The Up and Coming Tax -- I - Sharon Anstey presents a stamp duty guide for the tax practitioner.

The Up and Coming Tax – I
Sharon Anstey presents a stamp duty guide for the tax practitioner.
Stamp duty is, together with stamp duty reserve tax, projected in the current financial year to account for £7.2 billion which is more than the combined receipts of inheritance tax and capital gains tax.
Stamp duty has traditionally been considered as just part of the costs of a transaction. In the majority of cases one simply accepted a 1 per cent top rate of stamp duty. Since 1997 we have seen a steady increase in the rates to a top rate of 4 per cent. It is feared that this top rate will increase to, say, 7 per cent which is more in line with our European counterparts. Due to these increases, stamp duty mitigation has become an important part of tax planning.
Stamp duty has historically been the domain of lawyers; it is often described as a 'lawyer's tax'. All tax professionals, however, should now have regard to stamp duty when advising clients; they will ignore it at their peril.
What is stamp duty?
Stamp duty is a tax on instruments and not on transactions. Therefore, where an asset can be and is transferred by delivery or orally, there is no liability to stamp duty. For example, property in chattels can be transferred by delivery, but with regard to land a document is required. However, the Electronic Communications Act 2000 together with changes to Land Registry procedures, will remove the requirement for a document in most cases. As a result, the Chancellor's November 2000 Report announced that stamp duty will be modernised. It is anticipated that these reforms will be included in this year's Finance Act. This article deals with stamp duty in its current form, but we can expect substantial changes in the future.
What is an instrument?
An instrument is defined in section 122, Stamp Act 1891 to include 'every written document'.
From the legislation it is evident that more than one instrument may be written on the same document and each of those must be separately stamped with the appropriate duty.
Payment of stamp duty will be denoted by impressed stamps and not by means of adhesive stamps unless there is express provision to the contrary (section 2, Stamp Act 1891).
The legislation prescribes that all the 'facts and circumstances' which affect the liability to stamp duty or amount of the duty should be set out in the document. Failure to do so and with the intent to defraud can result in a penalty of up to £3,000.
'A voluntary tax'
Stamp duty is often described as a voluntary tax. Unlike stamp duty reserve tax, the Stamp Office with limited exceptions has no direct power of enforcement relating to stamp duty. No offence is committed by not having a document stamped. It remains to be seen whether or not failure to stamp a document will become a statutory offence. The payment of stamp duty is enforced indirectly. Section 14(4), Stamp Act 1891 provides that an unstamped document cannot be relied upon in evidence, nor can it be used for any purpose whatsoever except in criminal proceedings if it is executed in the United Kingdom or relates to property in the United Kingdom.
With regard to land, the Land Registry will not register the transfer of land unless the document is properly stamped, nor will a company register the transfer of shares unless the document has been correctly stamped.
What instruments are chargeable?
Schedule 13, Finance Act 1999 provides for the main categories of instrument that are charged to tax, the most significant one being 'a conveyance or transfer on sale'.
The conveyance must be 'on sale'. Sale is not defined but it is implied that there must be a vendor, a purchaser, property and consideration.
There has been in the past a number of cases relating to the meaning of sale. In Commissioners of Inland Revenue v Glasgow and Southern Western Railway [1887] 12 App Cas 315 it was assumed that compulsory purchase transactions were a sale. However, in the later case of Attorney General v Felixstone Gas Light Co [1907] 2 KB 984 it was suggested that consent was necessary for a sale.
Historically a part exchange of land was not considered to be a sale which required a consideration wholly in cash. This rule has now been changed by section 241, Finance Act 1994 in relation to transfers of land. That said, it seems that the Stamp Office may have changed its view on the basic principle and may treat such transactions to the extent of the cash component as a sale. (see press release 18 April 1994).
The legislation provides that where a transfer is for shares or securities duty will be chargeable on the value of the stock (section 55, Stamp Act 1891).
Although the consideration for a sale will normally be cash, stock, marketable securities, debts and other liabilities are also treated as sale consideration (sections 55 and 57, Stamp Act 1891).
Rates
The enormous rise in the rates since July 1997 has meant that stamp duty is now a significant cost on property transactions.
The rate of stamp duty for shares and marketable securities is 0.5 per cent. For other property, the rates are as follows:
Consideration with certificate of value Rate

These rates do not operate on a slice system but rather on a slab system. Therefore once the threshold is exceeded, the applicable rate is applied to the whole consideration.
Stamp duty is now rounded up to the nearest £5.
Certification
In order for the above reduced rates to apply, the appropriate certificate of value must be provided. For example, the 4 per cent rate will apply not only where the consideration is greater than £500,000 but in any other case where the appropriate certificate of value is not given.
