My Shout - Stamp Duty
Barry Gillham takes a looks at the effect of stamp duty reform and finds the new system unfair
It is two years (to the day!) since Stamp Duty Land Tax (SDLT) replaced Stamp Duty on the grant of leases. It was meant to be cash neutral in terms of money collected but was designed to stop the multinational property companies from finding ways simply not to pay. It was introduced at a time when the Government put out the message that tenants and small businesses wanted shorter leases, and longer leases were solely to the benefit of the big property companies.
Under the old system, there were only two rates of charge. For leases under 7 years, it was 1% of the annual rent. For longer leases, the rate was 2%.
Firstly, tenants and landlords see the benefit of leases for 20 or more years in the licensed trade. For landlords, there is the security of income for the foreseeable future which enables funding to be obtained at reasonable cost.
This is common throughout the property industry, but our trade is different in that the tenants also want longer leases.
With a 20-year lease, the goodwill of the business is worth a lot more than with a five-year lease. This is not so with offices, factories and many shop businesses. Banks require at least 10 years of unexpired 'life' on a lease to fund the purchase of a lease or the refurbishment of business premises. Leases in the licensed trade have value. In respect of other properties, they are often regarded as millstones.
The other expensive error in the calculation is that the tax is paid on what is known as a 3% discount rate. In other words, it assumes rent in year one at 100%; year two at 97% and so on for 20 or 30 years. Tax is paid on the cumulative rent paid over the term of the lease. Businesses are bought and sold, at best, on a 12% discount rate - often at 25%. In other words, a buyer will pay 100% for this year's profits; 88% or 75% for next year's profits and so on. The current basis of charging is simply not fair. By way of example, a 25-year lease at a rent of £50,000pa will attract SDLT of £6,740. Under the old system, the stamp duty would have been £1,000. Is this cash neutral? If a 12% discount rate was adopted, the tax would be £1,517.
New tenants entering the trade will probably know little of this until their solicitor asks for a cheque! No doubt the money had been ear-marked for a new carpet or redecoration. Many current lessees have 15 or 20-year leases entered into around 1989 to 1994 when the leasing system became prevalent. They will be considering taking new leases and will be facing large tax bills just to maintain the status quo.
This is a swingeing tax on the small self-employed business person. It was designed to catch big businesses for whom stamp duty had become easily circumvented.
The ALMR are to highlight the iniquities of the new system to the Government. At the very least, the discount rate should be amended to reflect the realities of business life. Unless the basis for assessing SDLT is amended, many of you will be paying large lumps of tax when you move pubs or renew your lease. Make your views known to your MP. Do your bit to stand up for the rights of the small (or even the medium-sized!) business person.
