Stamp duty dodges target mass market

©Getty

Looking to mitigate stamp duty land tax? Do you want to save thousands of pounds? We have just the scheme for you. It is legitimate, supported by leading barristers and has a 100 per cent success rate...

Sales pitches like this, for so-called stamp duty tax “solutions”, have been typically directed at high-end buyers of houses worth £1m and more. But buyers of properties priced as low as £250,000 are now being targeted by conveyancers and solicitors.

Tax mitigation schemes seek to take advantage of loopholes in legislation, enabling buyers to avoid paying stamp duty land tax (SDLT) in return for a large fee. This can be as high as 34 per cent of the stamp duty tax payable.

While the government has stepped up its battle against tax-dodging by property buyers – through legislative changes and legal action – avoidance schemes are being mass-marketed.

But tax and legal experts warn that these schemes are high-risk. The tax planning might not be successful, and the homeowner could still end up paying the full stamp duty amount, plus interest and penalties, if HM Revenue & Customs challenges the transaction.

“It is becoming increasingly common to see the average purchaser targeted,” says Ben Thompson of Legal & General Mortgage Club.

“For this market, a few thousand pounds freed up can make a real difference and this may be seen by some as a segment of the population most open to being talked into saving money, regardless of the consequences.”

Robert King, partner at Smith & Williamson, the accountancy firm, says the impending General Anti Abuse Rule, due to take effect this year, should sound the death knell for such planning. However, he notes that SDLT schemes “seem to be very stubborn and hard to eradicate”.

“The simple advice to any housebuyer offered the opportunity to avoid SDLT would be to give such schemes a wide berth. The likelihood will be that the planning will not work and you will end up having to pay the tax in the end, plus interest and quite possibly a penalty,” explains King.

Most stamp duty avoidance schemes take advantage of “sub-sale relief” where a buyer immediately transfers a property to someone who may be a connected party, and is therefore not liable for stamp duty. The relief was originally devised as a way to exempt legitimate intermediaries, such as housebuilders, from paying stamp duty twice – first when they bought the land and again after selling the finished house.

Paul Emery, real estate tax director at PwC, believes the “days are numbered” for schemes that use this relief when legislation to close the loophole is introduced this year. “I would genuinely be very surprised if it doesn’t kill it off,” he says.

However, the threat of looming legislation has not stopped some firms from continuing to target normal homebuyers with such schemes – despite the Solicitors Regulation Authority last year warning members that they risk fines if they are involved in devising or selling stamp duty avoidance schemes. The SRA says it is not aware of any marked increase in stamp duty avoidance schemes, but urges anyone with information to email report@sra.org.uk.

Several homebuyers who contacted FT Money say they have been offered tax mitigation schemes by conveyancers. One reader was shocked to be offered a scheme by a low-cost online conveyancer when using the firm to buy a modestly priced house. The company concerned did not respond to repeated requests for comment.

Other firms, such as CDP Corporate, one of the companies advertising SDLT mitigation online for properties costing more than £250,000, believe such schemes will exist for the next decade.

According to James Parker of CDP Corporate, his firm attracts a broad spectrum of homebuyers looking to mitigate their SDLT, from multimillion pound purchases down to £300,000. “The buyers we speak to don’t like the tax at all. They don’t like the way it is structured in that there’s no relief, no tapers. They know how easy it is to avoid,” he says.

Listen to Tanya Powley talk about the future of stamp duty on the FT Money Show podcast

Experts suggest one way of eradicating tax avoidance could be to make SDLT a fairer system. They point out that the proliferation of avoidance schemes is directly linked to the quadrupling of stamp duty tax rates between 1997 to 2000 (see timeline).

The tax burden has been raised further in the past two years with the introduction of a 5 per cent and 7 per cent stamp duty rate for properties over £1m and over £2m, respectively. Last year, a 15 per cent stamp duty rate was also implemented for those buying properties priced at over £2m through a corporate structure.

“I think that when you are talking about 7 per cent or 15 per cent rates those are very big numbers. The higher the tax the more you encourage people to seek to avoid it,” says Emery.

King believes a lot could be done to improve the SDLT system and bring more clarity. “If taxpayers generally feel that a tax operates fairly, this is helpful in encouraging compliance,” he explains.

However, rather than trying to simplify stamp duty, politicians are instead focused on introducing additional property taxes. Last week, the Labour Party revealed it would impose a mansion tax on properties worth more than £2m if it was elected, adopting one of the Liberal Democrats’ key policies.

A common criticism of SDLT is the “cliff edge” effect, whereby if you buy a house priced at £1 over the threshold for a particular tax rate, the homebuyer pays the higher rate on the full amount, not just the excess.

The Scottish government, which is due to take control of stamp duty north of the border in 2015, has already announced plans to reform the archaic tax. It has proposed a move away from Westminster’s slab approach to a “progressive system where the amount is paid is more closely related to the value of the property”. It has also signalled a wish to lighten the tax burden at the lowest end of the market.

