budget bulletin march 2016 sergeant and sims on stamp...

Sergeant and Sims onStamp Taxes

Sean RandallLLB, CTA (Fellow)

Associate Tax Partner, Head of Stamp Taxes, KPMG LLP

This special Budget Bulletin should be inserted at the front of the binder.

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SDLT MEASURES—DIVISION AA

Reform of structure, rates and thresholds fornon-residential land transactions provisions fornon-residential property – Overview of Tax Legislationand Rates, para 1.58; Budget Resolutions, Motion 45From 17 March 2016, the way that SDLT is charged on the acquisition ofinterests in or over non-residential (or mixed-use) land and buildings will

Budget Bulletin March 2016

SSSD: Budget Bulletin

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change from a ‘slab’ system to a ‘slice’ system, with all consideration(generally VAT-inclusive) over £250,000 subject to SDLT at 5 per cent.

The new tax rates and tax bands are as follows:

Consideration PercentageSo much as does not exceed £150,000 0%So much as exceeds £150,000, but does not exceed£250,000

2%

The remainder (if any) 5%For example, a commercial property transaction for £5 million would previ-ously have attracted SDLT of £200,000 (a flat rate of 4 per cent), but nowattracts tax of £239,500:

● 0% on the first £150,000 – nil

● 2% on the next £100,000 – £2,000

● 5% on the remainder (£4,750,000) – £2,375,000

This is a 20 per cent increase.

In addition, where the net present value (‘NPV’) of rent payable over theterm of a new lease exceeds £5 million, the rate of SDLT will increase from1 per cent to 2 per cent on that part of the NPV that exceeds £5 million. Thiswill affect occupiers of commercial property under rental leases.

The new rates apply to relevant land transactions with an effective date on orafter 17 March 2016 unless they are pursuant to contracts exchanged before17 March 2016 and the purchaser elects for the old rules to apply. Butprotection from the rate increases under the transitional rules is switched offif a pre-17 March 2016 contract is varied, amended or assigned after17 March 2016 unless the contract has been substantially performed before17 March 2016.

These tax increases are exacerbated by the Government’s controversialdecision not to provide relief for businesses from the 3 per cent SDLTsurcharge that applies to the purchase of residential properties from 1 April2016, as to which see below. Investors, traders and developers buyingresidential properties in England, Wales and Northern Ireland face a signifi-cant (and unexpected) jump in their SDLT costs from 1 April 2016.

Higher rate on additional residential properties –Overview of Tax Legislation and Rates, para 1.59;Overview of Legislation in Draft, para 6.1; BudgetResolutions, Motion 46For land transactions with an effective date on or after 1 April 2016 subjectto transitional provisions, an SDLT surcharge of 3 per cent will apply on theacquisition of ‘additional’ dwellings such as ‘buy-to-lets’ and second homesin England, Wales and Northern Ireland. Scotland’s equivalent land andbuildings transaction tax supplement also comes into effect on this date.

SDLT measures—Division AA

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The purpose of these measures is to free-up housing supply by making iteasier for individuals buying a main residence to compete with personsbuying housing for investment or other purposes. The rest of this part talksto the SDLT surcharge only.

The surcharge is potentially payable by individuals buying second andsubsequent dwellings and by companies, unit trusts and other entities on thefirst and subsequent purchases of dwellings. An interest in an overseasdwelling counts for the purposes of establishing whether a purchase is apurchase of a second dwelling.

The key exception for individuals is where they are replacing their mainresidence. In that case, a claim for repayment of the surcharge can be madewhere the previous main residence is retained but sold within three years ofthe purchase of the new main residence. Dwellings owned by co-habitingspouses and civil partners are taken into account when applying the mainresidence rules, effectively to treat the couple as a single unit.

Inherited interests of 50 per cent or less in a dwelling do not generally countfor the purpose of establishing the number of dwellings owned for three yearsafter the inheritance.

Controversially, no reliefs exist for individuals or companies buying in thecourse of a property investment, development or trading business. In theconsultation document published in December 2015, the Government hadproposed a relief for ‘large-scale’ investors buying or owning 15 or moreresidential properties. However, a purchase of six or more dwellings in asingle transaction and a purchase of mixed (commercial and residential)property still fall under the generally lower ‘commercial’ rates.

Multiple dwellings relief (‘MDR’) remains available for multiple purchases of‘surchargeable’ properties, but the minimum MDR rate increases from1 per cent to 3 per cent so its value has been eroded.

The consequences for certain types of investor are severe: investors in studentaccommodation will in most cases see the rate of SDLT increase from1 per cent to 3 per cent and smaller scale investors who typically purchasefewer than six properties in any one transaction will endure significant taxincreases.

Trustees are subject to the charge unless (very broadly) there is an individualbeneficiary with a life-interest in the trust who owns no other interest inresidential property.

HMRC have accepted very few of the recommendations made in response tothe consultation on the surcharge, so there are a number of problems with thenew regime. An obvious one that runs counter to the stated policy behind thesurcharge is the lack of any relief for developers who contribute to housingsupply by purchasing residential properties for refurbishment or developmentfor on-sale.


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Application to certain authorised property funds –Overview of Tax Legislation and Rates, para 1.60;Overview of Legislation in Draft, para 6.2As announced at the Autumn Statement 2015, the Government will introducean SDLT seeding relief for Property Authorised Investment Funds andCo-ownership Authorised Contractual Schemes (CoACSs) and makechanges to the SDLT treatment of CoACSs investing in property situated inEngland, Wales and Northern Ireland so that SDLT does not arise ontransactions in CoACS units. The legislation will take effect from RoyalAssent to the Finance Bill 2016. As compared to the legislation in the draftFinance Bill 2016 published in December 2015, changes will be made to thecalculation of the clawback and the start of the control period.

Widening the scope of the reliefs from the super15 per cent rate – Overview of Tax Legislation andRates, para 1.61; Overview of Legislation in Draft,para 6.3; Budget Resolutions, Motions 47–49As announced at the Autumn Statement 2015, the scope of the reliefsavailable from the super 15 per cent SDLT rate will be extended where aresidential property is held for the purposes of an ‘equity release scheme’(also known as a regulated ‘home reversion plan’), occupied by certainemployees, or acquired for demolition or conversion into non-residential use.The changes, which are aligned with equivalent changes to ATED, as towhich see below, will come into effect from 1 April 2016.

