THE Treasury is believed to be poised to clamp down on tax avoidance in offshore unit trusts, putting at risk the multibillion-pound offshore property unit trust industry.

The Inland Revenue wants to put a squeeze on property dealers who are exploiting a loophole in stamp duty legislation that allows them to escape the 4 per cent land tax levy by injecting buildings into new offshore property unit trusts.

When a building is transferred into a new offshore unit trust, the deal is typically free of stamp duty. Some property dealers have taken advantage of the rule — which is designed to help pension and life companies to repackage their assets — by transferring individual buildings into a new offshore trust and then selling on shares in the new vehicle free of stamp tax because the property is held offshore.

Because the deal is free of stamp duty, a purchaser in this instance may be prepared to pay a higher price for the property, effectively sharing the 4 per cent stamp tax saving with the seller, allowing both parties to benefit from the avoidance scheme. Typically, this kind of tax avoidance is limited to high-value property deals because of the large costs of structuring the transaction and because of the risks involved. Most of the funds are based in Jersey.

Stamp duty relief on transferring assets into new property unit trusts, known as “seeding relief”, was originally brought in two years ago in order to make it easier for pension and life companies and investment houses to repackage their assets into different trusts.

At that time, it appeared to be unfair that a company that was legitimately seeking to improve the efficiency of its operations by setting up new trusts should be hit with a 4 per cent stamp duty bill on asset transfers.

However, the extent of the abuse means that industry experts fear that the Treasury will move to halt the tax avoidance and potentially damage the legitimate and successful offshore property unit trust industry in the process.

William Hill, the head of property for Schroders, said: “The Treasury must not use a sledgehammer to crack a nut, particularly at a time when it wants to encourage greater innovation and to widen the ownership of property through the introduction of tax- efficient real estate investment trusts.” Mr Hill said that avoidance was the outcome of a “fundamentally flawed approach” to stamp tax, arguing that stamp duty is set at too high a rate on large transactions.

“If you have an unfair and silly tax, you can’t blame the property industry for trying to avoid it,” he said.

He called for stamp duty to be charged on a tapered scale according to the value of the property transaction.

Melville Rodrigues, a member of the British Property Federation stamp duty working party and a partner in Mayer Brown Rowe & Maw, the law firm, said: “Stamp duty avoidance has become a cat and mouse game between the Government and the property industry.

“This will continue so long as stamp duty land tax rates are at current levels. Rate reduction would discourage the avoidance mindset and could well result in a greater tax receipt for the Government.”

The British Property Federation and the Association of Property Unit Trusts are putting together a working party to provide ideas to the Treasury on how to deal with the problem.

A Treasury spokesman would only say: “We keep all taxes under review.”

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