SDLT Loophole closed as Chancellor clamps down on Tax avoidance

17 March 2012 – 

Clare Hartnell, Global Head of Property & Construction at business and financial adviser Grant Thornton UK LLP reacts to today's Budget announcement:

"This Budget focused entirely on growth with tweaks to current policy designed to assist corporates.  However, the focus remained squarely placed on further anti-avoidance measures with the long-awaited Stamp Duty Land Tax (SDLT) loophole clampdown finally confirmed.

"Due to the ongoing economic situation the Finance Bill, which will follow the Budget, is likely to be scrutinised in a way that last year's wasn't.  Many of the measures included in the Bill will be focused at retaining our AAA credit rating, which is vital following speculation that the rating could be under threat."

SDLT loophole clampdown

"Combating tax avoidance has been a running theme for the Coalition Government and it was inevitable the issue would be highlighted. The Chancellor announced that he will close certain stamp duty avoidance loopholes.  We were expecting the Government to act in the autumn statement on this topic so this move is not a surprise, especially following recent media coverage, but it will be interesting to see how widely these are drafted.

"In particular, there has been a lot of recent speculation about the use of offshore companies to acquire UK property without creating a liability to SDLT. There is a risk that it will mean acquiring property in the UK is less attractive for offshore individuals.  The addition of a 15% charge for acquisitions by certain persons other than individuals (i.e. companies and similar entities) is going to cause a lot of concern and the details of this provision will be of great interest to many innocent residential property investors and dealers.  We understand that the 15% will be applied to both UK and non-UK corporates, unless they are property developers.

"The announcement of a higher 7% rate of SDLT for purchases of residential property over £2 million is aimed at raising additional funding for the Government, although the risk is that this may drive further elaborate avoidance schemes.  The Chancellor made it quite clear that he would deal with such schemes swiftly, without notice and retrospectively.  It may discourage offshore entrepreneurs coming to the UK with the resultant impact on business.  It remains to be seen the extent to which these changes will impact the attractiveness of the UK to those offshore individuals.

"It should be noted, however, that once UK property is held by an offshore company, a subsequent transfer of ownership of the offshore company is likely to go unnoticed by HM Revenue & Customs (HMRC).  It is proposed that such companies will be subject to UK capital gains on disposals of property held by non-resident companies or shares in non-resident property holding companies. But it is not clear if it is intended to catch sales of shares in an offshore company by an individual.

"It has also been announced that SDLT will be included in any future General Anti-Avoidance Rule (GAAR), and that retrospective legislation could be introduced to combat schemes undertaken from today.  As such, until the GAAR is released, there will be a great degree of uncertainty as to what is or is not acceptable tax planning, which will be a worry and a risk for property businesses undertaking transactions between now and then."

Update on the General Anti-Avoidance Rule

"We were waiting for an update on the GAAR and I am pleased that the Chancellor has decided on further consultation for this piece of legislation because in order for it to be effective it is essential that it is properly constructed.  Similar anti-avoidance rules implemented in South Africa, Hong Kong and Canada have not been successful and it's vital we do everything possible to avoid that situation here in the UK.  Clearly there are some advantages of having a GAAR but it is important that it is not so widely drafted that it also catches genuine tax planning."

No joy for Clegg's Mansion Tax

"The Chancellor ruled out the creation of two new top-level council tax bands or a ‘mansion tax’ as championed by the Liberal Democrats, who believed installing this measure would enable the Treasury to raise the income tax threshold to £10,000.  Conservative ministers oppose the measure as it breaches the Tory manifesto commitment not to revalue homes for council tax."

Real Estate Investment Trusts (REITS)

"In a previous Budget, the Chancellor offered property investors tax breaks on deals by loosening the REIT regulations in an attempt to attract spending to the UK and mitigate Britain’s housing shortage.  Prior to these changes, businesses had to pay 2% of the value of their portfolio to become a REIT.  These changes have not yet brought about the 'hoped for' increase in REITs in the market and, given the housing shortage, we are supportive of any further reforms that help stimulate this sector further."

Good news for developers on relaxed planning regulations

"Developers in particular will be pleased with the continued effort to reduce the burden of existing planning regulations, which should encourage growth in sustainable housing supplies across the UK. It should also make it easier to change the use of buildings, which may help the conversion of surplus retail shops to residential."

VAT on alterations to listed building and self-storage

"One surprise was the change of VAT treatment on alterations to listed buildings.  Previously such alterations were zero-rated, but they will now become standard rated adding an unexpected cost to such alterations.

"Additionally, changes have been introduced to the VAT legislation resulting in the provision of self-storage going from an exempt supply to a standard rated supply."


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