Modernising Stamp Duty on Land Transactions

The Government today announced the next steps in the process of modernising stamp duty on land transactions, following the announcement of the main proposals in Budget 2003.

These include:

A significant change to the proposed charge on the rental element when a new lease is granted ('lease duty'), reducing tax bills by £1500 per lease on commercial transactions (£600 per lease on residential transactions), which will be of special benefit to smaller businesses.

A new relief for businesses raising finance through the sale and leaseback of their land and buildings and relief for 'chain-breaking' and similar companies which help to ensure an active housing market.

Further consultation on how the new regime might apply to partnerships. The announcement follows extensive consultation on the process throughout the earlier part of this year.

Ruth Kelly MP, Financial Secretary to the Treasury, said: "Stamp Duty Land Tax is on course for implementation on 1 December 2003. The proposals announced today, along with those announced in Budget 2003, will help to achieve the Government's aim of a modern, efficient, system of taxing land transactions which promotes fairness between taxpayers, reduces distortions and prevents avoidance. I am also pleased that our proposals, which follow extensive and valuable consultation with interested parties, will be of particular help to small and medium-sized enterprises and business start-ups." The Government will shortly be laying regulations before the House of Commons to give effect to the changes to lease duty, sale and leaseback, chain-breaking and other reliefs. The regulations will also make some technical corrections and clarifications which are set out in the attached Technical Note. The Government has today published draft clauses for consultation on partnerships.

The story so far

1. In his Budget Statement on 9 April 2003 the Chancellor of the Exchequer announced that a modernised system of stamp duty, renamed 'Stamp Duty Land Tax', would apply to most land transactions on or after 1 December 2003. This system will replace the current archaic system of impressing a physical stamp on documents with a regime in line with that for other taxes. People acquiring interests in land will be required to submit a 'Land Transaction Return' to the Inland Revenue along with payment of the duty. This will substantially reduce the scope for avoidance since liability will depend on the nature of the transaction and not on the technicality of which particular document was used.
2. The Chancellor also announced that on or after 1 December 2003 the threshold below which no stamp duty is payable would be raised, for commercial transactions, to £150,000 from the current £60,000. Furthermore, as an aid to regeneration, commercial transactions in designated disadvantaged areas would be entirely exempt from stamp duty.
3. Stamp Duty Land Tax is on course for implementation on 1 December 2003. The Inland Revenue has launched a substantial customer education programme aimed at ensuring in particular that solicitors, licensed conveyancers and other professional advisers are aware of the significance of the change for their practices.
4. The announcements made today cover Stamp Duty Land Tax on the rental element of newly granted leases ('lease duty'), further reliefs for particular commercial transactions and Stamp Duty Land Tax on partnership transactions.

Lease duty

5. In his Budget Statement the Chancellor announced his decision that a new structure for lease duty should come into force on 1 December. The current structure, with its arbitrary 'cliff edges' and reliance on average annual rent, created distortions, encouraged decisions which were tax-driven rather than business-driven, and gave opportunities for avoidance.
6. The Government is keen that any new structure should:
   • Minimise potential scope for avoidance.
   • Reduce the distortions inherent in the current system to achieve greater fairness in the treatment of different transactions.
   • Better reflect modern commercial practice.
   • Be based on clear economic principles and in line with modern valuation and accounting principles
   • Be more in line with the charge on freehold transfers (transfers of ownership).
7. A structure which in the Government's view achieves these aims was accordingly included in Finance Act 2003. However the Chancellor made it clear that consultation on a new structure would continue and that changes might be made before implementation of the new structure on 1 December 2003.
8. The Government is extremely grateful to all who participated in the consultation process. A good deal of valuable information and data was provided by participants and some important work was done in partnership. Throughout the consultation process the Government has been particularly keen to have regard to the effect of any new structure on small and medium-sized enterprises and business start-ups.
9. Having considered all the contributions made the Government now proposes to modify the structure contained in Finance Act 2003 as follows:
10. • The Finance Act charges Stamp Duty Land Tax on the 'Net Present Value' ('NPV') of rent payable under a lease. NPV sums the discounted values of the rents. This discount recognises that future rent payments will be of less value. The Government believes that NPV represents a fair way of assessing the amount on which Stamp Duty Land Tax should be charged and proposes to retain it.
    • The Finance Act sets a threshold of £150,000 for commercial leases, £60,000 for residential leases. If the NPV does not exceed the threshold no Stamp Duty Land Tax is charged on the rental element. These thresholds mean that 60% of commercial leases and 93% of residential leases will pay no Stamp Duty Land Tax on the rental element. The Government believes these thresholds are fair and intend to retain them.
11. The Finance Act provides that once the threshold is exceeded Stamp Duty Land Tax is charged at 1% of the full amount of the NPV. The Government proposes to modify this so that Stamp Duty Land Tax is charged at 1% of the excess over the threshold. This means that on any commercial lease chargeable to Stamp Duty Land Tax the tax payable on the rental element will be £1,500 less than under the Finance Act provisions. Similarly for residential leases, the Stamp Duty Land Tax payable on the rental element will be £600 less.

Example

A lease of commercial property for 18 years at an annual rent of £15,000 will have an NPV of £197,845. Under the Finance Act provisions Stamp Duty Land Tax of £1,978 would be payable. Under the Government's proposals only £478 will be payable.

11. The Government also proposes to clarify the Stamp Duty Land Tax treatment of leases with uncertain rents, so as to avoid an undue compliance burden on tenants, and to provide that rent increases more than five years after the start of a lease are ignored (subject to anti-avoidance provisions). Details are set out in the attached Technical Note.
12. The changes to lease duty are estimated to reduce the expected yield from Stamp Duty Land Tax by £20 million in a full year. Other reliefs
13. The Finance Act already provides for many reliefs from Stamp Duty Land Tax, for example for property acquired by charities or let by Registered Social Landlords. There are reliefs for house-builders who take houses in part exchange (which benefits in particular those providing retirement homes) and companies which assist in employee relocation.
14. The Government proposes, in line with commitments given by the Chief Secretary to the Treasury, the right Hon. Paul Boateng MP, during the passage of Finance Bill 2003 through Parliament, to widen these reliefs to include companies who help to ensure an active housing market, by 'chain-breaking' (buying property when a prospective sale falls through) and by buying houses from the personal representatives of people who have died. Details are set out in the attached Technical Note.
15. The Government also proposes to give relief for sale and lease-back transactions (where a company raises finance by selling a property for a capital sum and leasing it back at an annual rent). Provided certain conditions are met the 'lease-back' leg of the transaction will not be charged to Stamp Duty Land Tax.
16. The cost of and yield from these reliefs is expected to be negligible.
17. Technical corrections and clarifications.
18. The attached Technical Note sets out a number of technical corrections and clarifications. The Government is grateful to all those who made representations on these issues. The cost of and yield from these changes is expected to be negligible.

Partnerships

1. In his Budget statement the Chancellor announced that certain transactions involving partnerships would remain within the existing stamp duty regime until at least 2004 to give time for further consultation. These are: transactions between a partnership and a partner or an incoming partner, changes in partnership interests and transactions between a partnership and a departing partner.
2. The Government is today publishing draft clauses which bring these transactions, so far as they involve dealings in land, within the scope of Stamp Duty Land Tax. As with the Government's other proposals the aim is to give fairness between taxpayers, reduce distortions and prevent avoidance.
3. The Government will be meeting interested parties to discuss these proposals but would welcome comments from others. The Government's intention is that the clauses will be included in Finance Bill 2004 and will take effect from the date of Royal Assent to Finance Bill 2004.

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