ATED MEASURES—DIVISION AB

Widening the scope of the reliefs – Overview of TaxLegislation and Rates, para 1.61; Overview ofLegislation in Draft, para 6.3; Budget Resolutions,Motions 50–52As announced at the Autumn Statement 2015, the scope of the reliefsavailable from ATED will be extended where a residential property is held forthe purposes of an ‘equity release scheme’ (also known as a regulated ‘homereversion plan’), occupied by certain employees, or acquired for demolition orconversion into non-residential use. The changes, which are aligned withequivalent changes to the super 15 per cent SDLT rate, as to which see above,will come into effect from 1 April 2016.


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STAMP DUTY AND SDRT MEASURES—DIVISION A

Deep in the money options (DITMOs) – Overview of TaxLegislation and Rates, para 1.62; Overview ofLegislation in Draft, para 7.1; Budget Resolutions,Motions 53–54From 23 March 2016 the exercise of options to purchase relevant securitiesfor delivery to a depositary receipt issuer or clearance service system are to becharged at the higher rate of 1.5 per cent based on the greater of the optionstrike price and the market value of the securities. Relevant securities for thepurposes of the 1.5 per cent stamp duty charge means shares in or stock ormarketable securities of a UK incorporated company; and for the purposesof the 1.5 per cent SDRT charge means chargeable securities of a UKincorporated company.

This measure, which was announced at the Autumn Statement 2015, is aimedat stopping specific arrangements involving the exercise of deep in the moneyoptions (‘DITMOs’) where the options are exercised with delivery of thesecurities into higher rate depositary receipt and clearance service systems.However, the change applies to all options exercised for delivery to thesesystems and not just DITMOs.

DITMOs are options to acquire securities for a low strike price granted at ahigh option price. SDRT is not payable on the grant of such options; it isonly payable on the low (usually very low) strike price. No SDRT is payableon subsequent trading of those securities held within higher rate depositaryreceipt and clearance service systems.

Options (including DITMOs) not exercised for delivery to such systems orthose exercised for delivery to clearance service systems which have enteredinto arrangements with HMRC to disapply the higher rate 1.5 per cent stampduty and SDRT charge are unaffected.

The change was expected to take effect from 16 March 2016, but will in facttake effect from 23 March 2016.

OVERVIEW OF TAX LEGISLATION AND RATES

Chapter 1: Finance Bill 2016Stamp duty land tax1.58 Reform of charging provisions for stamp duty land tax (SDLT) onnon-residential property. SDLT on purchases of non-residential property isbeing reformed with effect on or after 17 March 2016. SDLT will be payableat each rate on the portion of the purchase price which falls within eachband, rather than at a single rate on the whole transaction value. The ratesand thresholds for freehold and lease premium transactions, as well asleasehold rent transactions, are also being amended as part of this reform.

For freehold and lease premium transactions the portion of the transactionvalue up to £150,000 is charged at a rate of 0%, the portion of the transaction

Overview of Tax Legislation and Rates



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value between £150,001 and £250,000 is charged at a rate of 2% and theportion over £250,001 is charged at a rate of 5%. For leasehold renttransactions the portion of the net present value of the rent (NPV) up to£150,000 is charged at a rate of 0%, the portion of the NPV between£150,001 and £5,000,000 is charged at a rate of 1% and the portion of theNPV over £5,000,000 is charged at a rate of 2%.

A tax information and impact note is published at Annex A [see Stamp dutyland tax: reform of charging provisions for non-residential property underheading Tax Information and Impact Notes below].

1.59 Higher rate of stamp duty land tax (SDLT) on additional residentialproperties. As announced at the Spending Review and Autumn Statement2015, legislation will be introduced in Finance Bill 2016 to apply higher ratesof SDLT, 3 percentage points above the existing rates, for purchases ofadditional residential properties on or after 1 April 2016.

A tax information and impact note is published at Annex A [see Stamp dutyland tax: higher rates on purchases of additional residential properties underheading Tax Information and Impact Notes below].

1.60 Stamp duty land tax (SDLT): application to certain authorised propertyfunds. As announced at the Spending Review and Autumn Statement 2015,the government will introduce a seeding relief for Property AuthorisedInvestment Funds (PAIFs) and Co-ownership Authorised ContractualSchemes (CoACSs) and make changes to the SDLT treatment of CoACSsinvesting in property so that SDLT does not arise on the transactions in units.Some minor technical changes have been made since publication of the draftclause. This legislation will take effect from the date Finance Bill 2016receives Royal Assent.

1.61 Annual tax on enveloped dwellings and 15% rate of stamp duty land tax(SDLT): widening the scope of the reliefs. As announced at the SpendingReview and Autumn Statement 2015, the scope of the reliefs available fromthese charges will be extended where a residential property is held for thepurposes of an Equity Release Scheme (Home Reversion Plan), occupied bycertain employees, or acquired for demolition or conversion into non-residential use. Following consultation on the draft legislation some amend-ments have been made of a minor technical nature. These changes will comeinto effect from 1 April 2016.

1.62 Stamp duty and stamp duty reserve tax: deep in the money options(DITMOs). As announced at Spending Review and Autumn Statement 2015,legislation will be introduced in Finance Bill 2016 to stop avoidance of stampduty and SDRT using ‘deep in the money’ options to transfer shares to adepositary receipt issuer or clearance service. Deep in the money call optionshave a strike price significantly below market value. Shares transferred to adepositary receipt issuer or clearance service as a result of the exercise of anoption will now be charged the 1.5% higher rate of stamp duty or SDRTbased on either their market value or the option strike price, whichever ishigher.

Overview of Tax Legislation and Rates

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Draft legislation was published for consultation in December 2015. Thelegislation has been revised so that the change will now have effect from23 March 2016 and apply to options exercised on or after 23 March 2016which were entered into on or after 25 November 2015. The effective date hasbeen moved back to allow the appropriate resolutions for stamp duty andSDRT to take effect at the same time.

