Avoiding Stamp Duty: A Clever Loophole Exposed

[cashinmattress]

Avoiding Stamp Duty: A clever loophole exposed

Clever lawyers are using loopholes in legislation to help wealthy clients avoid Stamp Duty on the purchase of expensive properties - and buyers are saving tens of thousands of pounds.

Solicitors are reluctant to talk about the schemes because they use legislation intended for specific purposes – in particular Islamic finance mortgages – and are applying it to the purchase of any high value property.

The downside is that these firms charge between 25% and 50% of the Stamp Duty saved as a fee, and in some cases there are extra administration costs on top.

However, home buyers are going ahead because saving even half of Stamp Duty at 4% on, say, a £3 million house purchase is still worth having. On such a purchase, if you paid Stamp Duty in full it works out at £120,000. Even if you pay half that in fees, you still save £60,000.

Lawyers are basically not interested in operating the Stamp Duty avoidance schemes on low value properties because the fees are not juicy enough. So to be eligible, you must be buying a home worth more than £500,000.

Exploiting a loophole

One of the most popular schemes uses concessions introduced to help Muslim homebuyers with a mortgage. Under Islamic law interest is illegal so the big banks pressed the government to approve a scheme which involved the banks purchasing property on behalf of their client, and then leasing it to them on a long lease on which the individual paid ‘rent’ instead of interest. The property is eventually transferred to the intended owner. But to avoid Stamp Duty being paid twice, once by the bank and again when the transferred to the eventual owner, concessions were introduced.

‘There was a lot of political pressure by the banks to introduce Islamic finance schemes but most of the UK banks won’t get involved in the exploitation of these schemes for fear of attracting the attention of the authorities,’ says a partner in a big firm of London solicitors. ‘However, some of the foreign banks will.’

How it works

The most popular schemes make use of what is known as ‘The Alternative Finance Strategy’. Under this strategy, a bank or regulated UK financial institution – often a nominee company set up by the bank - contracts to purchase the property from the seller for the agreed purchase price and at the same time grants to the real purchaser a lease, usually for 999 years, for the same amount as the purchase price paid to the original seller.

The lease includes an option for the real buyer to acquire the freehold or head lease in the property on request. The process also involves the financial institution initially paying only 85% or so of the purchase price; because under Stamp Duty legislation the purchase has not been ‘substantially performed’, no Stamp Duty is paid. The property is eventually transferred to the real purchaser who pays the outstanding 15%. As long as it is below the Stamp Duty threshold of £175,000 (until December 2009) no tax is payable.

Promoters of the schemes are sometimes estate agents who refer clients to solicitors who operate the scheme. But you can find several on the Internet. One estate agent claims to have saved his clients a total of £1.1 million in Stamp Duty over the past year and the website www.avoidstampduty.com claims, ‘our solicitors have been running this scheme for four years and process 40-50 cases a month. To date they have a 100% success rate.’

Other schemes are in existence using partnership concessions or other concessions which allow spouses to transfer properties between themselves at less than the true open market value. All are fairly complicated and carry hefty fees. ‘We have been looking at the partnership schemes but the Revenue keeps having little goes at them – but I am not aware of any challenges yet,’ confirms one firm of highly reputable solicitors.

Her Majesty’s Revenue & Customs is aware of many of these schemes and in April of this year introduced a consultative document on Stamp Duty avoidance. Recent legislation requires firms involved in any tax avoidance scheme to ‘disclose’ these schemes to the tax man. But disclosure of Stamp Duty avoidance schemes is limited by the legislation – a situation which the tax authorities hope to amend.

An announcement was made in the 2008 Budget that Disclosure of Tax Avoidance Schemes (DOTAS) would be extended to cover SDLT schemes that concern residential property with a value of at least £1 million. So how long these Stamp Duty avoidance schemes will last is anyone’s guess.

