EXAMINING STAMP DUTY: AN IDEAL GOVERNMENT REVENUE MACHINE AND A BURDEN TO BRITISH CITIZENS
Stamp duty can be a costly part of any number of common transactions in Britain – from buying a home to investing in a U.K. company. In order to truly understand the degree to which this tax impacts a transaction’s bottom line, it is important to understand all the scenarios in which stamp duty is payable as well as determine what type of relief and exemptions are available. Before determining if stamp duty is an ideal tax, it is also vital to gather expert opinions on the various types of stamp duty, the reasons these taxes were created, and how recent changes are affecting British citizens and businesses. While the government may find stamp duty a perfect fulfilment of taxation principles due to its simplicity and the considerable revenue generated, stamp duty seems to be burdensome and impedes the financial success of many residents who dream of homeownership and to those companies who want to increase their market value through the stock exchange system.
There are three types of stamp duty: stamp duty, stamp duty land tax, and stamp duty reserve tax. Stamp duty is “a charge on instruments” (Thomas 2003). Stamp duty is a general term for a tax that is levied on the purchase of shares and on property. While there is a flat rate for the purchase of shares, the rate for property has a range tied to different home purchase price thresholds.
Considered a new tax in its own right rather than an offshoot of stamp duty, the stamp duty land tax went into effect on 1 December 2003 (Thomas 2003). This tax is charged to all land transactions whether or not it is actually stamped, or recorded, in a document (Thomas 2003). Included in these transactions are all types of property, including houses, flats, other buildings and land. What it really is considered is a land transaction but it retains the reference to stamp duty to link its activities to the original taxation system (Thomas 2003). The tax must be paid by the person buying the land and it is calculated as a percentage of the total purchase price. No stamp duty land tax is paid on any transaction under ?125,000. One per cent is paid on anything valued between ?125,000 and ?250,000. From ?250,001 to ?500,000, the tax is three per cent and anything valued at ?500,001 is taxed at four per cent (DirectGov 2006).
The stamp duty land tax has been “founded on an entirely new set of concepts” and is “directly enforceable against the purchaser under a strict new self-assessment regime” (Thomas 2003). While some of the same relief provisions have been carried through from the stamp duty tax, other changes have been made to discourage certain types of transactions. For example, if the purchase price of a property is ?150,000 and the government has designated that area as disadvantaged, no stamp duty land tax is required (DirectGov 2006). Relief provisions that are retained from stamp duty include all the major provisions except that “group relief, reconstruction and acquisition reliefs, and charities relief” are now designed in a manner that prevents exploitation for “tax planning purposes” (Thomas 2003). Relief is now available for builders who make purchases in part-exchange as well as for “transactions not made for chargeable consideration” (Thomas 2003).
The stamp land duty tax was designed to achieve a number of purposes. As with any tax, it was created as a way to raise more revenue for the government. The tax does this by stopping the loopholes in the stamp duty that were “exploited for planning purposes” (Thomas 2003); requiring the purchaser to file a tax return and pay the tax within thirty days of the close of the land transaction (Thomas 2003), and introducing a new upfront levy on the value of the rental stream over the “full term of the lease instead of on the average annual rent (Thomas 2003).
The last of the three types of stamp duty is the stamp duty reserve tax. This tax is paid on any U.K share transactions when a person buys shares in a company that is incorporated in the UK or in a foreign company that maintains a share register in the UK (DirectGov 2006). These shares can be bought through a stockbroker and completed on paper forms or electronically through CREST, the electronic settlement and registration system (DirectGov 2006). The tax is a flat rate of 0.5 per cent based on what is paid for the shares, not what they are worth (DirectGov 2006). A higher rate of 1.5 per cent is paid when shares are transferred into a depository receipt scheme or a clearance service (DirectGov 2006). The fees are paid through the CREST system if a person uses a brokerage but are paid directly if this system is not used (DirectGov 2006).
Even if a person does not pay cash but provides something else of value in exchange for the shares, the stamp duty reserve tax is based on the value of what the person gives for those shares (DirectGov 2006). Other situations that require payment of stamp duty reserve tax is when a person buys an option to buy shares, rights arising from shares and an interest in shares (DirectGov 2006).The only time the stamp duty reserve tax does not have to be paid is when shares are given to a person for nothing or a person buys foreign shares.
One area where stamp duty revenue tax has been causing some dilemmas is with unit trusts, open-ended investment companies, and the structure of stakeholder pension products. The best example of this is with companies that provide CAT-marked investments:
Stamp duty reserve tax arises when investors buy or sell units in the fund, and is generally paid for by the fund. It cannot be forecast accurately in advance, for the ultimate liability will depend on factors beyond the fund managers’ control. Yet this tax must be included in calculating whether charges to investors meet the CAT standard of 1 per cent a year, despite the fact that it is not a charge made by the ISA provider, but a government tax. This has led providers to question the commercial liability implied by offering a CAT-market product (Warland 2000).
The net result of the stamp duty reserve tax is that it is “complex to administer, very difficult for fund investors to understand,” and did raise significant revenue (Warland 2000). It has been argued by the figures within the City of London, including the London Stock Exchange, that stamp duty reserve tax should be scrapped because “it undermines the competitiveness compared with other financial centres and distorts securities trading” (Wighton 2006). The National Association of Pension Funds says that stamp duty increases transaction costs, which are then passed onto employers (Brown-Humes 2006). Stamp duty reserve tax is also considered controversial because “it accounts for a greater proportion of overall share transaction costs…because broker commissions and other costs have fallen” (Brown-Humes 2006).