OVERVIEW OF LEGISLATION IN DRAFT

6. Stamp duty, etc6.1 SDLT: additional properties. As announced at Autumn Statement, thegovernment will introduce higher rates of SDLT on purchases of additionalresidential properties, including buy to let properties and second homes, from1 April 2016. The higher rates will be 3 percentage points above the currentSDLT rates. The government will consult on the details of the higher rates.Draft legislation will be published for consultation in January 2016.

6.2 SDLT seeding relief. As announced at Autumn Statement, the govern-ment will introduce a new relief from SDLT (‘seeding relief ’) and makechanges to the SDLT treatment of Co-ownership Authorised ContractualSchemes (CoACSs). Seeding relief will relieve the initial transfer of propertiesinto Property Authorised Investment Funds (PAIFs) and CoACSs, to removebarriers to investment in these funds. The legislation will have effect on andafter the date of Royal Assent to Finance Bill 2016. (Draft clause 50 andTIIN [see Stamp duty land tax: property investment funds under headingLegislation Day 9 December 2015 below].)

6.3 Annual tax on enveloped dwellings and 15% rate of stamp duty land tax. Asannounced at Autumn Statement, legislation will be introduced in FinanceBill 2016 to extend the scope of the reliefs available from annual tax onenveloped dwellings and 15% rate of stamp duty land tax where a residentialproperty is held for the purposes of an Equity Release Scheme (HomeReversion Plan), occupied by certain employees, or acquired for demolitionor conversion into non-residential use. These amendments will have effectfrom 1 April 2016. (Draft clauses 51, 52, 53, 54, 55 and 56 and TIIN [seeAnnual tax on enveloped dwellings and stamp duty land tax: extension of scopeof reliefs from 15% rate under heading Legislation Day 9 December 2015below].)

7. Duties7.1 Stamp duty and stamp duty reserve tax: deep in the money options. Asannounced at Autumn Statement, legislation will be introduced in FinanceBill 2016 to stop avoidance of stamp duty and stamp duty reserve tax using‘deep in the money’ options to transfer shares to a depositary receipt issuer orclearance service. Deep in the money call options have a strike price signifi-cantly below market value. Shares transferred to a depositary receipt issuer orclearance service as a result of the exercise of an option will now be chargedthe 1.5% higher rate of stamp duty or SDRT based on either their marketvalue or the option strike price, whichever is higher. The change will have

Overview of Legislation in Draft



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effect from Budget day 2016 and apply to options exercised on or afterBudget day 2016 but only where they were entered into on or after25 November 2015. A consultation has been published on 9 December 2015to ensure there are no unintended effects. (Draft clauses 57 and 58 and TIIN[see Stamp duty and stamp duty reserve tax: deep in the money options underheading Measures With Effect From 16, 17 or 23 March 2016 below].)

9. Tax administration and OTS9.12 Stamp duty land tax: changes to the filing and payment process. Asannounced at Autumn Statement, the government will consult in 2016 onchanges to the SDLT filing and payment process, including a reduction in thefiling and payment window from 30 days to 14 days. These changes will comeinto effect in 2017 to 2018.

TAX INFORMATION AND IMPACT NOTES

Stamp duty land tax: higher rates on purchases ofadditional residential properties(Policy paper: 16 March 2016)

Who is likely to be affectedIndividuals purchasing a residential property in England, Wales and North-ern Ireland who, at the end of the day of the transaction, own 2 or moreresidential properties and are not replacing a main residence. Companies andother non-natural persons purchasing residential property in England, Walesand Northern Ireland.

General description of the measureFrom 1 April 2016 higher rates of stamp duty land tax (SDLT) will becharged on purchases of additional residential properties, such as secondhomes and buy-to-let properties. The higher rates will be 3 percentage pointsabove the current SDLT rates:

Threshold Existing SDLT rates New additional propertySDLT rate

£0–£125k 0% 3%£125k–£250k 2% 5%£250k–£925k 5% 8%£925k–£1.5m 10% 13%£1.5m + 12% 15%If, at the end of the day of the transaction, an individual owns 2 or moreproperties and has not replaced their main residence, the higher rates willapply. Purchasers will have 36 months to either claim a refund from thehigher rates, or before the higher rates will apply, in the event that there is aperiod of overlap or a gap in ownership of a main residence. Companiespurchasing residential property will be subject to the higher rates, including

Overview of Legislation in Draft

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the first purchase of a residential property. Properties purchased for under£40,000, caravans, mobile homes and houseboats will be excluded from thehigher rates. Furthermore, small shares in recently inherited properties willnot be considered when determining if the higher rates apply.

Policy objectiveHigher rates of SDLT on additional residential properties form part of thegovernment’s Five Point Plan for housing, and are part of the government’scommitment to supporting home ownership and first-time buyers.

Background to the measureThis measure was announced at the Spending Review and Autumn Statement2015. The government ran a consultation on these changes between28 December 2015 to 1 February 2016.

Detailed proposal

Operative dateThis measure will have effect for purchases which complete on and after1 April 2016. Where contracts have been exchanged on or before 25 Novem-ber 2015 but not completed until on and after 1 April 2016, the higher rateswill not apply.

This measure does not apply in Scotland as SDLT was devolved to Scotlandon 1 April 2015. This measure will apply in Wales until 1 April 2018, whenSDLT will be devolved to Wales.

Current lawThe main SDLT legislation is in Part 4 of Finance Act (FA) 2003. Section 55provides for the amount of tax chargeable and sets out separate tables ofrates for purchases of residential and non-residential (or mixed residentialand non-residential) property. Section 56 and Schedule 5 to FA 2003 providefor a separate SDLT charge on the net present value of the rent payableunder a new lease.

Proposed revisionsLegislation will be introduced in Finance Bill 2016 to insert a new sec-tion 56A and Schedule 5A into FA 2003 to provide for the higher rates ofSDLT for purchases of additional residential property.

The changes will have effect on and after 1 April 2016 by virtue of aresolution under the Provisional Collection of Taxes Act 1968.

