Developers to pay more duties on land deals as loopholes are closed
With development land sites currently being offered for sale at agricultural prices or about one-tenth of peak prices, some developers have begun to compete with farmers for sites with potential.
However they need to be aware that this year's Finance Act enacted measures to ensure developers pay stamp duties that they had avoided through a range of devices over the years. Nevertheless in certain cases there are still some means of alleviating stamp duty on development sites.
During the boom, developers avoided paying stamp duty on land purchases by either leaving the transaction "resting on contract" or by using licences or long agreements for leases.
In property transactions, the trigger for stamp duty is the execution of a deed of conveyance/assignment or the grant of a lease, so by avoiding the execution of these instruments a stamp duty charge would not crystallise.
Widespread use of this loophole was estimated in 2006 to have resulted in about €250m in lost revenues to the Exchequer.
While anti-avoidance provisions have been on the statute books in various forms for the last six years, they have not, until now, been commenced.
Resting on Contract
Where a person contracts to purchase land and does not take a conveyance of legal title within 30 days of paying 25pc or more of the consideration payable under the contract, then the contract will be stampable with the same duty as if it were a transfer of the land.
Where stamp duty is paid on the contract, any subsequent transfer of the land will not be stampable. For example, say a developer contracts to buy land for €10m and pays €2.5m to the landowner on signing the contract, now the developer will have to pay stamp duty of €200,000 (ie €10m x 2pc) on that contract if a conveyance is not executed and stamped within 30 days of making that payment.
While this new provision should not create a stamp duty charge on historic land purchases left 'resting on contract', it may create a previously unanticipated charge on the future unwind of certain tax-based investments which used 'resting on contract' planning.
What is interesting though is that a previous iteration of the legislation (the Finance (No.2) Act 2008 version) had carve-outs for public private partnerships and specific types of tax-based investments, such as nursing homes, hospitals, convalescent homes, etc, but these carve-outs are not included in the 2013 legislation.
This may be because new tax-based investments are essentially a thing of the past for a variety of reasons, but the new provisions potentially impact on old investments that have not yet been unwound.
Similar arrangements to the "resting on contract" provisions exist for building licences and long agreements for leases.
What relief is still possible?
It should be still possible to mitigate stamp duty on certain transactions by using sub-sale relief. Sub-sale relief applies where a property is sold from A to B and, prior to the conveyance of legal title, the property is sold by B to C.
If legal title is conveyed directly from A to C, sub-sale relief applies so that the stamp duty is only payable on the conveyance from A to C and the sale from A to B falls out of the stamp duty charge.
This type of planning is still possible provided B pays less than 25pc of the consideration to A on signing the contract (the balance can be paid on completion ie the conveyance from A to C). However, an additional charge to stamp duty could arise on the contract from A to B if in excess of 25pc of the consideration is paid over and the conveyance to C does not take place within 30 days.
In summary, although the writing has been on the wall for this loophole for quite some time, only now has it effectively been put to rest by specific anti-avoidance legislation.
But with development deals having dwindled in the post-boom landscape, the introduction of such measures so late in the day may ultimately mark an attempt to lock the door after the horse has bolted.
Beryl Power is senior tax manager, PwC Real Estate Practice