Most firms of lawyers know about these schemes even if they don’t operate them themselves. Presumably they are able to put clients in touch with firms who can offer the avoidance schemes. Otherwise a simple search on the Internet produces www.avoidstampduty.com and www.ecademy.com

[The Generation Game]

Is this the same thing?

http://www.rightmove.co.uk/property-for-sa....0%26index%3D30

[carrera]

What I don`t understand is that any lease granted for over 7 years will be registrable with the Land Registry -

When you register you will have to give a declaration that the land is exempt from duty - from what they are saying you are having a 999 year lease for a sum of say £600k, then buying the freehold at £150k in a few years time -

That £600k consideration provided for the lease would be subject to tax at 4% upon registration...and you are obliged to by law to register - it is not optional.

I can perhaps understand islamic financing getting around this ..however, the rest us in my view will be looking at possible tax evasion and not tax avoidance .. let's not forget that if HMRC decide to run a few test cases .. and win, they will go back six years and want payment on all similar transactions ..

Let's not forget how deparate for money this Government is ...

I`m not convinced, I`d like to see one done in black and white and have a look over all the doucments and declarations given to both Companies House, Land Registry and HMRC ...

What they are doing is not difficult and most lawyers could do that for a heck of a lot less than what they are charging ..to me, synical as I am, if it looks too good to be true.. there's a catch !!

[OnlyMe]

Remember the debtmongerers were very keen on promoting the availability of Islamic mortgages, any form of leverage and shit you could throw at property was being encouraged.

http://www.iibu.com/press/200306.htm

LEADING PROVIDER OF "ISLAMIC MORTGAGES" IN THE UK WELCOMES BUDGET BOOST

* 09/04/2003

The bank with the longest-standing Islamic home finance business in the UK today welcomed aspects of Gordon Brown's latest budget that will help the bank in its efforts to offer a better service to thousands of Muslim customers in the UK.

Ahli United Bank (UK) PLC ("AUBUK"), whose business roots in the UK go back to 1966, is to date the only significant provider in this country of "Islamic Mortgages" that comply with the strict principles of Islamic Law. Ensuring this compliance, though, raises the costs of the "Mortgages" to its customers - not least because to date it has usually entailed a double payment of stamp duty. AUBUK has been closely involved with a working party recently set up by the Bank of England to look at ways of reducing these costs. It believes this week's budget will do much to help the "Islamic Mortgage" product to develop.

[mbga9pgf]

F*cking typical. Give the Mooj breaks again.

Makes me sick.

[huw]

I believe that any sequence of steps that's purely designed to avoid tax, can be set aside by the tax authorities when calculating the bill ... if that's correct, I wonder if buyers eventually risk paying stamp duty + 50%?

I bet the lawyers have got a clause that covers them in such cases

[nohpc]

Is it really unethical to avoid paying tax through a legal loophole? Would anybdy not take advantage is they could?

[Guest sillybear2]

This was common throughout the boom, using an offshore company to purchase the property, therefore avoiding stamp duty.

[Guest sillybear2]

Is it really unethical to avoid paying tax through a legal loophole? Would anybdy not take advantage is they could?

"It's within the rules so it's OK!"

Ethics and abiding by the spirit of the law is dead, it seems.

[happy_renting]

I think a wise judge once said 'no-one is obliged to arrange their finances to maximise the amount of tax they pay.'

Tax avoidance is legal, legitimate and sensible. It is a dangerous situation when tax authorities ignore this and pretend that avoidance is evasion.

The real problem is the complexity of our tax laws from which such loopholes arise. We need a flat tax system.

[anonguest]

This was common throughout the boom, using an offshore company to purchase the property, therefore avoiding stamp duty.

Errr....how does that fact that a foreign company buys a UK property mean that it doesnt have to pay stamp duty? Surely whether the buyer is foreign or not doesnt negatte the requirement to pay the tax at the time of purchase?

Otherwise any UK citizen could simply register a shell company overseas at the foreign countrys equivalent of companies house (any Euro country? or only tax havens?), and then buy the house, with the buyer living in it as a tenant?

[Guest sillybear2]

Errr....how does that fact that a foreign company buys a UK property mean that it doesnt have to pay stamp duty? Surely whether the buyer is foreign or not doesnt negatte the requirement to pay the tax at the time of purchase?