Summary of impacts

Exchequer impact(£m)

2016–17 2017–18 2018–19 2019–20 2020–21+ 630 + 695 + 750 + 805 + 855

Tax Information and Impact Notes



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These figures are set out in Table 2.2 of Budget 2016and have been certified by the Office for BudgetResponsibility. More details can be found in the policycosting document published alongside AutumnStatement 2015.

Economic impact This measure is not expected to have any significantmacroeconomic impacts.The costing accounts for a behavioural responsewhereby the volume of affected transactions isreduced. It should increase the amount ofowner-occupied properties.

Impact onindividuals,households andfamilies

Around 10% of residential property transactions areexpected to be subject to the higher rates.This measure is not expected to have an impact onfamily formation, stability or breakdown.

Equalities impacts The impact of these changes will reflect thedemographic composition of buyers purchasingadditional residential properties.This measure is not expected to have an impact onany of the protected equality groups.

Impact on businessincluding civilsocietyorganisations

Businesses purchasing residential property may pay ahigher amount in SDLT.Lawyers and conveyancers are expected to incurnegligible one-off costs due to familiarising themselveswith the new structure of SDLT. The process ofautomatically calculating the amount of tax will befully integrated into HM Revenue and Customs(HMRC) online systems.

Operationalimpact (£m)(HMRC or other)

HMRC will have to make changes to IT systems toimplement this measure, at an estimated cost of£400,000. Staff costs of administering this change areestimated at £1.5 million a year.

Other impacts Other impacts have been considered and none havebeen identified.

Monitoring and evaluationThe measure will be monitored through information collected from taxreturns.

Further adviceIf you have any questions about this change, please contact the HMRCSDLT Helpline on Telephone: 0300 200 3510.

Stamp duty land tax: reform of charging provisions fornon-residential property(Policy paper: 16 March 2016)


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Who is likely to be affectedPurchasers of non-residential property with an upfront payment worth morethan £150,000 or a lease net present value of more than £5 million.

General description of the measureThe measure changes the rules for calculating the stamp duty land tax(SDLT) charged on purchases of non-residential properties and transactionsinvolving a mixture of residential and non-residential properties. At present,for purchases of freehold, the assignment of an existing lease and for theupfront payment (premium) on a new leasehold transaction, SDLT ischarged at a single percentage of the price paid for the property, dependingon the rate band within which the purchase price falls. On and after 17 March2016, SDLT will be charged at each rate on the portion of the purchase pricewhich falls within each rate band. The new rates and thresholds for freeholdpurchases and leases premiums are:

Transaction value band Rate£0–£150,000 0%£150,001–£250,000 2%£250,000 + 5%For new leasehold transactions, SDLT is already charged at each rate on theportion of the net present value (NPV) of the rent which falls within eachband. On and after 17 March 2016 a new 2% rate for rent paid under anon-residential lease will be introduced where the NPV of the rent is above £5million.

The new rates bands and thresholds for rent paid under a lease are:

Net present value of rent Rate£0–£150,000 0%£150,001–£5,000,000 1%£5,000,000 + 2%Policy objectiveThis measure cuts the tax that many businesses pay when purchasingnon-residential property, whilst ensuring those purchasing the most expensivenon-residential properties make an important contribution to tackling thedeficit.

Background to the measureThis measure was announced at Budget 2016.

Detailed proposal

Operative dateThis measure will have effect on and after 17 March 2016. Where contractshave been exchanged but transactions have not completed before 17 March2016 purchasers will have a choice of whether the old or new structure andrates apply.




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This measure does not apply in Scotland as SDLT was devolved to Scotlandon 1 April 2015. This measure will apply in Wales until 1 April 2018, whenSDLT will be devolved to Wales.

Current lawThe main SDLT legislation is in Part 4 of the Finance Act (FA) 2003.Section 55 provides for the amount of tax chargeable. It includes 2 tableswhich set out how the tax is to be charged: Table A applies where the relevantland consists wholly of residential property (section 55(1B) and (1C)) andTable B applies where the relevant land consists wholly of non-residentialproperty or partly of residential and partly of non-residential property, ie amixed transaction (section 55(2)). Section 56 and Schedule 5 of FA 2003provide for a separate SDLT charge on the net present value of the rentpayable under a new lease.

Para 9A, Schedule 5 of FA 2003 provides that where the annual rent is £1,000or more, SDLT is charged at 1% on the whole of the premium up to £250,000regardless of whether it is below the £150,000 non-residential threshold. Thehigher non-residential rates apply if the premium is more than £250,000.

Proposed revisionsLegislation will be introduced in Finance Bill 2016 to amend section 55 of FA2003 to provide for a new method of calculating the amount of tax due inrespect of transactions to which Table B (non-residential and ‘mixed’ prop-erty) applies.

Amendments will also be made to Table B at paragraph 2 of Schedule 5 ofFA 2003 to provide for an additional rate of 2% to be applied when NPV’s ofthe rent is above £5 million and to abolish para 9A, Schedule 5 of FA 2003.

The changes will have effect on and after midnight 17 March 2016 by virtueof a resolution under the Provisional Collection of Taxes Act 1968.

Summary of impacts


2016–17 2017–18 2018–19 2019–20 2020–21+ 385 + 515 + 535 + 560 + 590

Economic impact This measure is not expected to have any significantmacroeconomic impacts.The costing takes into account impacts on thefrequency of transactions. For transactions where thetax charge is lower than the previous SDLT systemthere is an expected increase in the volume oftransactions, and for high-value propertiesadjustments for wider behavioural effects have beenmade. It also incorporates temporary behaviouraleffects around implementing the new system.


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This measure will only affect those individuals andhouseholds who purchase non-residential property.The measure is not expected to impact on familyformation, stability or breakdown.

Equalities impacts This is a business measure and is therefore notexpected to have an impact on any protected equalitygroups.


There are approximately 100,000 non-residential andmixed property transactions per year.All non-residential freehold and lease premiumtransactions worth less than £1.05 million will pay thesame SDLT or less compared to the current system.For leasehold rent transactions, those with a NPV ofup to £5 million will pay the same in SDLT as underthe current system.As a result of these changes over 90% ofnon-residential property transactions will pay thesame or less in SDLT.This measure is expected to have a negligibleadministration impact on businesses. Businesses(lawyers and conveyancers) are expected to incurnegligible one-off costs due to familiarising themselveswith the new structure of SDLT. The process ofautomatically calculating the amount of tax will befully integrated into HM Revenue and Customs(HMRC) online systems from April 2016. Before thenHMRC is providing online calculators to reduce theadministrative burden of the change in method totaxpayers. There may be an additional ongoing costfor the few businesses that do not file online. This isalso expected to be negligible.This measure is also likely to have a negligibleadministration impact on civil society organisations.


