An introduction to stamp duty land tax

Stamp duty land tax (SDLT) is upon us. It replaces stamp duty as the principal tax on dealings in UK land. It adopts the basic structure of stamp duty but modernises it by closing or severely restricting its loopholes and eliminating its idiosyncrasies.

The similarities to stamp duty end there:

• SDLT is a tax on transactions, not documents. The tax arises whether or not there is a document.
• SDLT is not voluntary. It is a compulsory tax. The Inland Revenue can compel a purchaser (which also includes an assignee, tenant and any other person acquiring an interest in or right over UK land) to pay the tax.
• SDLT requires neither the filing of original documents nor having them physically stamped. A new procedure for reporting transactions and paying the tax is introduced, the central feature of which is the land transaction return.

In this briefing note we provide a basic introduction to the new tax.

When do the new rules come into effect?

Implementation day for SDLT is 1 December 2003. All transactions with an effective date (see below) on or after 1 December will be within the SDLT regime.

Where a contract to acquire an interest in land is completed before 1 December, SDLT will not be applicable. Instead, the old stamp duty regime will apply. Where a contract was entered into on or before 10 July 2003, then (provided it is not modified or varied after that date) it will never be in the SDLT regime - even if completed on or after 1 December 2003.

Simultaneously with the introduction of SDLT, stamp duty is abolished for all future land transactions. There are some complex transitional provisions, the objective of which is to ensure that

• transactions are not caught by both SDLT and stamp duty, in order to avoid any double charging; and
• there is no gap through which to avoid both stamp duty and SDLT.

Basic procedure

Purchaser's obligation: Liability to pay SDLT is imposed on the purchaser of an interest in land. For these purposes, a purchaser also means an assignee, a tenant and any other person acquiring an estate, interest, right or power over or in UK land. This wide definition of purchaser includes, for example, the person benefiting from the release of a restrictive covenant and a landlord taking a release or surrender from its tenant.

The liability is personal to the purchaser, and various nasty things can happen to a purchaser who does not comply. As the liability is personal, the purchaser must preserve and retain all records relevant to the SDLT liability of the transaction.

Land transaction return: SDLT imposes a statutory obligation on a purchaser to deliver a land transaction return. This return is central to SDLT. It is the means by which the Inland Revenue learns of the transaction. The return is in four parts (forms SDLT1, SDLT2, SDLT3 and SDLT4). If the circumstances of a transaction are such that all four forms have to be completed, then 12 pages of detailed information must be supplied. There is a 37 page guidance note to help fill out the forms. Full details of the transaction are required, including a description of the land and the parties and details of the type and value of the consideration paid (or to be paid) in return for the land. The return replaces the need to submit original documents and a "particulars delivered" form, as all the required information should be in the land transaction return.

Self-assessment: The return must include a self-assessment, whereby the purchaser calculates its own tax liability. The Inland Revenue will use the information on the land transaction return to complete its own calculations of SDLT due.

Revenue certificate: Where the Inland Revenue's calculation agrees with the purchaser's self-assessment, the Inland Revenue will issue a certificate to the purchaser. HM Land Registry will not process applications for registration unless the certificate is produced when the application is made. Where the calculations do not match, the Inland Revenue will contact the purchaser and its advisers to agree the amounts due.

Self-certificates: Some land transactions do not oblige a purchaser to make a land transaction return. In these circumstances, a purchaser can "self-certify". This means that the transaction documents can be sent direct to HM Land Registry. Self-certificates will be subject to audit and to the same enquiry process as land transaction returns. Consequently, there is a duty to preserve records for at least six years.

"Process now - check later": The issue of a Revenue certificate is not a guarantee that all SDLT due has been paid. In the first place, the Inland Revenue has nine months from the filing date to corroborate the details in the land transaction return. It may open an enquiry into the return at any time within that nine-month window. Furthermore, where no land transaction return is filed, the Revenue has six years in which to make assessments of tax due. Finally, where information is "discovered" within a period of six years of a land transaction suggesting that more SDLT is due, then assessments can still be made (the time limit for discovery assessments increases to 21 years in cases of fraud or negligence). All this means that a purchaser must retain and preserve all records relevant to a land transaction for at least six years.

What triggers the obligation to make a return and pay SDLT?

A return must be submitted each time there is a notifiable transaction. A notifiable transaction is any of the following:

• the purchase of a freehold or a leasehold interest;
• the grant of a lease for seven years or more;
• the acquisition of any other interest in land (including the grant of a lease for less than seven years) where the rate of SDLT is at least 1%.

The return must be submitted (and SDLT paid) within 30 days of the effective date of a notifiable transaction. In most cases, the effective date will be actual completion. The effective date is accelerated (and so tax becomes due sooner) where, before actual completion, a land purchase contract is substantially performed. These rules are designed to attack "resting on contract" schemes. Substantial performance occurs where:

• the purchaser takes possession of substantially the whole of the land. Possession is deemed to take place where the purchaser receives or becomes entitled to receive rents or profits from the land. It is immaterial whether possession is taken under the terms of the agreement or under a separate (and temporary) licence; or
• a substantial amount of the consideration is paid or performed. Generally "substantial" means 90% or more of the price. Where consideration is in the form of rent, it is specifically provided that the first payment of rent is sufficient to trigger substantial performance.

How is SDLT calculated?

The amount of chargeable consideration subject to SDLT is broadly any consideration in money or money's worth. This is far wider than stamp duty. The SDLT charge can be based on consideration consisting of anything from VAT to jelly babies, or from the provision of any sort of services to the assumption of (or release of) existing debt. Where consideration is not expressed in money, its value is its market value at the date of the transaction. There is an elephant trap here for consideration in the form of building services and specific guidance should be sought if an SDLT charge on the value of the building services is to be avoided.

