Stamp Duty / VAT question?
Discussion
I'm in the process of making a bid for a new commercial property (circa £700k). It's a long-term (999 yr) leasehold property. I've bought four smaller properties close by on a similar lease and I paid no stamp duty. However, I've been told by an accountant at my auditors that because I'm the first buyer for this new building (it's currently being built) that I'm gonna have to pay 4% stamp duty. He then told me that I'm gonna have to pay 4% of the total price inclusive of the VAT. Is that right? If so, it means I'm paying Tax on the Tax? That would mean 700k + 122k VAT = 822k X 4% = 33k stamp duty! Obviously I'd get the VAT back, but was not expecting the Stamp Duty.
Technically the 4% stamp duty (or stamp duty land tax/SDLT as it is now called) is payable because the price is over £500k
VAT is payable because it is a commercial building and is new build.
Sadly you do pay SDLT on the VAT and ever since it came in I have thought that it is utterly iniquitous but that's tax for you.
Presumably you will get the VAT back but SDLT is hard to dodge. One trick we use is for the seller to grant a long lease at no rent to a nominee company, the buyer pays a nominal amount for the property and then pays the seller the effective purchase price for the surrender of the lease. You end up with the same title but the transaction is not charged to SDLT.
We tend to use it only on transactions over £5m but that's mostly because we are in central London and the extra costs outweigh the SDLT benefit below that level.
We also split the cost in a way that still requires payment of SDLT but at a lower level than would be case on the full price to keep it off the Revenue's radar.
It might be worth running it past your lawyer.
VAT is payable because it is a commercial building and is new build.
Sadly you do pay SDLT on the VAT and ever since it came in I have thought that it is utterly iniquitous but that's tax for you.
Presumably you will get the VAT back but SDLT is hard to dodge. One trick we use is for the seller to grant a long lease at no rent to a nominee company, the buyer pays a nominal amount for the property and then pays the seller the effective purchase price for the surrender of the lease. You end up with the same title but the transaction is not charged to SDLT.
We tend to use it only on transactions over £5m but that's mostly because we are in central London and the extra costs outweigh the SDLT benefit below that level.
We also split the cost in a way that still requires payment of SDLT but at a lower level than would be case on the full price to keep it off the Revenue's radar.
It might be worth running it past your lawyer.
billsnemesis said:
One trick we use is for the seller to grant a long lease at no rent to a nominee company, the buyer pays a nominal amount for the property and then pays the seller the effective purchase price for the surrender of the lease. You end up with the same title but the transaction is not charged to SDLT.
Interesting. Do you know if there are there any CGT implications if I were to sell the property in, say, 5 year's time?
Not sure, my bit is the lease/title side but I imagine that as you have paid full value for the property you should be able to claim that as the acquisition value and not be hit. I would have guessed that if there were any CGT implications our investor and developer clients would have spotted it.
The reason this works for SDLT is because the transcation in which the majority of the cash is transferred is not one on which SDLT is payable. The CGT calculation focusses on different issues so has a different result.
Maybe one of the accountants out their (enter Eric stage right?) could comment on whether the acquisition cost for a capital asset is only the purchase price or, as in this case, the price for the asset plus a separate payment for enhancing that asset so that both taken into account in calculating CGT liability.
I will try asking our tax people but half the time I don't understand their answers anyway.
The reason this works for SDLT is because the transcation in which the majority of the cash is transferred is not one on which SDLT is payable. The CGT calculation focusses on different issues so has a different result.
Maybe one of the accountants out their (enter Eric stage right?) could comment on whether the acquisition cost for a capital asset is only the purchase price or, as in this case, the price for the asset plus a separate payment for enhancing that asset so that both taken into account in calculating CGT liability.
I will try asking our tax people but half the time I don't understand their answers anyway.
I'm afraid your man's right ... another example of being taxed on the tax you're already paying.
It works all this way all the time with VAT - clearest example is paying VAT on fuel and fuel duty.
But that said, you should be claiming back the full amount of VAT paid, including that paid on the Stamp Duty.
hang on ... I am tired and already proved to myself I'm not thinking straight today ... is the SD paid on the value of the property + VAT? Is that what's being said here?
>> Edited by J1mmyD on Thursday 6th April 16:34
It works all this way all the time with VAT - clearest example is paying VAT on fuel and fuel duty.
But that said, you should be claiming back the full amount of VAT paid, including that paid on the Stamp Duty.
hang on ... I am tired and already proved to myself I'm not thinking straight today ... is the SD paid on the value of the property + VAT? Is that what's being said here?
>> Edited by J1mmyD on Thursday 6th April 16:34
Eric Mc said:
CGT usually uses the full costs incurred in acquiring the asset (whatever it happens to be) as the "Base Cost" for deducting from the proceeds when the asset is eventuially sold to arrive at the CGT figure.
OK, but in this instance there are two payments; one to acquire the asset (the freehold title) and a second to remove from that title the more valuable asset which is the lease.
Putting some numbers on a deal we are actually doing here: buying freehold for £1m, paying £20+m to terminate a lease. Once the lease is terminated the full value applies to the freehold which was acquired for £1m. Is the base cost £1m or "£1m plus the £20+m"?
Presumably the base cost is the combined payment otherwise there is going to be huge CGT implications which I cannot believe that our tax guys or the client's accountants would have missed.
So taking this generically, if I buy something for £1m and spend £5m making it worth £10m is CGT charged on £9m or £4m?
There may be some fancy footwork being entered into here to try and "manufacture" some sort of favourable CGT acquisition.
However, the Revenue has the power to look beyond the actual transaction or series of transactions so that they can get a view of the bigger picture.
If the overall aim of the exercise is to acquire a "property", then I would suggest that the cost of acquiring that property, however convoluted, is the CGT cost.
Also, if any consideration paid in the chain of transactions has been at less than Market Value, the Revenue have the power to substitute Market Value instead of what was actually paid. Finally, if any of the parties involved in the initial purchase/sale of the property are "connected" in any way, the Revenue might be more inclined to take a closer look at the consideration being offered.
There are specific tax regulations (Income Tax rather than CGT) on the sale of leases.
However, the Revenue has the power to look beyond the actual transaction or series of transactions so that they can get a view of the bigger picture.
If the overall aim of the exercise is to acquire a "property", then I would suggest that the cost of acquiring that property, however convoluted, is the CGT cost.
Also, if any consideration paid in the chain of transactions has been at less than Market Value, the Revenue have the power to substitute Market Value instead of what was actually paid. Finally, if any of the parties involved in the initial purchase/sale of the property are "connected" in any way, the Revenue might be more inclined to take a closer look at the consideration being offered.
There are specific tax regulations (Income Tax rather than CGT) on the sale of leases.
Gassing Station | Business | Top of Page | What's New | My Stuff