Business

Worries over stamp duty avoidance

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Image caption Homes bought for more than £125,000 carry a stamp duty bill for buyers

Homebuyers are avoiding paying stamp duty - costing the government millions a year - as the number of websites offering tax avoidance tips grows.

HM Revenue and Customs (HMRC) says it is chasing unpaid tax of £35m amid tax planning and "mitigation" schemes being offered on the internet.

Dozens of websites are now advertising deals, for a fee, claiming there is a loophole in the law.

But HMRC is pursuing tax avoiders and law firms have issued warnings.

Levy

Homebuyers are legally required to pay a stamp duty land tax of between 1% and 5% of the value of a home they buy.

Buyers are liable for the tax when they spend more than £125,000 on a property.

The websites claim that tax specialists will use "stamp duty tax planning" to negate a homebuyers requirement to pay the duty. They charge a fee of around half of the amount that would have been paid in tax.

Online calculators aim to assist people to work out how much they can save. Those who sell the schemes say customers are attracted because of tough economic times and mortgage lenders' requirements of higher deposits.

Stuart Cam runs half a dozen referral websites. He said he sent around 500 people a month to tax planners.

He said there were two popular methods. One was by paying for chattels - fixtures and fittings - separately and, as a result, bringing the cost of the actual property below the £125,000 threshold.

The second was by setting up a limited liability company to buy the property, which then immediately sold it back to the individual.

"There is a corporation in the middle, between you and the vendor, and due to the way corporation tax works you do not have to pay duty," he said.

Is it legal?

Tax planners claim they are legally exploiting loopholes in the current law.

"This is an aggressive tax planning move. You are essentially taking tens of thousands of pounds out of the Revenue's pocket. It is not for everyone. We tell our clients there is a 10% chance that they will receive a letter from HMRC challenging their tax return," said Mr Cam.

"My understanding is that everything being done is within the law. HMRC does understand these schemes and they have not yet closed the loopholes," said Mr Cam.

But an HMRC spokesman said: "The schemes rely on an interpretation of law that produces an outcome different from that envisaged when the law was enacted, and that HMRC does not accept."

Anyone using an avoidance scheme was artificially reducing the tax due on property transactions, giving them an unfair financial advantage over the majority of property purchasers who played by the rules, he said.

The tax authority was investigating 1,200 people it believed had underpaid tax totalling £35m.

HMRC was gearing up to challenge the schemes through the courts, the spokesman said.

Warnings

Law firms have warned against the internet schemes' tactics.

Boodle Hatfield said it was increasingly common to read of wealthy individuals buying property through companies, often located offshore, to avoid paying stamp duty land tax.

This could have been fuelled by the increase earlier in the year of the rate to 5% on properties valued over £1m.

"There is a growing belief that it is possible to avoid paying stamp duty land tax on the purchase of a property or land, and unless particularly aggressive tax planning is undertaken, that is just not the case," said Ian Montgomery, a solicitor specialising in tax at the firm.

"It is a common misconception that it is possible to purchase a property using a company and avoid stamp duty.

"When a property is purchased through a company, whether based offshore or in the UK, it pays the same rate of stamp duty as if it were an individual.

"Stamp duty may be avoided by future purchasers when the company decides to sell the property. This is done by the owner selling shares in the company rather than the property itself, but the duty will be paid on the initial purchase."

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