Changes will be required to HMRC IT systemsincluding online tax calculators. In advance of themain systems changes HMRC will support customersby providing a standalone online calculator and onlineguidance to inform them of the change in the rules.The changes are estimated to cost approximately£110,000 for IT with some minor additional costsincurred in helpline staff time.


Monitoring and evaluationThis measure will be kept under review through communication with affectedgroups.




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The measure will also be monitored and assessed through informationcollected from tax returns and communication with stakeholders and pub-lished as Official Statistics.

Further adviceIf you have any questions about this change, please contact the HMRCSDLT Helpline on Telephone: 0300 200 3510.

MEASURES WITH EFFECT FROM 16, 17 OR23 MARCH 2016

Stamp duty and stamp duty reserve tax: deep in themoney options(Policy paper: 9 December 2015)

Who is likely to be affectedBusinesses or individuals who enter into option contracts over UK securities,and businesses which issue depositary receipts, or provide clearance servicesor stamp duty reserve tax settlement services.

General description of the measureWhere a registered UK company share is transferred as a result of theexercise of an option, stamp duty (SD) or stamp duty reserve tax (SDRT) iscurrently calculated and paid on the strike price (the amount paid asconsideration for the share) rather than on the market value of the share.

This measure will change the SD and SDRT rules so that shares transferredto a clearance service or depositary receipt issuer as a result of the exercise ofan option will be charged the 1.5% higher rate of stamp tax based on eithertheir market value or the option strike price, whichever is higher.

Policy objectiveAn option to buy shares with a strike price far below market value is referredto as a deep in the money option (DITMO). HM Revenue and Customs(HMRC) are aware of an increasing amount of avoidance in which DITMOsare created in order to transfer shares to depositary receipt issuers andclearance services. The result of this avoidance is that tax is only payable onthe very low strike price rather than the full market value of the shares.

This measure makes the tax system fairer by removing the opportunity foravoidance arising on the transfer of shares using a DITMO. This is a targetedmeasure which only focuses on shares transferred to a depositary receiptissuer or clearance service as a result of the exercise of an option as this iswhere all the avoidance activity has been identified. All other share transferswill be unaffected.

Background to the measureThe measure was announced at Autumn Statement 2015.


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Detailed proposal

Operative dateThis measure will have effect from Budget Day 2016. It will apply to optionswhich are entered into on or after 25 November 2015 and exercised on orafter Budget day 2016.

Current lawSections 67 and 70 Finance Act 1986 provide for a higher 1.5% stamp dutywhere securities are transferred to a nominee or agent acting for a personwho issues depositary receipts for relevant securities or whose business is orincludes the provision of clearance services. The charge is levied on theamount or value of the consideration for the sale, or (if the transfer is not onsale) the market value of the securities at the time the instrument is executed.

Sections 93 and 96 Finance Act 1986 provide for a higher 1.5% SDRT chargewhere securities are transferred to a depositary receipt issuer or a nominee oragent acting for a depositary receipt issuer or to a recognised clearanceservice or its nominee. The charge is levied on the amount or value of theconsideration where the securities are transferred for consideration. In allother cases, the charge is levied on the open market value of the securities atthe time of the transfer.

Proposed revisionsLegislation will be introduced in Finance Bill 2016 to amend sections 67, 70,93 and 96. This will mean that where UK securities are deposited with adepositary receipt issuer or clearance service following the exercise of anoption, the transfer is chargeable to stamp duty or stamp duty reserve tax at1.5% based on either their market value or the option strike price, whicheveris higher at the date the instrument is executed (if the charge is to SD) or thedate of transfer (if the charge is to SDRT).

Summary of impacts


2015–16 2016–17 2017–18 2018–19 2019–20 2020–21nil + 35 + 40 + 40 + 40 + 45

These figures are set out in Table 3.1 of AutumnStatement 2015 and have been certified by the Officefor Budget Responsibility. More details can be foundin the policy costings document published alongsideAutumn Statement 2015.

Economic impact This measure is not expected to have any significantmacroeconomic impacts.

Measures With Effect From 16, 17 or 23 March 2016



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Possible impacts on individuals (mainly high net-worthindividuals) who deposit shares with a depositaryreceipt issuer or clearance service following theexercise of an option.Information on the number of individuals thismeasure my affect is not available, but it is notexpected to be significant due to the nature of thetransaction involved.The measure is not expected to impact on familyformation, stability or breakdown.

Equalities impacts It is not expected that this measure has any impactson groups sharing protected characteristics.


Possible impacts on the business of depositary receiptissuers, clearance service operators and settlementservice providers. Also on businesses who depositshares with a depositary receipt issuer or clearanceservice following the exercise of an option. Businessesaffected will need to be aware of the new rules andcalculate the market value. The ongoing administrativecosts are expected to be negligible. Wider impacts onUK derivatives industry are not expected to besignificant as share transfers made other than to adepositary receipt system or clearance service as aresult of exercising an option will be unaffected.The measure is not expected to impact on civil societyorganisations.


There will be no significant operational impacts as aresult of this measure.


Monitoring and evaluationThe measure will be monitored through information collected from settle-ment services and from tax receipts.

Further adviceIf you have any questions about this change, please contact Stephen Robertson Telephone: 03000 585455 or Simon English on Telephone: 03000 585446or email: stamptaxes.budget&[email protected].

Stamp duty and stamp duty reserve tax: sharestransferred to depositary receipt issuers or clearanceservices as a result of the exercise of an option(Technical note: 9 December 2015)


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IntroductionThe Government will introduce legislation in the Finance Bill 2016 relating tothe transfer of shares to depositary receipt issuers or clearance services as theresult of the exercise of an option. Draft legislation and a consultation hasbeen published on 9 December 2015. The new rules will apply to optionswhich are exercised on or after Budget day 2016 and which were entered intoon or after 25 November 2015.

