Stamp Duty was levied in the UK in 1694 to pay for the war with France. Initially only planned for four years, like many other taxes it generated such high revenues for the government that it was never repealed.
The tax covered “vellum, parchment and paper”, which were used to write on back in the day. This was extended during the 18th and 19th centuries to cover a range of goods, including newspapers, insurancepolicies, gold and silver plate and even hair powder.
In 1808 the tax extended to property sales. Contrary to popular belief Stamp Duty was not a tax on propertybut on the instruments used to transact the property deal.
As the tax was not a property tax you could have sold aproperty prior to 1st December 2003 and opted to not pay the stamp duty. This would mean however you could not register the transaction on the land registry.
After the 1st December 2003, a new tax was introduced called the Stamp Duty Land Tax. As the name implies is a tax on the transaction of land whether it is recorded on a document or not. In its now current form it is a land transaction tax. The words Stamp Duty are not appropriate as Stamp Duty is a tax that is levied on documents.
Historically this included the majority of legal documents such as cheques, receipts, military commissions, marriage licences and land transactions. A physical stamp had to be attached to or impressed uponthe document to denote that stamp duty had been paid before the document was legally effective. More modern versions of the tax no longer require an actual stamp.
In India much of the documentation is still completed in this way for it to be considered valid.
The words Stamp Duty signify the tax’s origin only. The Stamp Duty Land Tax is not a reformation of an old tax but a completely newone. One of the main reasons for the SDLT was to close off the loopholes which many were using to avoid paying any stamp duty tax on the purchase of property.
The purpose of Stamp Duty is of course to raise revenue for the government.
Stamp Duty revenue rose by 12% from £2.9bn in 2008/09 to £3.3bn in 2009/10, reaching a recent peak of £6.7bn in 2007-08, which was more than inheritance tax and capital gains tax combined.
As the introduction of the SDLT closed the doors to Stamp Duty savings scheme new doors are always being found. Most of the practitioners who claim to sell these schemes do not actually know how they work. These introducers pimp out the benefits and give out some of the attributes of the scheme to give the illusion it is they who are selling the schemes when in fact the scheme is owned by another party and implemented by a tight knit band of solicitors sworn to secrecy, so this for bidden knowledge should not fall into the hands of commoners. The reason being knowledge is power, the knowledge of how these schemes work is retained tightly by those who invented these schemes, and those who become privy to these schemes are sworn to secrecy.
Schemes like this have many introducer sources to get business and avoid trying to get direct business with the public, as this keeps the heat away from them from the Inland Revenue as there is a further layer of protection involved.
One such scheme going around in the market was based on Islamic Finance. As a Muslim one is not allowed to pay interest under Sharia Law. Therefore certain exemptions where granted by the government.
There are two ways around this problem to circumvent the paying of interest. One is you don’t call it interest you call it rent, and the second one the bank purchases the property and sells it back to you at a higher price.
The second is more complex to fit into the current system. This means two purchases have taken place one by the bank from the seller, the second is from the Bank to the new purchaser.
To me changing the labels in a Holy Book and rubber stamping it is not will not get you to heaven no matter how clever you make the procedure and how many scholars you get to endorse it. Classic case of forgetting the essence and focusing on detail.
One dressed up Muslim brother in the Islamic Bank of Britain, Edgware Road was adamant it was the process which changes something from Ha-ram to Sharia Compliant.
Interestingly both methods use current interest rates to work out the rent payable and the enhanced resell price the bank sells back to the ultimate purchaser.
Another Business Development manager of a prominent Islamic bank who I’ve known for many years opened up to me privately and declared it was a sham.
We also have a client who is the head mistress of a prominent Islamic school in London. In her opinion it too was simply an exploitation of Sharia Law and a money making scheme.
Basically the system of printing money and charging interest on money you have invented from thin air is fundamentally wrong this is the reason why Sharia Law forbids the charging of interest. But by changing the labels you are merely dealing with the symptoms of the problem and not the actual problem.
So the relatively new Islamic Finance which prevents the charging of interest is being used to get around paying stamp duty.
A Recent Article dated 28th October 2011 by the BBC News highlighted the issue of SDLT avoidance issue and HM Revenue andCustoms (HMRC) says it is chasing unpaid tax of £35m amid tax planning and “mitigation” schemes being offered on the internet.
A notable article in the Daily Mail dated 19th July 2010 titled “Buy for £20m – and pay no stamp duty: How Candy brothers advised foreign buyers to avoid millions in tax on luxury flats”. A Leaked email states.‘There is no downside to trying the structure,’ wrote Christian Candy to the representatives of one of the penthouse buyers. ‘There will be no additional costs other than legal fees and interest (if the structure fails). There will be no penalties! The upside to your principal is a £5,000,000 saving.’
These were for the penthouse flats valued at £100m. This meant that instead of buying the property on a freehold or a lease and registering its sale price with the Land Registry, which would incur stamp duty, the purchaser would buy out the shares in a company that owns the property.
Often high value properties are not held in personal names, they are held either in Ltd company names or offshore companies. When purchasing the shares are transferred over. This proves problematic forsomeone looking for comparables. When a property is transacted in this way the figure paid does not hit the land registry as the property does not change hands the company which holds the property has changed hands.
Previously the Inland Revenue had a 9 month window to investigate and SDLT savings schemes from date of submission. Now this period has been increased to 6 years from the date of the completion. If the HMRC can prove fraud or Negligence the period is extended to 21years.
It’s easy to use these schemes but what happens when ‘it’ hits the fan? Is the scheme insured? Will the scheme promoters fight the HMRC on your behalf ? These are the questions which need to be asked prior to entering into a SDLT saving scheme.
Suresh Vagjiani
Managing Director
Sow & Reap
A Property Investment & Financing company.