What rates of tax are applied?

The rate of tax to be applied depends on the amount and type of the chargeable consideration, and the nature of property involved.

Non-rent consideration - Residential

Not more than £60,000 - 0%.

More than £60,000 but not more than £250,000 - 1%.

More than £250,000 but not more than £500,000 - 3%.

More than £500,000 - 4%.

Non-rent consideration - Commercial

Not more than £150,000 - 0%.

More than £150,000 but not more than £250,000 - 1%.

More than £250,000 but not more than £500,000 - 3%.

More than £500,000 - 4%.

Rent consideration - residential

Net present value of not more than £60,000 - 0%

Net present value of more than £60,000 - 1%

Rent consideration - commercial

Net present value of not more than £150,000 - 0%

Net present value of more than £150,000 - 1%

A separate briefing note (Stamp Duty Land Tax on New Commercial Leases) gives further details about SDLT on rents.

Is there any relief against the tax?

Some reliefs (for example disadvantaged areas relief) have been imported from the stamp duty regime without change. It is still possible, therefore, to buy substantial investment properties in the business districts of Birmingham or Leeds, or in London's Midtown or Docklands without incurring any liability whatsoever to pay SDLT.

Other reliefs (for example, group relief, charities relief and relief for certain exchanges of land) have been imported into SDLT but additional restrictions have been imposed. There are some new, targeted reliefs. For example, transfers to local planning authorities pursuant to CPOs or under s106 of the Town & Country Planning Act 1990 agreements are exempt from SDLT.

Some reliefs have been severely restricted. The Inland Revenue, for example, wanted to abolish sub-sale relief entirely. At the very last minute, ministers were forced to concede that some form of sub-sale relief was essential - although the circumstances in which the new relief applies are restrictive.

Other reliefs have been discarded entirely. One example is the relief for an exchange (with equality money) of commercial properties. Under stamp duty, it was possible to structure a transaction such that the transfer of the lower value property attracted only £5 duty. Under the SDLT regime, tax will be due on its full value.

Why should I make a return and pay the tax?

SDLT is a compulsory tax. It should not be confused with the voluntary nature of stamp duty. There are serious consequences where a purchaser fails to fulfil its statutory responsibilities. Some consequences are simply financial; others limit a purchaser's ability to deal with its land; ultimately, failure to comply can result in imprisonment.

Here are some examples of the consequences of not complying with the new rules:

• A purchaser will be unable to register its purchase at HM Land Registry without an SDLT certificate - no certificate is issued until a land transaction return is filed and SDLT paid.
• There is a new statutory offence of fraudulent evasion of SDLT. Where found guilty, a purchaser is liable to imprisonment (for up to seven years) and/or a hefty fine. Falsification of documents is also an offence, which might result in imprisonment and/or a fine.
• The Inland Revenue has been given new powers to inspect premises, and anyone delaying or obstructing the inspection commits an offence and is liable to a fine.
• There is a flat-rate penalty for failure to deliver a land transaction return - £100 if delivered up to three months late and £200 thereafter. Where the failure continues for more than 12 months, there is a tax-related penalty (in addition to the flat rate penalty). This could be as much as the SDLT itself and is of course payable in addition to the SDLT.
• There are daily penalties for failing to make returns having been notified of the need to do so. The maximum rate is £60 per day, and is payable in addition to flat rate or tax-related penalties.
• A penalty (which again could be as much as the SDLT itself) is imposed where an incorrect return is made fraudulently or negligently. The same level of penalty may be imposed where a purchaser discovers an error in a return and then fails to correct it.
• Penalties are imposed for failure to produce documents and information, when required to do so the purposes of an enquiry.
• A penalty of up to £3,000 is imposed for assisting in or inducing the preparation or delivery of a return or other information relevant to the SDLT charge which is known to be incorrect. A further penalty of up to £3,000 may also be imposed where a purchaser fails to keep and preserve records relating to a land transaction.
• Any late payment of a penalty carries an additional interest charge.
• Civil proceedings can be taken to recover any unpaid SDLT.
• Interest is due where SDLT is paid late.
• Where no return is filed, a "Revenue determination" of the SDLT liability can be made. This acts as a selfassessment and triggers the full might of the Revenue's enforcement powers (particularly as to recovery of SDLT). The determination can be made at any time within six years of the effective date of the transaction which gives rise to the liability.
• The Inland Revenue has power to make a "discovery assessment" where they discover information creating (or increasing) an SDLT liability, or negating or clawing back a relief. Where the reason for the loss of SDLT is fraud or negligence, then an assessment to recover the SDLT can be made at any time up to 21 years from the effective date of the transaction; otherwise, the time limit is six years.

Purchasers should bear in mind the prospect of "joined up thinking" from the Inland Revenue. Cross-checking against corporation tax and/or personal tax returns will make it easier for the Inland Revenue to discover that land transactions have taken place and the amount of consideration paid for them. You have been warned!

How can we help?

The Real Estate Tax team specialises in devising bespoke solutions to real estate-based tax problems. We advise - of course - on the basic ins-and-outs of SDLT. In an everevolving SDLT landscape, you need to have the most up-todate position. Our involvement with the SDLT consultation process and our contacts with Inland Revenue specialists enable us to give you the latest interpretation of the new tax.

Most importantly, we can help you refine the way you do business in order to mitigate your SDLT liabilities. For example, SDLT has no application to share acquisitions. Stamp duty (at 0.5%) continues to be due on the price paid for shares. The threat to introduce stamp duty at 4% on the transfer of shares in 'property-rich' companies has been withdrawn - for the time being. The purchase of UK land via single purpose vehicles continues to represent substantial savings of SDLT when compared to direct acquisitions of land (although other taxes may out-weigh that benefit).