This document provides some technical details on the circumstances andmanner in which the proposed legislation will operate.

Stephen Roberts or Simon English, HM Revenue & Customs, CTIS, Room3C/20, 3rd Floor, 100 Parliament Street, London, SW1A 2BQ

Telephone: 03000 585 455 (Stephen Roberts) or 03000 585 446 (SimonEnglish)

Email: stamptaxes.budget&[email protected]

Chapter 1: Overview1. Where registered UK company shares are transferred as the result of anexercise of an option, stamp duty (SD) or stamp duty reserve tax (SDRT) iscalculated and paid on the ‘strike’ or ‘exercise’ price (the amount paid asconsideration for the shares) rather than the market value of the shares. Thisapplies both to transfers subject to the 0.5% charge and to transfers subjectto the 1.5% charge.

2. The new legislation will mean that shares transferred to a depositaryreceipt issuer or clearance service as a result of the exercise of an option willbe charged the 1.5% higher rate of stamp duty or SDRT based on either theirmarket value or the option strike price whichever is higher.

3. Draft legislation has been published on 9 December 2015 together with atechnical consultation.

4. The measure will apply to options which are exercised on or after Budgetday 2016 but only where they are entered into on or after 25 November 2015.

Chapter 2: Technical background

Options5. An equity option is a financial contract between the issuer of an optionand the ultimate option holder which gives the holder the right, but not theobligation, to buy (a ‘call’ option) or sell (a ‘put’ option) a stock or share atan agreed price per share (referred to as the ‘strike’ price) on or before a givenfuture specified date. In order to acquire the rights, the buyer of the optionwill usually have to pay the issuer of the option a fee (the premium).

Issue or grant of an option6. The granting of an option over UK shares by the option writer is exemptfrom SD (unless an instrument is formally executed granting the option) andSDRT.




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Further guidance on the issue or grant of an option can be found here:http://www.hmrc.gov.uk/manuals/stsmanual/STSM113010.htm.

Secondary trading of an option7. A subsequent transfer to another person of rights to an equity option forconsideration prior to the expiry of the option can be chargeable to SDRT ifthe terms of the option provide for a transfer of shares on exercise of theoption. No SDRT charge arises on the transfer of rights to an equity optionwhere the terms of the option provide only for cash settlement upon optionexercise.

Further guidance on secondary trading of an option can be found here:http://www.hmrc.gov.uk/manuals/stsmanual/STSM113020.htm.

Exercise of an option8. The transfer and physical delivery of the underlying UK shares forconsideration following the exercise of an option is subject to SD or SDRT atthe rate of 0.5% on the strike price. The higher 1.5% charge is payable basedon the strike price where, upon option exercise, the underlying shares aretransferred and delivered to a depositary receipt system or operator of aclearance service (or to their appropriate nominees).

Depositary receipts9. A depositary receipt is in effect a substitute for the share itself and is issuedby a bank whose business includes the issuing of receipts against the depositof the actual shares concerned. Depositary receipts are often referred to asAmerican Depositary Receipts (ADRs). In Europe the issuing of receipts isoften known as EDRs (European Depositary Receipts) and GDRs (GlobalDepositary Receipts) when issued outside of Europe. In essence EDRs andGDRs are similar to ADRs.

Clearance services10. A clearance service is a system for holding securities which allows onwardtrading in those securities by an investor to be settled by book entry in thatsystem. Once deposited into a clearance service, shares can remain thereindefinitely, regardless of any changes in beneficial ownership. Because theshares are held by the company operating the clearance service (or itsnominee) the shares can be onward traded electronically without the use oftransfer instruments.

1.5% Stamp duty or SDRT charge11. Sections 67 and 70 Finance Act 1986 provide for a higher 1.5% SD chargewhere securities are transferred on sale or otherwise than on sale to anominee or agent acting for a person who issues depositary receipts forrelevant securities or whose business is or includes the provision of clearanceservices. The charge is levied on the amount or value of the consideration forthe sale, or (if the transfer is not on sale) the market value of the securities atthe time the instrument is executed.


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12. Sections 93 and 96 Finance Act 1986 provide for a higher 1.5% SDRTcharge where securities are transferred on sale or otherwise than on sale to adepositary receipt issuer or a nominee or agent acting for a depositary receiptissuer or to a recognised clearance service or its nominee. The charge is leviedon the consideration in money or money’s worth paid for the shares. In allother cases, the charge is levied on the open market value of the securities atthe time of the transfer.

13. A list of companies accountable for SD or SDRT at 1.5% can be foundhere: http://www.hmrc.gov.uk/manuals/stsmanual/STSM056040.htm.

Changes made by this legislation14. The SD and SDRT rules will be amended so that shares transferred to adepositary receipt issuer (or its nominee) or clearance service (or its nominee)as a result of the exercise of an option will be charged the 1.5% higher rate ofstamp duty or SDRT based on either their market value or the option strikeprice, whichever is the higher.

15. The change will apply to both call and put options where the option isexercised and the underlying shares are purchased, transferred and deliveredto a depositary receipt issuer or clearance service (or to their respectivenominee).

16. Shares which are transferred and delivered to a depositary receipt issuer(or its nominee) or clearance service (or its nominee) other than as a result ofthe exercise of an option will not be affected.

17. Where an option is exercised, but the underlying UK shares purchasedare not transferred and delivered to a clearance service or depositary receiptissuer (or to their respective nominees) the transfer will be subject to a 0.5%stamp duty or SDRT charge based on the option strike price. Therefore, therewill be no change to the current rules.

18. Similarly, the new legislation will not affect options which are exercisedand where the underlying purchased shares are delivered to an operator of aclearance service (or its nominee) who has an approved HMRC election inplace under section 97A Finance Act 1986 to account for the alternative 0.5%stamp charge. In this situation, shares delivered to an elected clearanceservice are chargeable to stamp at 0.5% based on the option strike price.

