A proposed change to stamp duty legislation will be bad for the construction industry and bad for the economy

THE CONSTRUCTION industry is on the floor and much of our economic woes relate to that fact. Now the Minister for Finance Brian Lenihan is proposing to shoot the construction industry in the foot by significantly increasing the tax cost of new developments.

The Minister is proposing to add 6 per cent to the site cost of many developments by abolishing a centuries old stamp duty relief called “resting in contract”.

Stamp duty is payable mostly on “deeds”, in other words documents which are not only signed but sealed by applying sealing wax to them. Some other classes of documents are also stampable. Until a “deed” is created no liability to stamp duty arises on it.

A sale of land usually commences with a written contract (not typically stampable since it is not a deed) and a payment of all or part of the price for the land. The sale will be concluded by the transfer of the legal title to the land to the purchaser. The document which effects this transfer is called a conveyance and is a deed.

Until this deed is executed the purchaser cannot prove good title to the land and in some circumstances could find that his rights to the land, although paid for, are lost or devalued. The most common stamp duty rate which applies to conveyances in larger land transactions is 6 per cent of the purchase price.

If a conveyance satisfies more than one purchase contract – for example, where the first purchaser has sold on the land before taking legal title to it and the title is conveyed from the original owner to the second purchaser (thereby bypassing the first purchaser) – the deed would in principle be stamped on the total of the two purchase prices involved. However, there is a specific relief in the stamp duty code which states that, in such circumstances, the stamp duty is to be charged only on the higher of the two purchase prices, thus avoiding a double charge on a single deed of conveyance.

Despite the financial risks involved in not taking conveyance of legal title once the land is paid for, some purchasers are willing to delay creating the deed of conveyance. This may be the case if they are satisfied with the financial standing of the vendor or if the vendor is connected with them. It is worth taking this approach where an early onwards sale of the land is expected, since it can avoid a double charge of stamp duty arising from two sales and conveyances occurring in quick succession.

The Minister is now about to give effect to a change in law which will require that stamp duty is paid within 30 days of the payment of 25 per cent of the purchase price of the land, even if the title is not conveyed at that time. This will have a dramatic impact on the construction industry.

A developer may contract to buy a site, pay for it without taking the conveyance of legal title, and proceed to build on the land. The developer will then sell the developed site to the potential occupier and the legal title will be conveyed by the original owner directly to the final purchaser. Often the time interval between the first and the final purchase of the land will be about one year, though it can be shorter or longer depending on the scale of the development and market conditions.

If the Minister activates the proposed change in law, the time by which stamp duty must be paid on the first contract will not permit the development work to have been concluded and the sale to the final occupier to have been put in place. The result will be that two charges of stamp duty will arise instead of one.

Ordinarily, this would result in a higher price for the development. However, in current market conditions, where the prices for developments are already below cost in many cases, this additional cost may mean that no development occurs. That means not two charges of stamp duty but none. It also means there will be no PAYE and PRSI on construction wages, no corporation tax on the developer’s profit, and no VAT for the State coffers.

It means the misery of unemployment or emigration for construction workers and increased social welfare costs for the State. Everyone suffers and no one gains.

The proposed change in stamp duty law is unwise. There is no guarantee, however, that it will not be implemented.

Once legislation has been published and an official stance taken, it is very difficult indeed to secure a change of mind. There is a natural reluctance to admit that an error may have been made. Nevertheless, an error has been made and this legislation should not be enacted.

Pat McDaid is a partner in KPMG’s private Irish business division