How to raise £1bn by closing a stamp duty “loophole”

¹This is an updated version of my old post ‘how to avoid stamp duty’You’re about to sign on the purchase of the Oblong – a £1bn glass monolith in the centre of the City of London. The handy HMRC calculator tells you if you execute a deed purchasing The Oblong, you’ll owe a neat £50m in SDLT.

How do you avoid the tax?

Well, as it happens, The Oblong – like almost every other serious bit of commercial real estate²This trick used to work for residential real estate, but now kinda mostly sorta doesn’t, because of ATED – I’ll write about that soon in the UK – is owned by a company – Oblong Propco Limited. This isn’t the normal kind of company that does a bunch of different things, but a “special purpose vehicle” (SPV) whose only activity is holding The Oblong, signing leases with tenants, and so forth.

After a quick chat with your advisers you realise that, on reflection, you love The Oblong so much that you’ll buy the company. Instead of paying £1bn for the land, you pay £1bn for Oblong Propco Limited, and The Oblong will come along with it.

Funny thing is, whilst the rate of stamp duty on land is 5%, the rate on shares is 0.5%. Funnier still, that’s shares in *UK* companies, and Oblong Propco Limited is incorporated in Jersey. So you pay nothing.³This is, I hope obviously, not legal advice.

Is this tax avoidance?

You clearly are avoiding SDLT, in the value-free sense of not paying SDLT that you would pay if you did something else. But is it “tax avoidance” in the way that term is usually used?

The thing is, you’re not doing anything remotely naughty. You could buy the land directly. Or you could buy the company. It’s a free choice. In many ways it’s more convenient to buy the company; it may have ancillary contracts (like window cleaners and security guards), and your bank may prefer to lend to a nice clean SPV and not a complex company with lots of different creditors. You’re just choosing to do the transaction in a particular, not remotely unusual, way.

For this reason, it’s not “tax avoidance” within any of the technical rules that could enable an HMRC challenge, and so this is as close to a dead cert as tax planning ever gets.

By way of comparison, here’s what would be tax avoidance. Say the current owners hold The Oblong directly, and not in an SPV. They want to sell free from SDLT (because part of the benefit will go to them in increased sale price). So, just before they sell to you, they transfer The Oblong into a new SPV and then sell you the SPV. That kind of game was stopped years ago, and now doesn’t work for a whole bunch of reasons – so HMRC would get their SDLT. But if the owners moved The Oblong into the SPV more than three years before they started talking to potential purchasers, then these rules won’t apply.

Is this a loophole?

The term “loophole” suggests something secret and clever, which only a few special people know about. Everybody in the real estate world knows you sell companies if you don’t want to pay SDLT. That includes HMRC. Most people would say it’s a loophole. Tax advisers and people in the real estate industry would disagree. But in my view, it’s an irrational limitation on stamp duty that shouldn’t exist. I’ll call it a “loophole” in scare quotes… but what we call it is much less important than what we do about it.

What do other countries do?

Spain, Germany, France, Australia… most countries that have a tax on land transfers also apply it to the sale of shares in SPVs holding land. Because it’s such a bloody obvious way to avoid tax.

What should we do about it?

There’s no technical barrier to charging SDLT on property SPVs. We even have legislation we could use to do it – we could copy and paste from the rules created a few years ago to charge capital gains tax on people selling property SPVs (“property rich companies“).

How much tax would we raise if we did that?

There are, as with many tax questions, no figures available that let us estimate this with any accuracy. However, there are around £60bn of commercial real estate transactions a year. What proportion of those involve shares in SPVs, rather than dealing in the real estate directly? There is no data available,⁴As far as I know, but if you can point me towards anything I would be most grateful but on the basis of my experience, I would say that it is likely, by value, the majority. It would be surprising if the revenues were less than £1bn (i.e. because if only 1/3 of these real estate transactions are currently in SPVs, changing the law would yield £60bn x 1/3 x 5% = £1bn).

People could still use SPVs to hold real estate – and in many cases that would still make sense. But we’d be taxing SPV transactions in the same way as land transactions – and taxing economically similar transactions in a similar way is good tax policy.

Before Brexit, EU law made it difficult in practice to impose SDLT on SPV shares without huge loopholes⁵Problem was that the Capital Duties Directive meant we couldn’t charge SDLT on the issuance of shares. So people could have responded to SDLT on the transfer of SPV shares by instead issuing new shares to the purchaser, and repurchasing/cancelling the shares of the seller. Why doesn’t EU law stand in the way of the French, German etc taxes applying to sales of shares? It’s one of life’s little mysteries.. But that’s fallen away – a true Brexit dividend.

So what’s stopping us now?

Gherkin photo by Ed Robertson on Unsplash

• 1
  This is an updated version of my old post ‘how to avoid stamp duty’
• 2
  This trick used to work for residential real estate, but now kinda mostly sorta doesn’t, because of ATED – I’ll write about that soon
• 3
  This is, I hope obviously, not legal advice.
• 4
  As far as I know, but if you can point me towards anything I would be most grateful
• 5
  Problem was that the Capital Duties Directive meant we couldn’t charge SDLT on the issuance of shares. So people could have responded to SDLT on the transfer of SPV shares by instead issuing new shares to the purchaser, and repurchasing/cancelling the shares of the seller. Why doesn’t EU law stand in the way of the French, German etc taxes applying to sales of shares? It’s one of life’s little mysteries.