LEGISLATION DAY 9 DECEMBER 2015

Annual tax on enveloped dwellings and stamp duty landtax: extension of scope of reliefs from 15% rate(Policy paper: 9 December 2015)

Who is likely to be affectedCompanies, partnerships with company members, and collective investmentschemes (collectively referred to as non-natural persons (NNPs)), whichacquire and own residential property in the UK valued over £500,000.

Legislation Day 9 December 2015



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General description of the measureThe measure will extend the scope of the reliefs available from annual tax onenveloped dwellings (ATED) and 15% higher rate of stamp duty land tax(SDLT).

Policy objectiveThis measure is intended to relieve from these charges UK residentialproperty acquired or owned by NNPs for genuine business purposes.

Background to the measureATED and 15% SDLT are charged on NNPs who acquire and beneficiallyown an interest in UK residential property. SDLT is charged at 15% onacquisition (i.e. on enveloping), and ATED is charged annually whilst theproperty remains within the envelope. Both taxes include a number of reliefsaimed at legitimate business use (e.g. property developers).

Initially, the ATED and 15% SDLT entry thresholds were set at £2 million,but Finance Act 2014 lowered these to £500,000. Following this change,certain business/commercial arrangements have been identified which do notcurrently qualify for a relief, specifically Equity Release Schemes i.e.: HomeReversion Plans; properties occupied by certain employees; and acquisitionsby businesses for demolition or conversion for non-residential use.

Legislation is being introduced so that relief will also be available in thesecircumstances.

Detailed proposal

Operative dateThese amendments will come into effect on 1 April 2016, to coincide with thelowering of the ATED entry threshold to £500,000.

Current lawSections 132 to 150 of Finance Act (FA) 2013 make provision for reliefs fromATED. In particular, sections 133 to 134 provides relief where a property isowned by a qualifying property rental business and section 145 provides reliefwhere a property is occupied by certain qualifying employees of a trade.

Similarly paragraphs 5 to 5K, Schedule 4A to FA 2003 make provision forreliefs from 15% SDLT and for withdrawal of the relief in certain circum-stances. In particular, paragraph 5 provides relief where a property isacquired by a property rental business, trade or developer and paragraph 5Dprovides relief where a property is acquired for occupation by certainqualifying employees of a trade.

Proposed revisionsLegislation will be introduced in Finance Bill 2016 to amend FA 2003 and FA2013 to widen the scope of the reliefs available from both ATED and the 15%higher rate of SDLT. Section 145 of FA 2013 is amended so that relief from


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ATED is not only available where a property is occupied by an employee of atrade, but also where a property is occupied by an employee of a qualifyingproperty rental business. Similar amendments are made to paragraph 5D ofFA 2003 in respect of the 15% rate of SDLT.

New section 147A is inserted into FA 2013 to also provide relief from ATEDwhere a property is occupied by a person employed to act as caretaker in abuilding of multiple occupancy: e.g. a block of flats. New paragraphs 5EAand 5JA are inserted into FA 2003 to provide similar relief from 15% rate ofSDLT and for subsequent withdrawal.

New section 144A is also inserted into FA 2013 to provide relief from ATEDwhere an interest in a property is held exclusively for the purposes an EquityRelease Scheme (specifically a ‘home reversion plan’) where that activity isregulated by the Financial Conduct Authority. New paragraphs 5CA and5IA are included in Schedule 4A to FA 2003 to provide similar relief from the15% rate of SDLT and for subsequent withdrawal.

New paragraph 5AA is inserted into Schedule 4A to FA 2003 to provide relieffrom the 15% rate of SDLT where a business purchases a property either fordemolition or conversion for non-residential use. New paragraph 5GAprovides that relief will be withdrawn if, within a period of 3 years from thedate of transaction, if demolition or conversion has not begun or theproperty is used as a dwelling.

Summary of impacts


2015–16 2016–17 2017–18 2018–19 2019–20 2020–21negli-gable

negli-gable

negli-gable

negli-gable

negli-gable

negliga-ble

This measure is expected to have a negligible impacton the Exchequer.

Economic impact This measure is not expected to have any significanteconomic impacts.


These changes are not expected to have any directimpact on individuals as ATED and 15% SDLT arecharged on companies, partnerships with companymembers, and collective investment schemes.These changes are only likely to impact on individualsinsofar as they prevent any additional costs beingpassed down to residents, live-in employees and theirfamilies, or to individuals who enter into homereversion plans.This measure is not expected to impact on familyformation, stability or breakdown.

Equalities impacts These changes are not expected to have an adverseimpact on or any of the legally protected equalitygroups. This measure is not expected to have anequality impact on groups of people sharing anyprotected characteristics.




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ATED and 15% SDLT impacts on businesses (i.e.NNPs) acquiring and holding UK residential propertyor land. Businesses will now be able to claim relieffrom the charges when these changes are introduced,resulting in a negligible reduction in administrativecosts as it reduces the number of returns that need tobe filed and subsequently the information that wouldotherwise have been required those in the returns.Certain qualifying property rental businesses will beable to claim relief from these charges in respect ofaccommodation it provides, or intends to provide, tocertain employees and their family. Similarly,businesses which self-manage buildings of multipleoccupancy (e.g. blocks of flats) will be able to claimrelief from these charges in respect of theaccommodation occupied, or intended to be occupied,by a caretaker.Businesses who enter into Home Reversion Plansregulated by the Financial Conduct Authority, will beable to claim relief where, as a result of the scheme,they acquire part or the whole of an interest in aproperty.A business which acquires residential land andproperty to convert into non-residential use, or fordemolition, will be able to claim relief from the 15%rate of SDLT.Small and micro business assessment: the impact ofthis measure is anticipated to be the same irrespectiveof business size. Business of any size can be affectedby these measures.This measure will have no impact on civil societyorganisations as these are exempt under the currentlegislation.


There will be some costs for changes to HMRC’s ITsystems but these are not expected to be significant.


Monitoring and evaluationThe measure will be monitored and assessed through existing data-gatheringsystems and information collected from tax returns.

Further adviceIf you have any questions about this change, please email:[email protected]


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Stamp duty land tax: property investment funds(Policy paper: 9 December 2015)

Who is likely to be affectedManagers of and investors in Property Authorised Investment Funds(PAIFs) and Co-ownership Authorised Contractual Schemes (CoACSs).

