OverseasProperty: The battle to avoid stamp duty land tax in the UK will continue, writes Stephen Goldstraw, but the rules of engagement are now somewhat less certain after recent interventions by UK. authorities

Many believe that Karl Marx first said "property is theft". Many others believe the phrase actually emanates from French anarchist Pierre-Joseph Proudhon, in a publication in 1840. In fact, the thought is much older than this.

The English Diggers were a 17th century organisation which believed that all land should be under common ownership and, in 1649, they wrote: "Those that buy and sell land, and are landlords, have got it either by oppression, or murder, or theft."

Whoever first said it, this concept is embedded in UK political thinking. It has been the reason over the years for many forms of taxation. The windows tax, development land tax and the proposed new planning gain supplement all took their moral basis from the notion that owning land was in some way wrong and needed punishing.

In its early years it is arguable that stamp duty did not really fit within this "anti-property" group of taxes because the rates of duty on property transactions were similar to the rates on other asset transfers.

However, in the last 10 years the tax has shown its true colours. The rate of duty on other asset transfers has largely been abolished, whereas for property transactions it has quadrupled. Stamp duty land tax (SDLT), as it is now known, makes no pretence at being anything other than a clobbering of property owners.

With every increase in the SDLT rate came a corresponding increase in the interest in avoidance arrangements. It is not hard to see why. Property prices in the UK are high, and having to pay an extra 4 per cent can make many purchases unviable. It is of little comfort to UK purchasers to know that, were they to make a similar purchase in Ireland, the rate would be over double. Indeed, this fact is actually disturbing since it is widely believed that the British government is bent on moving the rate to the European average of something like 7 per cent.

The tax avoidance battle has been hard fought. SDLT was itself introduced in an attempt to make it easier to counteract the devices which avoided stamp duty on land transactions. Since its introduction thousands of hours of tax advisers' time has been spent inventing new techniques to mitigate the tax. By and large these techniques have been pretty successful. The offshore unit trust scheme alone (whereby property was transferred into a non-resident unit trust and the units subsequently sold to the purchaser) must have saved hundreds of millions of pounds of tax, maybe more.

The UK Revenue has, however, been fighting back. Specific legislation was introduced to attack particular schemes - the offshore unit trust scheme, for example, is no more. Furthermore, legislation was introduced under which anyone who thought up a good SDLT avoidance scheme was liable to disclose it to The Revenue. This has proved to be very effective and results in The Revenue becoming aware of attempted avoidance schemes much more quickly than was the case in the past. As a result, legislation counteracting the schemes is enacted sooner, meaning that the shelf life of new schemes is short.

Despite the success of these disclosure rules, The Revenue was agitated that tax advisers were still coming up with weird and wonderful ways of avoiding SDLT. Even if the schemes were around for only a few months, vast tax takings could disappear down them before the British government managed to close them. This was the case even though legislation was usually enacted by the simple issue of a press release, the detailed statutory provisions being worked out later and backdated.

So, in an escalation of the battle, the British government announced on December 6th, 2006, that it was enacting, with immediate effect, a general anti-avoidance rule which was designed to stop all fancy SDLT schemes once and for all. The legislation is enacted in the pithily titled The Stamp Duty Land Tax (Variation of The Finance Act 2003) Regulations 2006. It basically says that, where a sale and purchase has been carried out via a number of transactions, SDLT shall be chargeable as though there was a straightforward sale of the property for the largest amount given or received by anyone involved in any of the transactions.

It is curious legislation. The language used is exceptionally wide, being an attempt to catch all schemes which could be dreamt up by any tax adviser however devious. It is followed by examples of the sort of thing which would be caught by the wide words, the examples being a series of schemes which The Revenue learned of as a result of the disclosure rules described earlier.

Needless to say, there followed a heated debate by tax professionals about whether the provisions actually work to stop all future schemes, or indeed even the ones mentioned as examples. The language is pretty vague and leaves it unclear as to when one is meant to amalgamate transactions and when one is not. The law says all transactions "in connection with" the sale and purchase of the land are covered, but it does not say when one transaction is connected with another.

Furthermore, giving the words their widest meaning, the effect of the new regulations was, amongst other things, to abolish sub-sale relief, reverse long established case law that no charge arises on building works provided by a seller, and introduce a charge on the sale of a company owning a property.

Realising the difficulties of interpretation, HMRC has almost immediately issued technical guidance on the meaning of the new legislation. The guidance appeared on February 1st, 2007, but it is not really guidance on the meaning of the law. It simply sets out some examples of when The Revenue does not intend to operate the new law. This is not "guidance" so much as an apology for having introduced inoperable and ill thought out provisions.

Be that as it may, The Revenue say that it is not, for example, generally going to treat the new rules as resulting in a liability "where a builder sells a property and separately agrees to perform building works; on the amount attributed to non-property assets where these are transferred together with land; where there is a transfer of shares in a company or units in a unit trust followed by a sale of the property (except where the transfer of shares is preceded by a land transaction in relation to which it might be a scheme transaction); where reconstruction relief or acquisition relief applies; where land is purchased and then leased to a third party; and where separate parcels of land are purchased".

The fact that some of these circumstances may have led to a liability under the new law shows how badly it was drafted. The British government's idea is to re-enact the regulations in the next finance act following a consultation exercise and the hope is that, by then, they will be better targeted. With this in mind the new guidance has been issued only on an interim basis.

In the meantime the battle to avoid the tax will continue, albeit with less certain rules of engagement. No doubt there will be some schemes which appear to circumvent the new law, but taxpayers will have to be increasingly brave to undertake such ventures. They have to tell HMRC all about the scheme and the courts have little sympathy nowadays with tax avoiders.

Stephen Goldstraw is a tax expert at Manches LLP, the London specialist property lawyers. He can be contacted at stephen.goldstraw@manches.com and tel: 0044 207 740 4 4433 (www.manches.com)