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Are HMRC consistent in their approach to SDLT avoidance schemes?
FAIRNESS IN SDLT
HMRC have come in for some serious criticism recently with their apparently soft deals to settle tax disputes with the likes of Vodafone and Goldman Sachs for example. Indeed there does seem to be a sense developing of one (flexible) rule for certain taxpayers such as large corporates indulging in aggressive tax avoidance schemes and another much stricter rule for the rest of us. HMRC are very keen to adopt a stringent moral tone when it comes to ordinary taxpayers who use schemes to avoid stamp duty land tax (“SDLT”). They talk about “fairness” to other taxpayers and the need to raise money for schools and hospitals and coalition ministers tell us that “we are all in this together”.
But when it comes to SDLT are we really “all in this together”? SDLT is now supposed to be charged at 5% on homes worth more than £1m and even those struggling to buy above £125,000 have to start paying the tax. And yet this tax is increasingly avoided by wealthy often foreign buyers using one of the widest loopholes in the UK’s tax system. This loophole is not a contrived avoidance scheme relying on badly drafted tax law. It is perfectly legal and HMRC are fully aware of it. The loophole involves simply holding the property concerned within an offshore company and then buying the shares of that company with the property inside it.
SDLT is only payable on property and as the property itself remains in the company and has not been sold directly, no SDLT is paid. The shares have been sold but don’t attract SDLT or stamp duty. When SDLT was devised back in 2003 the minister concerned described the use of such company vehicles as a serious threat to the Exchequer and asked HMRC to come up with legislation to block the use of these so-called single purpose vehicles. Nothing came of this so the loophole remains.
Hamptons were quoted in The Times a few weeks ago as saying that 30% of the homes they have sold in Central London in the past year were wrapped up in offshore companies. Indeed at the upper end of the market buyers now expect a property to be held within a company so that no SDLT will be paid. When an expensive property is not already in a company such as on the grant of a new lease it is common for it to be bought by a company so that it can be sold on in due course free of SDLT. The amounts involved are potentially huge with for example a £25m property normally generating £1.25m in SDLT and yet it is unlikely that HMRC keep an estimate of the tax lost by way of this loophole. A recent Sunday Times article on One Hyde Park said that of the 56 flats registered as sold so far all but a handful were sold to companies registered in offshore tax havens. Only nine have been registered for council tax and of those only four are registered as occupied with the other five as second homes.
This practice distorts the official price statistics because such company sales are not recorded at the Land Registry. But the more fundamental issue is fairness. Is it such a surprise that many ordinary buyers take advantage of SDLT avoidance schemes when buyers at the top end of the market can take advantage of such a glaring loophole that has been tolerated by HMRC for so long? Should HMRC be quite so disapproving of SDLT schemes when they turn a Nelsonian blind eye towards this glaring anomaly? The fact that there is also an inheritance tax exemption for foreign buyers in holding the property through an offshore company plus the fact the non-resident owners do not pay capital gains tax only adds to the sense of unfairness in our property tax system. The squeezed middle indeed.