In looking at the complete stamp duty tax scheme, the changes in the Finance Act of 2003 were intended to bring reform that was considered long overdue as well as infuse the government with much-needed revenue. Prior to that, legislation had been considered outdated and inadequate especially considering the real value that revenue from such a tax could yield (Thomas 2006). Prior to the Finance Act of 2003, the HM Revenue & Customs (HMRC)did not have the power to enforce the stamp duty on any transaction that was not properly stamped (Thomas 2006). To the HMRC, “clamping down on perceived avoidance was the dominant motive for change” (Thomas 2006). To them, it was “unfair for well-advised taxpayers to avoid paying tax through good planning, as this puts an unfair share of the tax burden onto everyone else” (Thomas 2006). From this philosophy was born the most recent stamp duty requirements. In looking at the principles of taxation, stamp duty is ideal in that it is “easy to administer and collect” (Brown-Humes 2006). To everyone else outside of the government, the tax is considered less than ideal.
As one of the most hotly debated government schemes and deemed a tax on the masses (Barrow 2006), it has been acknowledged by the chancellor that stamp duty land tax does place a burden on the average British citizen. According to figures released in May 2006, stamp duty is raking in revenues of ?1 billion per month (Barrow 2006) between residential and commercial transactions as well as share investment. These figures far surpass any tax amount ever demanded from citizens in Britain’s history (Barrow 2006). . In fact, one writer went as far as to say that the stamp duty has been one of the most lucrative stealth taxes developed by New Labour (O’Kelly 2006). As one economist noted, “We have now got to the level where it is hitting mainstream home-owners. It’s only going to get worse” (Barrow 2006). According to Halifax, Britain’s biggest mortgage lender, 2.6 million homeowners had to pay stamp duty land tax (Barrow 2006). That equates to five out of six homeowners feeling this burden (Barrow 2006). Another way to slice and dice the figure comes from the Council of Mortgage Lenders. They found that 55 per cent of first-time buyers and 86 per cent of home-movers paid the tax in September.
The government has retorted that there are a number of relief provisions in place. It was recently announced that new – no pre-existing dwellings – that are considered “zero-carbon” homes sill be completely exempt from stamp duty (Goff and Harvey 2006). While attractive to new homeowners, this is not very realistic as many first-time buyers are not prepared to inhabit in such a revolutionary dwelling or they live in an area where there is not enough renewable energy to power these homes (Goff and Harvey 2006).
Another move intended to decrease the burden was the announcement last year to increase the threshold at which stamp duty is triggered (Batchelor 2006). As one finance expert noted, “If stamp duty had kept pace with rising house prices since 1993 the threshold would have been set at ?190,000” instead of ?125,000 (Batchelor 2006). It seems as if the rising house prices are making the new threshold rate seem ineffective as a relief. As Matthew Wyles of the Portman Building Society said, “Stamp duty continues to be a deeply unfair tax to all who pay it. The burden of this tax will continue to increase unless the government undertakes a radical alteration to its policy in this area and abandons its current strategy of making the occasional cosmetic tweak to the threshold to keep criticism at bay” (Houlder 2006).
The chancellor decided to end “seeding relief,” which was intended to help on “transfers of property into a unit trust with immediate effect” (Batchelor 2006). Revenue from taking away this relief is expected to raise ?50 million annually (Batchelor 2006). Recent changes also involved not making partnerships that are involved in a trade or profession responsible for stamp duty for land transactions owned by that partnership (Batchelor 2006). It seems as though the government could still use this lucrative tax to levy sellers instead of buyers since it is usually the sellers who are involved in investment schemes. It might even make sense to still gain this revenue from non-residents who tend to speculate in the property market, making home ownership less feasible for the first-time resident buyer (O’Kelly 2006).
While it may seem like an ideal tax in the minds of the government and a solution to stopping investors from exploiting the system, it certainly does nothing to help citizens who are already struggling to buy a home let alone pay the stamp duty required on the transaction. Recent announcements to raise interest rates alongside the intense housing price inflation only exacerbate a domestic problem that has been brewing for as long as the stamp duty policies have existed. Homeownership and investment should not create a financial burden for citizens in Britain because the government wants to resort to an overuse of its taxation powers. The concern, however, is that if stamp duty was ever scrapped and the government continued to overspend, whatever tax scheme replaced stamp duty might be a jump from the frying pan into the fire.
Barrow, Becky 23 May 2006, Stamp Duty Rakes in ?1bn a Month, Daily Mail.
Batchelor, Charles 23 March 2006, Stamp Duty, Financial Times.
Brown-Humes, Christopher 21 October 2006, Stamp Duty’s Hidden Benefit: It’s the Devil-you-know Tax, Financial Times.
DIRECTGOV 2006, Tax on Buying Shares, Available at: http://www.direct.gov.uk/MoneyTaxAndBenefits/Taxes/TaxOnSavingsAndInvestments/TaxOnSavingsAndInvestmentsArticles/fs/en?CONTENT_ID=10013514&chk=Tac6CP.
Goff, Sharlene and Harvey, Fiona 9 December 2006, Exemption from Stamp Duty Seen as Token Gesture, Financial Times.
Houlder, Vanessa 7 September 2006, Amount Paid in Stamp Duty Up 30%, Financial Times.
O’Kelly, Sebastian 12 March 2006, How Brown is Still Coining It with His Unfair Stamp Duty; the Chancellor is Milking Homebuyers. But Shouldn’t His Stealth Tax Target Sellers Instead? The Mail on Sunday, p. 13.
Thomas, Michael 2003, Introduction to Stamp Duty Land Tax, Cambridge University Press.
Thomas, Michael March 2006, Stamp Duty Land Tax, 2nd Edition, London: Cambridge University Press.
Warland, Phillip 17 February 2000, How Stamp Duty Reserve Tax Threatens Low-Cost Savings, Financial Times.
Wighton, David 27 July 2006, Balls Faces Calls to Scrap Stamp Duty, Financial Times.