Be aware of SDLT clawbacks

Legal Matters

CRAIG JACKSON

TAX advisers are adept at using exemptions and reliefs to structure deals that maximise tax efficiency, sometimes beyond what may have been intended by the legislator.

Tax efficiency strategies for income and corporation tax often depend on domicile being re-located outside the UK. A problem with property is that it tends to stay stubbornly in the same place and in the same tax jurisdiction. Property has been, and remains, a "sitting duck" for tax. Unlike capital and people, property cannot easily move to a different tax jurisdiction.

Stamp duty land tax (“SDLT”) was introduced on 1 December 2003 to replace stamp duty for property transactions. SDLT was introduced in part because tax advisers had proved proficient at reducing the tax paid on land transactions under the stamp duty regime. Maximising tax efficiency with SDLT was more challenging than with stamp duty. However tax efficiency strategies were in place for the introduction of SDLT to make use of exemptions and reliefs in the SDLT legislation.

Since the introduction of SDLT, tax advisers have seen the opportunities for SDLT planning reduced in successive budgets. This year’s budget was no exception. Again it appears that the most popular strategies have been shut down.

The closing of SDLT planning strategies commenced in earnest with the introduction of the disclosure regime for SDLT schemes in August 2005. The concept of disclosure of tax schemes was familiar to advisers in the field of income and corporation tax but it was an innovation for SDLT.

SDLT planning schemes which result in a tax advantage for the acquirer of a land interest need to be disclosed to HM Revenue & Customs, allowing

counteracting legislation to be introduced before use of a scheme becomes widespread.

In recent years, two of the more popular strategies for SDLT planning have been the use of offshore property unit trusts and the use of alternative property-based financing arrangements – what had been referred to as the “Sharia mortgage” exemption. The relief from SDLT from “seeding” an offshore unit trust with property and taking back units in the trust was closed in March 2006. The option of using the Sharia mortgage exemption was reduced by this year’s Budget.

The Sharia mortgage exemption was introduced to ensure that lending products which were Sharia law compliant did not result in additional SDLT charges beyond what would be charged if the transaction was funded conventionally. Sharia law compliant funding structures involve a property being acquired by a financial institution which then either leases it back to their customer with an option to purchase or transfers it on to their customer. These structures would result in more SDLT being paid than on a conventional funding structure if no relief was available.

It became apparent that the exemption was being used to minimise SDLT by using a single purpose company in the financial institution role. This company would then be transferred on (and with it the property that it held) rather than the property without a charge to SDLT. The requirements of the relief have been tightened in the

Craig Jackson - tax planning 'an important part of the property deals structure'

current Budget so it is likely to be more difficult to use the relief for SDLT planning. The relief remains available for use for alternative financing arrangements.

The provisions on clawback relief were also tightened in the recent Budget. Transfers of property between companies in the same group are relieved of an immediate charge to SDLT. However if the acquiring company leaves the group within three years of the transfer then the relief is clawed back. Some groups were circumventing the clawback charge by removing the selling company from the group before the purchasing company left the group. This possibility has now been removed.

The recent budget has made SDLT procedurally easier to deal with but has also moved the more popular options for SDLT planning.

In the current market where margins are tighter, tax planning remains an important part of any deal structure. Advice on tax planning should be taken at the earliest opportunity to ensure that all relevant possibilities are considered. The recent alterations to SDLT suggest that those seeking to maximise tax efficiency should focus on the areas of income and corporation tax.

Craig Jackson is an associate in the Edinburgh office of Tods Murray. craig.jackson@ todsmurray.com.