The HM Revenues and Customs are to begin investigating 1,200 people who may have exploited a loophole in the law to avoid paying stamp duty on the purchase of a home.
It is estimated that this loophole may have cost the government over £35 million in tax revenue.
There has been a growing number of internet sites who are offering guidance on avoiding tax duty. Some are also claiming that there is a loophole in the law which enables people to avoid paying stamp duty and are offering tax planning and mitigation schemes for a fee.
The HMRC are now pursuing a number of people and law firms who have exploited the loop hole and have issued a series of warnings.
When an individual purchases a home worth over £125,000, they are required by law to pay a stamp duty of between 1% and 5% of the value of the home.
For homes worth between £125,000 and £250,000, the stamp duty for the purchase is 1% of the property value, although first time buyers are exempt from this charge. If the property is worth between £250,000 and £500,000, the duty increases to 2% of the property value. It increases further to 4% for properties between £500,000 and £1 million and then 5% for properties over £1 million.
A number of websites are offering a service called ‘stamp duty tax planning’ to help prevent or minimize the stamp duty that people have to pay, for a fee, usually around half of the amount that has been saved. Some sites even provide an online calculator to help show how much money people can save using the schemes offered.
There are two popular methods which the site use to reduce the amount of stamp duty that has to be paid on the purchase of a property.
One involves separating the cost of the property and the costs of the fixtures and fittings in the property before paying. This allows the cost of the property to be reduced and therefore reducing or negating the stamp-duty.
Another method involves setting up a limited liability company. The company buys the property and takes advantage of the corporation tax laws to avoid the stamp duty and the property is then sold back to the individual.
Experts suggest that the exploitation of the loopholes is legal and the HMRC is aware of the schemes that are offered, but have not yet closed the loopholes in the law.
Mr Stuart Cam, who runs several websites which offer the services, believes that they are working within the law. He said: “This is an aggressive tax planning move. You are essentially taking tens of thousands of pounds out of the Revenue’s pocket. It is not for everyone. We tell our clients there is a 10% chance that they will receive a letter from HMRC challenging their tax return”.
A spokesperson from the HMRC indicated that they were planning to challenge the schemes through the courts. He pointed out that they rely on an interpretation of the law that was not intended when it was enacted.