By George Turner

The Pandora Papers show how the tax industry uses ‘special purpose vehicles’ to avoid stamp duty – despite repeated legislation to prevent this.

The Pandora Papers shed light on a UK property market that operates under two parallel structures. The wealthy and well connected secretly trade high-value property using offshore companies, while anyone buying a suburban semi must put their name on a public register and fork out thousands in stamp duty.

The scale of the market in property-owning companies is vast. A Transparency International study from 2015 found almost 41,000 properties in London registered to overseas companies, covering an area of 2.5 square miles. Some 89% of these properties were registered in tax havens, including 13,831 in the British Virgin Islands alone.

The Pandora Papers have identified a relatively small but significant chunk of that market – 1,500 properties held through offshore companies, and property transactions worth £4bn. They show us that this market is not the preserve of the underworld, but the favoured way of doing business among kings, former prime ministers and leading businessmen.

Although there are many reasons why an individual may wish to hold property using an offshore company, none of which are particularly savoury, a major driver has been tax. Specifically, it’s stamp duty land tax – a levy on the transfer of property.

Rather than selling a property, a seller transfers ownership of the property into a new company, also known as a ‘special purpose vehicle’ (SPV). The seller of the property then sells all the shares in the SPV to the new owner, transferring control of the company and with it the property. Because the legal ownership of the property does not change – it remains with the company – stamp duty is not paid.

You and I may think that this is a crude and obvious scam. The tax industry believes this to be a completely normal and legal way to reduce a tax liability.

As such, the reaction of many in the industry to the Pandora Papers has been a collective shrug of the shoulders. One leading tax partner argued that the system was a “policy choice”. The government chooses not to tax property transactions involving SPVs. If the government wants to tax these transactions, all it has to do is change the law.

The problem with this argument is that the government did change the law – more than once.

Past efforts to fix the system 

The government first introduced legislation to counteract the use of SPVs to transfer property ownership way back in 1967. Under the 1930 Finance Act, companies could transfer ownership of a property to another company within the same group and claim relief on stamp duty, making the transfer tax-exempt. The 1967 Finance Act prevented relief from being claimed if the purpose of the transfer was to sell the property-owning company to a third party.

In the late 1990s, the use of SPVs as an avoidance tool became more popular as the New Labour government started to raise stamp duty on higher-value property transactions. Avoidance became so widespread that increases in stamp duty rates were not leading to increased tax receipts. Stamp duty became known in the profession as a ‘voluntary’ tax. By the early 2000s, Inland Revenue’s internal figures estimated that £750m a year in stamp duty was being lost on property transactions.

The government came to realise that the only way to fix the system was a complete overhaul. The last consolidated Act on stamp duty had been passed in 1891 and the system, which relied on the stamping of physical documents, had become unworkable.

In 2002, the Labour government started to consult on reform, aiming to prevent the use of SPVs and announcing interim legislation to close down avoidance schemes with immediate effect. Ruth Kelly, treasury minister at the time, criticised “the common practice of companies abusing the group relief rules to sell UK land and buildings within a corporate wrapper”.

As consultation on the new regime progressed, the government abandoned its attempt to introduce specific legislation to prevent the indirect transfer of property via SPVs, deciding that exemptions created by EU law would have made it too easy to get around.

New legislation, new avoidance schemes 

Some tax lawyers now argue that because these specific rules were never introduced, the government never intended to prevent SPVs from being used to avoid stamp duty. But these experts should know that even if the law does not specifically forbid a particular method of avoiding tax, it should not be assumed that the method is encouraged.

This is a fundamental principle of taxation, for one obvious reason. Without this principle, the government would have to predict and legislate against every possible avoidance scheme that tax advisers might dream up in future. The tax code is long enough already.

What’s more, the government plainly did not intend to create a parallel system of non-taxation for the wealthy. When new legislation was brought forward to create the new stamp duty land tax in 2003, it was defined in the broadest terms. The tax applied to all transfers of land, regardless of how they were documented, where they took place, or whether a legal instrument was used to carry them out.

As the chief secretary to the Treasury at the time, Paul Boateng, stated, the government was “seeking to apply the tax on substance rather than form. The tax is on transactions, not on documents, as stamp duty was […] Any other policies would allow avoidance, which we are determined to clamp down on.” The government also extended the rules preventing relief from stamp duty being granted to companies when transferring the property into another group company for sale.

Despite the new legislation, avoidance of stamp duty land tax continued with abandon. Reliefs brought in to encourage investment in disadvantaged areas were abused on an industrial scale, as were rules on sub-sales. New schemes saw properties traded using limited partnerships (rather than companies) as SPVs.

In response, the government tightened the law further in 2007, adding an anti-avoidance rule to stamp duty land tax – which itself was an anti-avoidance measure – and shutting down particular schemes involving partnerships. The new rules sought to capture any transactions that were part of a scheme or arrangement that reduced a stamp duty liability.

Avoidance continued, however. The supermarket chain Tesco provided one of the most famous examples of a landowner shifting to new avoidance schemes as soon as the new rules were introduced.

Even a change of government did not dampen the Treasury’s desire to end the use of SPVs to avoid stamp duty. In 2012, then chancellor George Osborne launched a stinging attack in his budget speech:

“A major source of abuse – and one that rouses the anger of many of our citizens – is the way some people avoid the stamp duty that the rest of the population pays, including by using companies to buy expensive residential property.

I have given plenty of public warnings that this abuse should stop. Now I’m taking action.”

That action adopted a new approach, which was to hike rates on purchases of residential property by companies, and put an annual charge on companies owned by offshore companies. The aim was to discourage avoidance by making it uneconomical.

Time to target the tax industry itself

So does the fact that the UK government has repeatedly tried (and apparently failed) to stop people from using SPVs to avoid tax on property mean that the transactions revealed by the Pandora Papers are legal, or not?

That can only be definitively answered by a court of law, and tax litigation is a particularly difficult area in which to predict outcomes. But it would appear to be at least arguable that the acquisition of a company that had no other purpose than to hold the title of a property could be considered to be the acquisition of an interest in land. Certainly, any reasonable person would see that for what it is. Even if the law took a different view, anti-avoidance rules could still be used to tax some transactions that were part of a scheme.

Whatever the outcome, the myth that the government intended to create a parallel tax-free market in offshore property-owning companies must now be dispelled. This raises questions about the knee-jerk response from academics, tax professionals and some industry journalists who sought to dismiss the revelations in the Pandora Papers on the grounds it was lawful activity.

Such statements are the tax profession’s equivalent of “don’t hate the player, hate the game”. They absolve clients from accusations of wrongdoing, and undermine the clear public interest in having journalists expose this activity. They deflect attention from the behaviour of tax professionals engaging in tax abuse, shifting the blame to politicians. Everyone can get behind hating politicians.

Given that the government has spent more than 50 years legislating to stop this form of avoidance, pretending that the solution is as easy as passing a new law brings us no closer to finding a resolution.

Instead, we need to focus on the real scandal, which is the way that the tax profession has carried out a 40-year assault on the attempts of democratically elected governments to tax property transactions. The only people ever held to account are their clients, via public naming and shaming. Now it’s time to deal with the enablers.

This article was originally published on and has been republished under a Creative Commons Licence. If you enjoyed this article, visit for more.

George Turner is the Director of TaxWatch UK.

Disclaimer: The ideas expressed in this article reflect the author’s views and not necessarily the views of The Big Q. 

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