The Government has won a landmark case against stamp duty avoidance on buying property.
A tribunal has ruled against a company, Durham-based Vardy Property Group, after it exploited a rule to avoid £290,000 of stamp duty on a 2006 purchase of a business park in Stockton-on-Tees.
While the case centred on stamp duty owed on business property, the ramifications extend to tax avoidance schemes deployed when buying a houses or flats.
Vardy had tried to use 'sub-sale relief', which is an exemption designed to prevent housebuilders having to pay stamp duty twice when they buy land and eventually sell the house they have built.
In his Budget earlier this year, George Osborne pledged to crack down on the 'morally repugnant' culture of tax avoidance as he cited a toughening of the rules on stamp duty.
The Chancellor raised the top rate, on homes worth more than £2million from 5 per cent to 7 per cent and also said homes bought by pensions and companies above this threshold would face a charge of 15 per cent.
HOW MUCH STAMP DUTY YOU HAVE TO PAYThe levy on residential property is owed when buying residential property at the following rates:
£125,000* to £250,000 - 1%£250,000 to £500,000 - 3%£500,000 to £1 million - 4%£1million to £2million - 5%More than £2million - 7%* The threshold in 'disadvantaged areas' starts at £150,000.
On non-residential property - offices, shops, and even forestry - the rates are similar. These rates also apply when six or more residential properties are bought in a single deal:
Up to £150,000; annual rent below £1,000 - 0%Up to £150,000; annual rent more than £1,000 - 1%£150,000 to £250,000; annual rent more than £1,000 - 1%£250,000 to £500,000 - 3%More than £400,000 - 4%- STAMP DUTY CALCULATOR
Mr Osborne was attempting to tackle a growing problem of affluent buyers using pension or corporate structures to buy property in order to avoid stamp duty.
He said at the time: 'On this specific issue of stamp duty avoidance, rich people, often foreigners who come to this country but also people here in Britain, who put homes into companies to avoid stamp duty – that is completely unacceptable and we are going to come down on that practice like a tonne of bricks.'
The Financial Times said the HM Revenue & Customs, which estimates it lost £250million of stamp duty in 2009-10 from avoidance and evasion - before the biggest surge of foreign buyers in 2011, regarded the Vardy case as a landmark.
Vardy bought the site for £7.25million through an intermediate company which than transferred it as a dividend payment. Vardy argued that no duty was payable on either transaction, using sub-sale relief on the first deal and with 'no chargeable consideration' on the second.
Simon Yeo, a stamp duty specialist at KPMG, told the FT the case was a breakthrough. and would 'make people think twice' on such use of sub-sale relief, also in the residential market where he says such arrangements are common.
Avoiding stamp dutyThe rise in the top of rate of stamp duty from 5 per cent to 7 per cent in the Budget in March sparked a new rush to find ways around it.
It was reported that London-based solicitors were offering schemes such as the buyer signing multi-year leases that are automatically renewed on a rolling basis. Others were exploiting the 'sub-sale relief' rules, which were at the centre of the Vardy case, by advising clients to sell a third party the right to purchase the property at a future date.
Stamp duty avoidance on average value properties is less common but some solicitors still push schemes to those who face the cliff face jump at the threshold levels. Many buyers express frustration at the unfairness of these increases, with the largest cliff-face at £250,000: £2,500 stamp duty is applied at 1 per cent when buying a £250,000 home but this leaps to 3 per cent or £7,530 when buying at £251,000.
One example of schemes pushed which This is Money has heard of is where a property is bought 'simultaneously' by two people. One pays the £270,000 asking price but then instantly or 'simultaneously' sells it to their partner for £250,000, thereby paying 1 per cent stamp duty rather than 3 per cent. The first deal is not registered for the purposes of the Land Registry and HMRC is informed of what has happened with the participants hoping the taxman's workload prevents an investigation.
In cases that This is Money has been told about, the clients of the stamp duty avoidance scheme typically pay about one third of what the full tax bill would be to purchase it.
Crucially, in the scheme that we have seen sold, the buyers' solicitor aims to ensure that there is no potential for tax evasion charges by writing to the tax office to notify them that this is taking place and it is a recognised tax minimisation scheme.
The schemes which have succeeded many times in allowing people to dodge stamp duty, rely on the tax office not having the time and resources to challenge it and once a year has passed, clients are told they will no longer be chased up. They are also typically sold an indemnity, which acts as insurance and means that even if the taxman does come after them for the full stamp duty amount the scheme will cover it.
Such schemes are ill-advised and could lead to an HMRC investigation of all those involved.
The moves to crackdown on stamp duty avoidanceThe taxman has long played a game of cat and mouse on stamp duty, especially one the tax became far more lucrative, following Gordon Brown's decision as Chancellor to axe a flat 1 per cent duty for all liable and introduced stepped levels paid on the full purchase price,
In 2003, the rules were tightened to force more realistic valuations of 'fixtures and fittings', with solicitors forced to declare that the estimates were honest. The £5,000 estimates for curtains and carpets were no more.
But the temptation to avoid duty rose as property prices exploded.
In 1997, at the dawn of a huge house price boom, Gordon Brown changed stamp duty from a flat rate of 1 per cent above £60,000, introducing tiers of 1.5 per cent above £250,000 and 2 per cent above £500,000. The duty on these tiers was then raised to 3 per cent and 4 per cent in 2000.
Not only did the Labour government create a distorting effect on the market, for those selling around the levels of the thresholds, but the exchequer has benefited from one of the most successful modern examples of 'fiscal drag'.
As we pointed out earlier this year, had the £250,000 threshold risen in line with house price inflation it would now stand at £675,000, according to Nationwide's house price index. The £500,000 threshold would now be at £1.35million.