaser passing by intermediate short term owners, thereby reducing stamp duty. Take a resting on contract example; a farmer enters into a contract with a builder to sell land but the land is eventually conveyed direct to the end purchasers of the developed property and no stamp duty is paid in respect of the dealings between the farmer and the developer. Under the proposed legislation, where the farmer receives 25p.c. or more of the consideration for the sale but a conveyance by the developer is not taken within 30 days, stamp duty would become chargeable on the contract as if it were in itself a conveyance of land. There is provision for an effective credit against any stamp duty payable later if an actual conveyance does takes place between the farmer and developer and is presented for stamping.

Under the proposals, where a land owner enters into a licence agreement with a developer and receives 25p.c. or more of the market value of the land, then within 30 days of that time, the licence agreement would be chargeable with stamp duty, as if it was a conveyance of the land.
An agreement for lease would sometimes be entered into between a land owner and a developer, with the actual lease subsequently being entered into between the land owner and the end purchaser. The new proposals bring agreements for lease in excess of 35 years within the charge to stamp duty where 25p.c. or more of the consideration has been paid, effectively treating the agreement for lease as if it was the actual lease.

Furthermore, legislation which provided that contracts for the sale of leasehold interests were liable to stamp duty as conveyances on sale where the actual transfer was not presented for stamping within 9 months of the contract being entered into, has been deleted. Such contracts fall within the new rules requiring stamping within 30 days.

Issues
There are several issues with this legislation. Fundamentally stamp duty has always been a tax on documents rather than on transactions and does not apply to a transaction that can be carried out without the use of a document to transfer legal title. This is one of the founding principles of the tax. The practices of resting on contract, and the use of licences and agreements for lease, have been present practically since the inception of stamp duty law.

The Revenue's survey was to review the extent of the use by property developers of arrangements to avoid stamp duty, following anecdotal evidence of avoidance. The conclusion from the review was that the 'bypassing' of stamp duty is relatively common. However, this has been effectively legislated for in the form of sub-sale relief and has always been the practice in respect of the arrangements mentioned above in accordance with the founding principle of stamp duty as a tax on documents transferring legal title. The survey essentially confirmed that legislation is being used in the manner in which it was intended. Such fundamental changes as those proposed, should at least be supported by policy documents and economic analysis of the consequences of altering this practice.

Furthermore, the detail of the draft legislation lacks commerciality and clarity in a number of respects. The resting on contract and licence provisions do not allow for repayment of stamp duty if a sale does not go ahead. The lack of definition of licence leaves that provision open to wide construction. The definition of 'development', although consistent with existing legislation, has been the cause of much debate, and confusion over the years.

The effect of these changes on the long established sub-sale relief is unclear. Sub-sale relief applies where a property is transferred from A to B and, prior to conveyance of legal title, the property is transferred to C. Provided that the legal title is conveyed directly from A to C the relief applies so that the stamp duty charge on the conveyance is the only stamp duty charge that will arise. There is now concern that this legislation could give rise to an additional stamp duty liability on the contract between A and B if in excess of 25p.c. of the consideration is paid over and the conveyance to B does not take place within 30 days. The provisions which exist to counter double charges to stamp in such situations do not sit well with the wording of the new provisions and therefore fail to offer protection. We hope that this is an oversight which will be corrected following representations.

The Revenue has not chosen to replicate legislation introduced in the UK a number of years ago (prior to the move to the stamp duty land tax ('SDLT') regime) which dealt with similar issues. The UK legislation contained additional provisions effectively preserving sub-sale relief, whereby only the excess of the consideration paid by the end purchaser, over that paid to the landowner, became subject to stamp duty on the conveyance to the end purchaser. Furthermore the UK legislation only applied in respect of payments in excess of ?10 million and allowed for a 90 day conveyance period which is more realistic in the context of property transactions. The 30 day limit and the change from 9 months to 30 days in the case of contracts for the sale of lease agreements is unreasonable and will result in an inadvertent application to many property transactions beyond the intended targets. Also, when the 30 day period is deemed to commence is open to interpretation.

Dail debates have indicated that the legislation is not intended to be retrospective. The Ministerial Order needs to be carefully worded to ensure that this is the case in respect of any existing arrangements.

What now?
It seems that many politicians have focussed on this area due to poorly understood anecdotal information. In reality, the parties most likely to suffer the cost of the measures are home buyers to whom the developers will pass on any increased costs and/or land sellers (largely farmers) by way of reduced price for the land. In any event the notion that an additional layer of stamp duty should always be paid by developers for their intermediate role in transferring a property is fundamentally at odds with the concept of a free, speculative property market which needs parties to act as intermediaries in as flexible and economical a manner as possible, thus keeping the market active and liquid.

Ideally, these proposals should be withdrawn. At a minimum, they need serious reconsideration. Representations are underway and all interested parties should engage in intensive lobbying to limit the damaging effects of the legislation before its introduction by Ministerial Order, a date for which has not been set. The industry needs to voice its concerns quickly in the hope that a more collaborative and commercially focussed process can take place such as that seen in relation to the new stamp duty regime for securities transactions.

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