It's something do with the fact it's a commercial transaction, I don't know the details but bomebody wrote a book on it :-

http://www.amazon.co.uk/Avoid-Stamp-Duty-R...n/dp/1904608353

The Labour party itself seem to know all about it too :-

http://www.independent.co.uk/news/uk/polit...uty-427849.html

It seems that routine fraud and avoiding stamp duty is somewhat of a forte for the Labour party. Such are the wonders of living in a highly corrupt country that pretends it's anything but.

Edited June 20, 2009 by sillybear2

[anonguest]

It's something do with the fact it's a commercial transaction, I don't know the details but bomebody wrote a book on it :-

http://www.amazon.co.uk/Avoid-Stamp-Duty-R...n/dp/1904608353

The Labour party itself seem to know all about it too :-

http://www.independent.co.uk/news/uk/polit...uty-427849.html

It seems that routine fraud and avoiding stamp duty is somewhat of a forte for the Labour party. Such are the wonders of living in a highly corrupt country that pretends it's anything but.

Thanks. Much appreciated, and very interesting.

[MrB]

Muslims Avoid Paying Stamp Duty.....

coming to a Daily Mail /Express near you.

tbh it is a disgrace!

[Guest sillybear2]

Muslims Avoid Paying Stamp Duty.....

coming to a Daily Mail /Express near you.

tbh it is a disgrace!

Well, it's more to do with the rules, but expect a mass conversion soon if it saves people money

[ThePiltdownMan]

They should change the law so that only genuine muslims are eligible for such mortgages.

[Venger]

The downside is that these firms charge between 25% and 50% of the Stamp Duty saved as a fee, and in some cases there are extra administration costs on top.

There's a thread running on MSE Mortgagee section, with a woman upset the scheme she bought under to avoid Stamp Duty has 'failed', and HMRC offered to take it no further if she pays what she owes (fill stamp duty) + outstanding interest. She also upset that all the money she paid "advisors" wasted, and from memory, talking about now having to try and get a £15K loan to pay HMRC.

The insurance-backed scheme, apparently no insurance in place according to administratrors of the failed company she used to do the avoidance/evasion. And even if there was insurance in place, it wouldn't pay out under measures Gov has taken. Then later a few other people pop in on the thread, saying they've also had letters requesting they pay what they owe.

http://forums.moneysavingexpert.com/showthread.php?t=4956059

Bit of googling I did late last night suggested quite a few people have used such Stamp Duty schemes.

Also in Sunday Times (20.07.14) Money supplement - re HMRC clamping down on all those vehicles celebs in recent news have used to limit what they paid in tax.

"Blitz on tax avoiders hits modest investors too."

It is not just the wealthy and celebraties who have invested in these schemes. There are a lot of modestly well-off people, such as self-employed contractors, who will face these demands for money," said Jason Collins of the law firm Pinsent Masons. Taylor said that for every celebrity or high profile client he is representing, he has another 50 who do not fit into that bracket and face significant financial hardship as a result of the clampdown. His clients include nurses, vicars, office workers and medical staff. Based on the number of people he is assisting, he thinks that about 120,000 investors could be involved in all, far more than the 43,000 that have been identified by the Revenue.

Edited July 23, 2014 by Venger

[19 year mortgage 8itch]

[Quicken]

The process also involves the financial institution initially paying only 85% or so of the purchase price; because under Stamp Duty legislation the purchase has not been ‘substantially performed’, no Stamp Duty is paid.

Why is it not substantial?

So it went from 2x stamp duty for two transactions to 0x stamp duty for two transactions. Nice one Brown, and congratulations to the coalition and HMRC for completely failing to correct this f*ck up. Trebles all round!

[Snugglybear]

Well, it's more to do with the rules, but expect a mass conversion soon if it saves people money

Who needs to convert? You're entitled to any product you want, within the rules of the institution. But one rule they can't have is not providing a product because the customer is not of the correct religion. Religious belief or the lack of it is one of the protected characteristics under anti-discrimination law.

Go for one of these schemes. Or get yourselves a fee- and interest-free current account at Lloyds. If you're refused, sic the Equality and Human Rights Commission on them.

[winkie]

Interest or fee or both...same thing.