Analysis by Savills, the estate agent, for FT Money highlights how big a financial burden SDLT can be over a lifetime – and the potential it has to deter homeowners from moving to a bigger home.

Assuming a succession of moves from a one- to a five-bedroom property, and using current prices, Savills found that the amount of stamp duty paid by an average family could range from as high as £1.186m in Kensington and Chelsea to just £3,909 in Kingston-upon-Hull.

“The Scottish government is proposing to remove the cliff edge effect – why can’t we do that in the rest of the UK?” asks King.

-------------------------------------------

‘Reform is long overdue’

Current housing market conditions mean that, in many parts of the UK, liability for residential stamp duty is a major factor in deciding whether to buy a property, writes Paul Smee.

We agree with the findings of the Mirrlees Review, which concluded that stamp duty was highly inefficient, discouraged mobility and meant that properties were not held by the people who valued them most. The “slab” structure, under which the highest tax rate is applied to the whole purchase price, creates “perverse incentives,” Mirrlees said. The only thing in favour of stamp duty, the review found, was that it was easy to collect.

But that is not a good enough reason to retain it. Replacing the slab structure with a system in which higher rates are only levied on the amount above each threshold would at least reduce the price-distorting effects of stamp duty. This could be done without any loss of revenue to the Treasury.

Generally, however, any major reform of stamp duty is likely to create substantial winners and losers. However, all recent governments have recognised that stamp duty deters buyers, and can thwart broader policy objectives. Both the coalition and former Labour government have permitted stamp duty “holidays” – usually to help first-time buyers – but have shied away from more fundamental reform.

There are other examples of conflicting policy objectives. The government, through its NewBuy and FirstBuy schemes, is keen to widen access to home-ownership to those who can muster a 5 per cent deposit. Unfortunately, some prospective buyers may then have to pay a levy of up to 3 per cent in stamp duty. As an interim measure, the government could at least consider the case for removing this inconsistency.

Paul Smee is director-general of Council of Mortgage Lenders

-------------------------------------------

‘Fundamentally flawed’

Stamp duty land tax is a strong contender for the UK’s worst-designed tax. Since the relevant rate applies to the full sale price, not just the part above the relevant threshold, a £1 increase in price that pushes it over a threshold can trigger an increase in tax liability of up to £40,000. That is, of course, an absurd structure for any tax, writes Stuart Adam.

Transactions of very similar value are discouraged to completely different degrees and there are enormous incentives to keep prices just below the relevant thresholds. At a bare minimum, the UK government should move away from this “slab” structure for SDLT, as the Scottish government is proposing.

But there is a more fundamental flaw with SDLT. One of the most basic tenets of the economics of taxation is that transaction taxes should be avoided. There is no reason to impose a heavier tax charge on those properties that change hands more often. Assets should be held by the people who value them most; the effect of a transactions tax such as SDLT is to discourage mutually beneficial transactions.

For example, if a family in a small house wants to move to a larger one while a neighbouring family in a large house want to move to a smaller one, SDLT might discourage them from buying each other’s houses, leaving both families worse off. At a macroeconomic level, this reduces labour mobility, as people are discouraged from moving to where suitable jobs are available.

SDLT should simply be abolished and the revenue made up elsewhere – perhaps from a sensibly reformed council tax to avoid giving out windfall gains to property owners.

Stuart Adam is a senior research economist at Institute for Fiscal Studies

-------------------------------------------

What’s in a name?

In a media-drenched world, the key to passing, or opposing, any new tax is a decent name. The “mansion tax” proposed by the Liberal Democrats and now pushed by shadow chancellor Ed Balls has branding worthy of a master of the dark art of spin – as should be expected from the man who successfully branded part of the last Conservative budget a “granny tax”, writes James Mackintosh.

Stamp Duty Land Tax does not pass the spin test; its predecessor, stamp duty, was one of the laws which prompted American colonists to revolt against Britain.

Yet, Brits today seem to accept one of the world’s worst-designed remaining taxes (although far better than the old kingdom of Travancore’s breast tax) as just another burden they have to bear, along with the weather. They shouldn’t. Tax may be a necessary evil, but the form of tax matters. The more something is taxed, the less there will be of it. Politicians understand this, and use it to justify “sin taxes” on alcohol and tobacco.

Tax moving house, then, and fewer people will move. We end up with a less mobile population, hurting the economy as well as the wellbeing of people who would like to move, but not so much that they want to pay tens of thousands of pounds in tax.

There is one exception: land. No matter how much land is taxed, it will not go away. Stamp duty is a flawed way of taxing land, as is a mansion tax, or the old window tax). Forget how the land is used, and forget the value of the houses on it. it is the land itself that should be taxed. Unlike virtually all other taxes, a land tax is likely to increase, rather than hurt, the efficiency of the economy by encouraging landowners to maximise its productive potential. All that’s needed is a snappy name.

James Mackintosh is the investment editor of Financial Times