General description of the measureThe measure will introduce a 100% relief from stamp duty land tax (SDLT)for the ‘seeding’ (initial transfer) of properties into an authorised PAIF orCoACS. The measure also introduces changes to the SDLT treatment ofCoACSs, so that an SDLT charge does not arise on transactions in units.

Policy objectiveThis measure supports the government’s objective of making the tax systemmore competitive and making the UK a more attractive location for themanagement and domicile of PAIFs and CoACSs.

The measure also supports the government’s objective of making the taxsystem fairer, by:

● ensuring that an SDLT charge does not occur when underlying eco-nomic ownership of property in PAIFs or CoACSs does not change

● ensuring CoACSs are treated in the same way as PAIFs for SDLTpurposes

Background to the measureAt Budget 2014 a consultation was announced, which was published on18 July 2014, entitled ‘Stamp duty land tax: rules for property investmentfunds’.

At Autumn Statement 2014 the government announced it intended to makethese changes, subject to the resolution of potential avoidance issues, and aresponse document to the 2014 consultation was published on 11 December2014. At March Budget 2015, this announcement was reiterated.

Further informal consultation was conducted with stakeholders during sum-mer 2015.

Detailed proposal

Operative dateThe measure will have effect on and after the date of Royal Assent to FinanceBill 2016.

Current lawA PAIF is a form of Authorised Investment Fund whose investment portfoliocomprises predominantly real property or shares in UK Real Estate Invest-ment Trusts.




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The transfer of property into a PAIF, including ‘seeding’ it with a start-upportfolio, is usually subject to SDLT as the PAIF acquires an interest in land.Currently properties held in existing PAIFs or certain types of collectiveinvestment schemes can be transferred into a new PAIF without a charge toSDLT. However any properties transferred into a PAIF that are not held insuch a scheme or fund will be subject to SDLT.

CoACSs are a type of collective investment scheme that can invest inproperty. CoACSs are transparent for SDLT purposes. This means thatSDLT would be charged every time property is acquired or disposed of orunits are redeemed, as this gives rise to a change in ownership of theunderlying units in the scheme.

Proposed revisionsLegislation will be introduced in Finance Bill 2016 to alter the SDLTtreatment of CoACSs. A CoACS will no longer be transparent for SDLTpurposes, so that a change in the ownership of the units will not give rise toSDLT, but SDLT will apply when a CoACS acquires a property. An SDLTcharge at market value will apply to acquisitions of property from connectedparties. The legislation will also make the operator, as opposed to the unitholders, responsible for filing and payment of SDLT including any tax clawedback.

The Genuine Diversity of Ownership (GDO) rules that are currently appliedto PAIFs will also be applied for the purposes of a CoACS claiming SDLTseeding relief, to ensure that narrowly held CoACS cannot benefit fromseeding relief.

A new seeding relief will be introduced for the initial transfer of propertiesinto an authorised PAIF or a CoACS in return for units in the scheme.

The relief will have the following design:

● a defined seeding period of 18 months within which seeding transac-tions are eligible for relief, provided that:

— the fund has not yet been opened to investors

— the sole consideration for a transfer is units in the fund acquiringthe property portfolio

● a ‘portfolio test’ limiting the application of the relief to transactionswhere a minimum number of properties and a minimum value ofproperties are transferred, in order to eliminate the risk of enveloping:

— for non-residential property, the minimum value will be £100million and the minimum number of properties will be 10

— for residential property, the minimum value will be £100 millionand the minimum number of properties will be 100

— for funds with a mix of both residential and non-residentialproperties, a percentage test applies. If the total value of residen-tial property in a portfolio is less than or equal to 10% then the


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non-residential requirements must be met. If the total value ofresidential property in a portfolio is greater than 10% it is theresidential requirements which must be met

● a mechanism to recover (‘claw back’) from the fund the SDLT that hadbeen relieved, where:

— the fund ceases to qualify as an authorised PAIF or CoACS,including meeting GDO conditions

— the portfolio test is not met at any time within 3 years of the endof the seeding period

● a mechanism to recover the SDLT that has been relieved in proportionto what was originally claimed where:

— some or all of the units received in consideration for the initialseeding are disposed of within 3 years of the end of the seedingperiod (a ‘first in, last out’ principle will be applied, so that the‘seeded’ units are treated as the last units to leave a fund ondisposal)

— a ‘seeded’ property is occupied by a person connected with thefund

Where SDLT is recovered from a PAIF, the fund itself will be wholly liablefor any tax when the relief is clawed back and will be required to make areturn of the tax due. Where SDLT is recovered from a CoACS, the schemeoperator will be liable.

Summary of impacts


2015–16 2016–17 2017–18 2018–19 2019–20– 10 – 15 – 10 – 5 – 5

These figures are set out in Table 2.1 of March Budget2015 and have been certified by the Office for BudgetResponsibility. More details can be found in the policycostings document published alongside March Budget2015.

Economic impact This measure is not expected to have any significantmacroeconomic impacts.


This measure is not expected to have any impact onindividuals, households and family formation, stabilityor breakdown.

Equalities impacts This measure is not expected to have any impact onprotected groups.




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The administrative burden on business as a result ofthis change is likely to be negligible as the additionalinformation required by HM Revenue and Customs(HMRC) for seeded properties is very small. Alsocurrent reporting mechanisms will be adapted to takeaccount of these changes which will also have anegligible impact on fund level administrative costs.The main beneficiaries will be life and pensioncompanies, charities and other tax exempt investorsthat invest in property. They will all benefit as a resultof SDLT cost reductions which may subsequently bepassed on to beneficiaries of these organisations.


It is anticipated that implementing this change willincur negligible additional costs for HMRC.


Monitoring and evaluationThis measure will be kept under review through communication with affectedgroups.

Further adviceIf you have any questions about this change, please contact the HMRCStamp Taxes Policy Team on email: [email protected].


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Customer enquiries should be directed to LexisNexis Customer SupportDepartment, tel: +44 (0)84 5370 1234; email:[email protected].

© 2016 RELX (UK) LimitedPublished by LexisNexisPrinted and bound in Great Britain by Hobbs the Printers Ltd, Totton,Hampshire

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