Stamp duty land tax schemes
Issued on 16 February 2012
We are concerned about the promotion or facilitation of stamp duty land tax schemes.
This warning notice is for anyone who is or is considering becoming involved in the promotion or facilitation of schemes the purpose of which is to avoid or reduce stamp duty land tax. We are particularly concerned with schemes involving residential properties, but this notice may be helpful in relation to schemes involving any type of property. This notice does not form part of the SRA Handbook, but the SRA may have regard to it when exercising its regulatory functions.
If you are or are considering becoming involved in the implementation or promotion of a stamp duty land tax (SDLT) scheme, you should consider whether you can comply with the Principles in the SRA Handbook. Whilst all the Principles may be relevant, some require particular attention:
- best interests of the client,
- behaving in a way that maintains the trust the public places in you and the provision of legal services.
What is a stamp duty land tax scheme?
A SDLT scheme is a scheme which is designed to reduce or eliminate the correct level of stamp duty payable on a property. Generally, buyers of residential property are required to pay stamp duty land tax when they spend more than £125,000 on a residential property. The tax is charged at between 1 per cent and 5 per cent of the value of the residential property.
Warnings by HM Revenue and Customs
HM Revenue and Customs (HMRC) has warned that "where HMRC find property sale arrangements that have been artificially structured to avoid paying the correct amount of SDLT these will be actively challenged, through the courts where appropriate". HMRC has also warned that, in general, these schemes do not genuinely provide the savings their promoters claim. The Times newspaper has reported that the loss to the HMRC "is conservatively estimated at £500 million but some tax specialists believe that the true figures could be more than £1 billion". If HMRC is successful in challenging an SDLT scheme, buyers could be liable to pay the whole of the SDLT plus interest and potentially a penalty.
Why are the Principles relevant?
Whilst buyers of property are free to use honest and proper tax planning to mitigate their tax liability, there are a number of risks and misconceptions surrounding SDLT schemes. If you are asked to promote or implement a SDLT scheme, buyers will place reliance on you to act with integrity, independently, and to consider whether an SDLT scheme is in their interests.
Even if a buyer is aware of the risks and would like to use an SDLT scheme, you should take care to act in a way that maintains the trust the public places in you and the provision of legal services. This is particularly important with SDLT schemes where significant fees can be made from the implementation of a scheme but which may, in view of the warnings by HMRC, result in financial loss to buyers and HMRC.
In view of the level of concern on the part of HMRC and the fundamental importance of integrity in the provision of legal advice, we are likely to look very closely at the conduct of any firm that is actively involved in these schemes.
We are taking action in a number of cases. In a recent case that came before the Solicitors Disciplinary Tribunal (SDT), a solicitor was fined £15,000 and ordered to pay £30,000 costs. There was also a finding that there had been a lack of integrity. There are further cases due before the SDT which may result in more substantial penalties.
We are aware that a number of firms are taking corrective action such as ceasing to promote SDLT schemes, informing buyers that independent legal advice may be needed as well as ensuring lenders are aware of all the details of the SDLT scheme.
Factors to consider to help you decide if a SDLT scheme is in the interests of your clients
Below is a list of some of the factors which may be relevant in deciding if a SDLT scheme is in the interests of your client(s).
The SDLT scheme
- SDLT schemes are constantly changing and are usually very complex, bearing in mind what purchasers want to achieve. HMRC publish information on schemes which have been discredited;
- Be wary of claims by promoters of SDLT schemes that the scheme is backed by a "robust counsel's opinion". Based on what we have seen, we warn that you must check that the opinion
- is genuine,
- has not been tampered with,
- is up to date, and
- specifically covers the scheme which is being promoted.
- Bear in mind that reliance on counsel's opinion is not necessarily a defence to allegations of breaches of the Principles, and such a position is substantially weaker if the opinion has not been obtained by you for the particular client and the transaction in which you are acting;
- Be wary of claims that the SDLT scheme is approved by HMRC. Be aware that disclosure of the scheme to HMRC, and the issue of a scheme reference number by HMRC, is not confirmation the scheme is backed by HMRC;
- Be aware that HMRC can currently challenge SDLT schemes up to four years after the effective date of the transaction and this can be extended if there has been a careless or deliberate error in the submission of the SDLT return;
- Consider carrying out due diligence on the promoter of the SDLT scheme. If the promoter claims they will repay the fee charged for implementing the scheme, robustly check how realistic this is, bearing in mind that HMRC has four years to challenge the scheme. If the promoter is unable to repay the fee, the buyer may look to you to reimburse them;
- If the SDLT scheme is based on a supposed "no win no fee" basis said to be backed by insurance, robustly check that the policy is suitable and relevant to the purchasers circumstances.
- Make sure that you have properly considered all the clients' interests and that no client will be disadvantaged by the scheme;
- Ensure that you account to the buyer for any benefit received by you, and disclose any referral arrangement connected to the scheme.
- If you act for a lender as well as the buyer, robust consideration needs to be given to whether the scheme could prejudice the interests of the lender. It is our view that it is likely to be very important to ensure that the lender is fully informed that the property is subject to an SDLT scheme with sufficient detail of how the scheme operates. Recent findings by the SDT would support this approach.
These schemes also carry significant risks for you. If you knowingly provide information in support of a tax return that is incorrect, HMRC could impose a penalty on you of £3,000 per submission.
For further advice on the application of the Principles in relation to stamp duty land tax avoidance schemes, please contact our Ethics helpline.