Paragraph 6 of Schedule 13 to the Finance Act 1999 provides that the instrument must contain a statement that 'the transaction effected by the instrument does not form part of a larger transaction or series of transactions in respect of which the amount or value, or aggregate amount or value, of the consideration exceeds that amount'. Most certificates follow this wording. A certificate which refers simply to 'the consideration' rather than 'the amount or value of the consideration' is not acceptable to the Stamp Office (see Stamp Office Manual at paragraph 4.11).
There has been some debate on whether the certificate must be in the document. Paragraph 6 of Schedule 13 clearly implies that it should be. However, in the past, the Stamp Office has allowed subsequent endorsement on a separate piece of paper. Now the Stamp Office Manual states at paragraph 4.9 that a certificate of value is a statement 'inserted in the document. Certificates which are separate from the document or which are on a separate piece of paper which is attached to it, are not acceptable'. This seems quite clear. At paragraph 4.12 it is advised that 'you should offer the customer the opportunity to add one if it appears to have been overlooked'. Paragraph 4.14 states that 'if a certificate of value has been left out of a document by mistake it may be added later in any convenient space on the document provided that it is signed by the parties'.
From the above, it is clear that it is not acceptable to simply attach a certificate of value on a separate piece of paper. However, a subsequent endorsement on the actual document is permitted (if signed by the parties). Despite this current Stamp Office practice, advisers should include the certificate in the instrument and not rely on current practice, as we all know this can change!
Part of a larger transaction or series of transactions?
This question can in practice be difficult to answer as each case has to be determined on its own facts. There is little guidance as to the meaning of 'a series of transactions'. It has been held that the purchase of more than one lot at a public auction by one purchaser from one vendor may be taken separately because there was no interdependence between the transactions (AG v Cohen [1937] 1 KB 478).
In the case of Kimbers & Co v Commissioners of Inland Revenue [1936] 1 KB 132, two contracts were made between the same parties on the same day. However, one contract was conditional upon completion of the other. It was held that although the contracts were connected, they could not be treated in substance as a single contract.
One cannot simply have separate contracts and conveyances to avoid duty. In practice, this issue can be significant. The Stamp Office Manual provides no assistance in determining this question. In certain situations it may be sensible to ask the Stamp Office for its informal view.
When does a liability arise?
The general rule is that a liability will arise on the completion of the sale rather than the contract itself. However, like most rules, there are exceptions (paragraph 7 of Schedule 13 to the Finance Act 1999). There are some contracts or agreements for sale that are chargeable as conveyances on sale, as follows:
1. Any equitable estate or interest in property.
2. Any estate or interest in property except:
(a) land
(b) goods, wares or merchandise
(c) stock or marketable securities
(d) any ship or vessel, or a part interest, share or property of or in any ship or vessel
(e) property of any description situated outside the United Kingdom.
In these cases, stamp duty is charged as if the contract were an actual conveyance on sale of the relevant property. An example of this is a sale of goodwill.
Where a contract has been properly stamped, there will be no duty on a subsequent conveyance (paragraph 8(3) of Schedule 13 to the Finance Act 1999). As the case of Peter Bone Ltd v Commissioners of Inland Revenue [1995] STC 921 illustrates, one has to be careful when structuring a land transaction not to create the sale of an equitable interest only. The vendor must contract for the sale of his entire legal and equitable interest in the property.
Consideration
The consideration generally determines the liability to stamp duty. The general principle is that a sale involves a payment of a price. If there is no price, under general law, there is no sale. However, the old market value rule generally abolished in 1985 is creeping back particularly in relation to land.
Cash
Where the consideration is cash expressed in sterling, matters are relatively straightforward. If the consideration is expressed in a foreign currency, section 6(1), Stamp Act 1891 provides that duty is calculated on the value of that money in sterling at the date of the document. If the document states the rate, that is the rate to be used. The document is deemed duly stamped unless it can be shown that the statement is untrue or fraudulent. If a document does not contain the rate to be used, the exchange rate on the date of execution of the document is used.
Stocks or securities
Where the consideration is expressed as stock or marketable securities, stamp duty is calculated on the value of that stock on the date of the document (sections 6(1)(b) and 55, Stamp Act 1891). The Stamp Office adopts as a matter of practice the valuation basis in section 272(3), Taxation of Chargeable Gains Act 1992 which in practice is the quarter up rule.
Where the consideration is not a marketable security, for example, a debenture, the amount liable to duty is the sum of the principal and interest to completion (section 55(2), Stamp Act 1891).
Debts
Where property transferred is subject to a debt, under section 57 stamp duty will be charged on the amount of the outstanding debt. There is relief available where the debt is more than the value of the property transferred. In such cases, duty is charged on the value of the property and not the debt (section 102, Finance Act 1980). This section is of limited application as it only applies where the property is being transferred to the person to whom the debt is owed. For documents to obtain the relief, they must be adjudicated.
