Budget Notes


Who is likely to be affected?

1. Parties to schemes designed to avoid payment of stamp duty land tax (SDLT).

General description of the measure

2. Legislation will be introduced in Finance Bill 2008 to prevent abuse where financial institutions assist parties to avoid payment of SDLT.

Operative date

3. This change will have effect for any transaction the "effective date" of which is on or after 12 March 2008. The effective date is normally the date of completion not the date of exchange of contracts. However, the effective date may be earlier than the date of completion if the contract is "substantially performed", for example, if the purchaser takes possession or pays the purchase price in advance of completion. Most residential contracts will not be "substantially performed" in advance of completion.

Current law and proposed revisions

4. Sections 71A, 72, 72A and 73 of Finance Act 2003 were introduced in 2005 to encourage the use of alternative finance structures that did not use conventional mortgage schemes to buy property.

5. Section 71A (2) allows an exemption from SDLT where there is a purchase by the lender from the borrower. Section 72 allows the equivalent exemption in Scotland. These equate to schemes where someone takes a mortgage out on what was a previously mortgage free property. The legislation also exempts a purchase by the lender from the borrower where there is a re-mortgage. (Sections 72A and 73 allow the Scottish equivalents of these types of exemptions.)

6. Some financial institutions have misused these two exemptions from SDLT by colluding with vendors so that ownership of a property is placed in a subsidiary company of the financial institution. The subsidiary then claims that the transaction is intended for the purposes of allowing the equivalent of mortgaging on a mortgage free property or re-mortgaging.

7. Once ownership of the property has passed from the vendor to the subsidiary, however, the financial institution can then sell the property without incurring any SDLT by selling shares in the subsidiary company.

8. New provisions will ensure that relief under sections 71A or 72 will not be available if there are arrangements in place for a person to acquire control of the financial institution.

9. Draft legislation and explanatory notes have been published today on the HM Revenue & Customs website.

Further advice

10. If you have any questions about this change, please contact Michael Lyttle on 020 7147 2792 (email: michael.lyttle@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk