· To review the provisions of the draft Taxation (Land Transactions) (Jersey) Law 200- which seeks to introduce an equivalent to stamp duty on share transfer transactions involving immoveable residential property in Jersey;

· To report to the States on the draft legislation;

· To introduce any amendments as considered necessary; and

· To examine the difficulties involved in extending the law to commercial properties

2. Panel Membership

The Corporate Services Panel is constituted as follows –

Deputy P.J.D. Ryan, Chairman

Deputy C.H. Egré, Vice-Chairman

Connétable J. Le Sueur Gallichan

Connétable D. J. Murphy

Deputy R.G. Le Hérissier

Scrutiny Officer: M. Haden

3. Independent Expert Adviser

The Panel engaged the following adviser to assist it with the review –.

Mr. Richard Teather, BA, ICAEW, a senior lecturer in Tax Law at Bournemouth University; a Freelance Tax Consultant and a writer on Tax Law and Policy.

4. Executive Summary

4.1 Summary

The Corporate Services Panel has reviewed the draft Taxation (Land Transactions) (Jersey) Law 200- which introduces a land transactions tax on residential share property transactions.

The Panel has not sought to re-examine the principle of the law which seeks to establish equity between purchasers of share transfer and freehold properties with respect to the financial costs of the transaction as the principle has already been approved by the States. Instead, the Panel has looked closely at questions related to the extent to which the draft law will cover all share transfer transactions, the operation and administration of the law and the effect of the law particularly on first time buyers.

The new tax will bring in additional revenue to the States and we have urged the Minister to consider using this income to provide additional relief to all first time buyers, whether by share transfer or flying freehold, in order to alleviate the well-known problems facing young people in taking their first steps on to the housing ladder.

The Panel considered the features of share transfer flat transactions in comparison with flying freehold and recognises why this mechanism has been uniquely popular in Jersey. The Panel has concluded that the introduction of the new tax represents an opportunity to favour the creation of flying freehold flat developments rather than share transfer in the future and we have asked the Minister to consider this issue in reviewing the discounts available to first time buyers.

In a subsequent report the Panel will examine the issues involved in extending the tax to cover commercial property transactions. We have had some initial discussions with witnesses on this issue and we have seen enough to recognise that this is a very complex area. Without prejudging our subsequent review, it is fair to say that the potential revenue yield from taxing commercial property transactions is an important consideration and should provide the Treasury with sufficient motivation to find a workable solution to this issue.

4.2 Key Findings

4.2.1 One of the consequences of the draft law will be that for the first time a full set of information about share transfer properties will become available (section 6.1).

4.2.2 The introduction of LTT will not in itself lead to a significant shift away from the creation of new share transfer apartment blocks in favour of flying freehold (6.3).

4.2.3 If the draft law is approved non resident investors will be liable to pay LTT on their investment properties. The fact that they are not qualified to occupy the property does not exclude them from the obligation to pay the tax. The purchase of multiple share transfer units by persons who wish to let those properties would still attract LTT on the initial purchase of each property (6.4).

4.2.4 The fact that J-category employees are obliged to purchase through a company does not give rise to an increasing number of share transfer properties (6.6).

4.2.5 The historical exceptions to the general restriction on company acquisition of residential property represent an insignificant proportion of the housing market although the value of individual properties may be substantial (6.7).

4.2.6 The potential yield from commercial share transfer property transactions is an important consideration and should provide the Treasury with sufficient motivation to find a workable solution to this issue (7.8).

4.2.7 The fact that LTT will be charged only where there is a transfer of shares in a company which also gives the purchaser the right to occupy residential property in Jersey (article 3.2 of the draft law) does not mean that the residential qualification policies of the Housing Law are superseded. Payment of the tax does not give a share transfer property owner the automatic right to occupy the property (section 8).

4.2.8 The current Housing Policy which enables people to purchase a flat, whether by share transfer or flying freehold, and still retain their status as First Time Buyers if they wish to move into a larger property within the definition of the Housing Departments’ restricted First Time Buyer market will not be altered by the introduction of LTT (9.1).

4.2.9 Owners of share transfer flats, having claimed a discount on LTT as first time buyers, will not also be entitled to the discount rate on stamp duty on purchasing a freehold property in the restricted First Time Buyer market (9.2).

4.2.10 The additional revenue for the States raised through LTT could be used by the Minister to increase reliefs for all first time buyers, whether they are purchasing a flat or a freehold property in the restricted First Time Buyer market (9.3).

4.3 Recommendations

4.3.1. The Treasury and Resources Minister is requested to consider

(a) the potential benefits of encouraging developers to use flying freehold rather than the share transfer mechanism for future property developments; and

(b) whether, by creating a relatively small differential in the discount available to share transfer first time buyers under the Taxation (Land Transactions) Law 200- in comparison with the Stamp Duty and Fees (Jersey) Law 1998, he might nudge the market in the desired direction (6.3)

4.3.2 The Panel requests the Minister to review the exclusion of co-habiting couples and same sex couples from reduced rates of LTT (7.7).

4.3.3 The Panel supports the Housing Minister’s intention to review the policy on allowing flat owners access to restricted First Time Buyers properties in order to ensure that share transfer properties are sold to first time buyers - in the same way as flying freehold operates (9.1)

4.3.4 The Treasury and Resources Minister is requested to review in the next Budget the current reliefs available to first time buyers in respect of both LTT and stamp duty taking into account the revenue to the States from the new tax (9.3).

5. Introduction

In 2005 the States unanimously approved proposition P211/2004 which charged the then Finance and Economics Committee with preparing the necessary legislation for consideration by the States to introduce stamp duty on share transfer transactions involving immoveable residential and commercial property in Jersey.

After extensive research and consultation with interested parties the Treasury and Resources Minister lodged P.185/2007, the draft Taxation (Land Transactions) (Jersey) Law (the ‘draft law’) in December 2007.

Effectively the draft law prevents the common use of ‘share transfers’ to avoid stamp duty on residential property transactions by imposing a new tax (‘land transactions tax’ LTT) on share transfers, where there is an underlying interest in Jersey land[1]. However, it is more restricted than the original proposition -

firstly, it was limited to sales involving residential property due to the complexities which had been encountered by the Treasury in bringing commercial property transactions into the remit of the law;
secondly, it only applies where shares also give their owner the right to occupy that property.

The Minister advised the States in his opening speech on the preamble to the draft law:

Having come to appreciate the complexities of the drafting and realising the difficulties even in the case of residential property, we decided to put commercial property transactions to one side for the time being. I make these preliminary remarks because I am conscious of the fact that we have already, in fact, in effect agreed the principles of the legislation when we agreed and accepted the proposition of the Deputy of St. Martin. The proposition before us today tries to bring the essence of that proposition into legal form, at least as far as residential property is concerned. Once that legal form is established, we shall see how it might be extended to share transfer transactions involving commercial property[2].

The States debated the preamble to the draft law on 12th March 2008 and approved the principle of the land transactions tax (LTT). It was then agreed to refer the draft law to the Corporate Services Panel for detailed scrutiny of the provisions of the law and their effect. This is the subject of this first report to the States.

It was also understood that the Panel would examine the complexities of taxing commercial property. This aspect will be dealt with subsequently in a second report. Although we have not fully examined the issue, we have had some initial discussions with witnesses and we seen enough to recognise that this is a very complex area.

For example, when an unincorporated business is sold, stamp duty is charged on the proportion of the price that relates to Jersey land (whether a shop, a factory or a farm). Applying this to the purchase of shares means that if any company (or group of companies) owns land in Jersey, a proportion of the purchase price of those shares would be subject to Jersey stamp duty. One problem is that many UK shops, banks and other companies operate in Jersey, and some of those will own their own premises; it would be an impossible situation to declare that Jersey stamp duty were payable every time anyone, anywhere in the world, bought shares in one of these non-Jersey companies.

We therefore agree with the Treasury Minister’s policy of bringing forward a law on residential property first, whilst continuing to work on options for taxing commercial property.

6. Background to residential share transfers

6.1 Lack of statistical evidence

An increasing proportion of the Island’s supply of housing is via apartments and these are frequently share transfer. It is estimated that share transfer transactions constitute about 60% of all sales of apartments[3].

It is commonly believed that the majority of share transfer transactions are at the lower end of the price scale. Mr. R. Trower of Broadlands Estate Agents told the Panel:

The majority of share transfer transactions are for apartments at the lower end of the property market and usually purchased by youngsters entering the property market for the first time or by elderly people looking to retire and ‘scale-down’. Both of these groups find the non-imposition of stamp duty to be of great benefit as neither of them can afford to be profligate with their money. It is obvious therefore where this proposed new tax will have the most effect[4].’

It has not been possible to verify this assumption with firm statistical evidence. This would require a comprehensive survey of transactions conducted by estate agents and an enquiry by the Panel produced only a meagre response.

This brings into focus one of the key difficulties with regard to assessing the impact of share property transactions on the housing market in Jersey. Sales occurring through share transfers are not processed through the Royal Court and therefore information on transaction prices is not readily available. Neither the Statistics Unit nor the Population Office were able to supply us with relevant information.

The Director of the Population Office informed us:

Share Transfer sales are not controlled by the Housing Law - we simply control occupation, and the applications submitted in this regard are received each time either a tenant changes or the shares change hands, nor do they specify the value of the property…As such, we cannot give you information on volumes or values of share transaction information.[5]

The Panel notes that one of the consequences of the draft law will be that for the first time a full set of information about share transfer properties will become available.

6.2 Historical development

The share transfer mechanism developed in a unique way in Jersey as a means of dealing with the conveyancing of apartments. Mr. Le Quesne, an experienced conveyancing practitioner, informed the Panel:

Share transfer is a very artificial means that was devised more than 40 years ago to overcome the problem of being unable to mortgage a long lease and unable to convey an apartment, or part of a building. I am not aware of any other jurisdiction which has an exactly similar form, although lots of jurisdictions have something similar to the flying freehold law. But the share transfer is very peculiar to Jersey. ….. Before 1991 you could not convey the freehold ownership of an apartment. You could grant a long lease of the apartment but you could not mortgage that. So, this means of passing exclusive right of occupation was devised, and one has to remember that no shareholder has any interest, direct interest, in the property belonging to the company. They do not have an interest in the freehold at all. They are only interested in the shares which give them the right of exclusive use occupation. The words are, “exclusive use and occupation”. It does not infer the word “ownership” because the ownership rests with the company[6].

Share transfer transactions however incur additional complications for the flat owner as there are requirements for annual company registration and other company administrative overheads.

Nevertheless share transfers have remained attractive principally because of their most significant advantage which is freedom from stamp duty. This advantage will be lost with the introduction of LTT.

6.3 Flying freehold - an alternative to share transfer?

Despite the introduction of flying freehold in 1991[7] many new developments have continued to use the share transfer mechanism. The Panel was interested to know whether the introduction of the new tax on share transfer transactions might encourage a phasing out of the share transfer market and a general movement towards flying freehold status.

For the property owner freehold status provides the advantage of owning immoveable property rather than shares in a company and removes the additional burdens imposed by the requirement to establish and administer a limited company.

For the States there are also advantages in encouraging the development of flying freehold rather than share transfer

Stamp duty is straightforward to collect and without the current extensive share transfer market there would be no need to establish the separate administrative process required to supervise the LTT.
Furthermore, sales of flying freehold flats are regulated by the Housing (Jersey) Law 1949. This means that the Housing Department can exercise its ownership policies whereas share transfer properties are free of these restrictions. In the Panel’s view, Housing Policies should be applied fairly across all types of property. (An example of the current lack of fair treatment is the First Time Buyer policy - see further discussion below).
Finally, flying freehold property developments are clearly designed for the benefit of the local residential population rather than the overseas investor.

Mr. Hart, a member of the Jersey Law Society Conveyancing Sub Group, informed the Panel that the complications in transferring existing share transfer properties into flying freehold would be considerable:

I do not think, just because of the sheer difficulty and administrative problems associated with it, that there have been any, that I am aware of, conversions from share transfer to flying freehold. So, all flat developments and conversions done prior to 1991 would be, and remain, share transfers. So, all those are continually turning over and indeed there have been quite a number of developments, notwithstanding the advent of the freehold law that have been structured as share transfers…. in order to convert a block of apartments from a share transfer structure to a flying freehold structure you would need every single owner to consent[8].

Mr. R. Kirkby, Jersey Finance, told the Panel it would be very difficult to achieve an objective to phase out share transfer transactions entirely:

I believe it would take decades to unwind the current situation, particularly where you have properties that are owned either by Jersey or non-Jersey companies or by non-Jersey trusts. So although you are not allowed to hold a Jersey property in a Jersey trust, you can hold a Jersey property in other jurisdictions’ trusts.[9]

Panel comment

The Panel believes that it is in the best interests of the Island to encourage developers to create flying freehold properties rather than to extend the range of share transfer apartment blocks. It believes that the Treasury and Resources Minister should consider ways in which the property market might be influenced to move in this direction.

One way in which we believe that this might be achieved would be to discriminate in favour of flying freehold developments in terms of the discounts on stamp duty and LTT available to first time buyers. Later in this report (see section nine), we suggest that the Minister should review the discounts available to first time buyers at the time of the Annual Budget and consider the merits of an upward review of discount rates for all first time buyers. In this context, we suggest that the Minister could, by creating a relatively small differential in the discount available to share transfer first time buyers under the Taxation (Land Transactions) Law 200- in comparison with the Stamp Duty and Fees (Jersey) Law 1998 nudge the market in the desired direction, with consequent long term benefits.

The effect of this proposal will be to make share transfer flats slightly less attractive to the purchaser. While existing share transfer owners may claim that this might deflate to some extent the potential value of their property, it might also be argued that they have previously benefited from the lack of stamp duty on their original purchase. Future potential property purchasers will be able to take account of the differential between freehold and share transfer and will be able to make an informed choice accordingly between the types of property with full knowledge of the cost implications.