The complications of consideration!
Nothing in tax is straightforward and stamp duty certainly does not disappoint. As the consideration determines the liability, one has to consider the effects of various payment proposals carefully.
Payment by instalments
Where some or all of the consideration will be made by periodical payments, section 56 applies. It applies only to conveyances on sale (payments which form part of the purchase price) and not to incidental payments of the sale, such as service charges (Swayne v Commissioners of Inland Revenue [1900] 1 QB 172 and Commissioners of Inland Revenue v Littlewoods Mail Order Stores Ltd [1962] 2 All ER 279).
Where the consideration is payable periodically over no more than 20 years, so that the consideration can be ascertained in advance, duty is payable on the full amount.
For consideration which is payable by instalments over a fixed period in excess of a 20-year period or is in perpetuity or indefinite but not terminable with life, the consideration is the amount payable over the first 20 years.
Where the payment period is for life or lives, the consideration is the total payable over the first 12 years. There is no element of discount for any delay in payment (Hotung v Collector of Stamp Revenue [1965] AC 766).
Any interest due on the purchase price which may be payable by instalments does not attract stamp duty. This is on the basis that interest is a further sum payable by the purchaser for the right to pay the consideration money by instalments (Stamp Office Manual at paragraph 4.116).
Where there is consideration near a threshold, it may be possible to express part of the consideration due as interest for a late payment. However, one would have to consider what implications this would have for other taxes.
Consideration unknown: the contingency principle
One often sees transactions which contain an element of consideration linked to either performance or for land, the grant of planning permission; what effect does this have on stamp duty?
In a situation where the consideration is contingent when the document is executed, the 'contingency principle' applies. Where the document is silent but an amount can be ascertained when the document is signed, that is the consideration for stamp duty purposes. In the words of the Stamp Office, this is known as 'the basic sum' or 'the prima facie sum' (Stamp Office Manual at paragraph 4.291).
Contingent consideration may take one of several guises, as follows:
Where there is a stated consideration which may vary up or down, duty is due on the stated amount.
Where there is a definite minimum consideration stated or a definite minimum can be calculated from the terms of the document, duty is due on the minimum amount.
Where there is a definite maximum consideration stated or a definite maximum can be calculated from the terms of the document, duty is due on the maximum amount.
If both a maximum and a minimum sum are stated, or can be calculated from the terms of the document, duty is due on the maximum amount.
The Example illustrates that in some instances, where the consideration is unknown, a maximum figure should not be stated.
Example

A agreed to sell land to B for £2 million. A further £1 million will be payable if planning permission is granted within three years. Stamp duty is payable on completion of the transfer on the maximum consideration of £3 million. If the contract terms were that A would receive £2 million for the land, and should receive either £500,000 now or 10 per cent of the sale price of the land in the next five years, stamp duty would be payable on £2.5 million.
A stamp duty liability will obviously depend on the nature of the deferred consideration. Where it is cash or stock, section 57 will apply (see above). Where the consideration consists only of new shares or loan notes, duty is paid only on the minimum or variable number of shares or loan stock that could be quantified at the completion date.
Wait and see
There are occasions where consideration is ascertainable but has not yet been ascertained (i.e. the calculations have not yet been completed). A common example is the agreement for the sale of a business where the consideration is equal to the net asset value shown by the audited accounts for the year ending on the day before the date of sale. In such a situation, the Stamp Office will adopt the 'wait and see' practice (Stamp Office Manual at paragraph 4.305). This practice only applies to ascertainable consideration which has not yet been ascertained. If there is an unascertainable consideration but a minimum or maximum sum is mentioned, then the contingency principle will apply.
In the case of transfers of any interest in land or the grant of any lease the contingency principle was amended by section 242, Finance Act 1994. Section 242 provides that if the consideration or any part of the consideration could not be ascertained at the time of execution of the document, then market value will be used.
With the exception of real property, if there is no quantification of the consideration, there is no stamp duty liability. For example, shares sold for an unascertainable consideration, geared to the market value of certain shares in six months time, will not attract duty. However, this agreement carries uncertainty, which will make it unattractive in most commercial arrangements.
The Stamp Office considers that it is not possible to avoid the market value rule by simply providing an artificial minimum amount of consideration which does not represent the actual consideration agreed by the parties (Stamp Office Manual at paragraphs 4.294 and 4.297). The Revenue's view is outlined in Tax Bulletin 1995 at page 236.
Part II of this article, concerned with stamp duty and leases and other more specialist situations is planned for next week's issue of Taxation. Sharon Anstey will shortly be joining Arthur Andersen to specialise in stamp duty.
 

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