Her Majesties Revenue & Customs is set to mount a court challenge to determine the legality, or otherwise, of stamp duty tax avoidance schemes.
Central to the challenge will be the use of limited companies to buy properties, and then sell them to individuals – something which does appear to be completely legal.
Essentially, the purchaser sets up a Special Purpose Vehicle, a company or a trust with a property as its sole asset. The purchaser then buys shares in the company and is subjected to a tax rate of just 0.5%.
There are many companies offering stamp duty tax avoidance: a Google search yielded over 3,200 results.
The taxman’s move follows this year’s Budget when Chancellor George Osborne announced that he would be clamping down on stamp duty avoidance, whilst law firms have also warned that HMRC is on the prowl.
HMRC estimates the tax avoidance schemes have cost it millions in lost revenue. It is investigating 1,200 people it suspects of having underpaid stamp duty by a collective total of £35m, whilst it will also go after others who have avoided the tax altogether.
The many schemes that claim to legally exploit stamp duty loopholes frequently charge fees of around half the amount that would have been paid in tax.
It is thought that a number of property investors have set up a limited liability company to buy the property to sell back to the individual.
An HMRC spokesperson said: “The schemes rely on an interpretation of law that produces an outcome different from that envisaged when the law was enacted, and that HMRC does not accept.”
Many Law firms have also warned against avoidance schemes of Stamp Duty Land Tax (SDLT).
Ian Montgomery, a solicitor at Boodle Hatfield, said: “There is a growing belief that it is possible to avoid paying stamp duty on the purchase of a property or land, but unless particularly aggressive tax planning is undertaken that is just not the case. It is a common misconception that it is possible to purchase a property using a company and avoid stamp duty. When a property is purchased through a company, whether based offshore or in the UK, it pays the same rate as if it were an individual. SDLT may be avoided by future purchasers when the company decides to sell the property. This is done by the owner selling shares in the company rather than the property itself, but SDLT will be paid on the initial purchase.”
Stamp duty on the purchase of shares stands at 0.5%, rather than the higher rate levied on property. If the company is based offshore, the purchase of shares is exempt from stamp duty entirely.
People who try to reduce stamp duty by paying separately for fixtures and fittings may have to prove to the taxman that what they paid for these assets did not exceed their true value
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