SDLT anti-avoidance provision applies even if no avoidance motive, says tribunal

Real esate tax expert Richard Croker of Pinsent Masons, the law firm behind Out-law.com, said:

"Although not binding because it is an FTT decision, the case draws attention to the difference between HMRC guidance on section 75A and the legislation as interpreted by the courts."

The case concerns the transfer of ownership of 30 Crown Place, an office block in London which was held in a limited partnership. The limited partner was a Guernsey property unit trust (GPUT), the majority of the units in which were held by a fund operated by real estate company Greycoat.

The transfer of units in a GPUT does not give rise to an SDLT liability. However, Hannover wanted to set up a fund investing in UK property aimed at German retail investors and did not want to hold the property through a GPUT as this would be unattractive to German investors. Hannover was also concerned about the possibility of historic liabilities in the limited partnership which sat below the GPUT and which held the property. It wanted the limited partnership to be removed from under the GPUT before it acquired it. It also wanted to collapse the GPUT structure and transfer the property directly to the Hannover fund immediately after the sale.

A set of transactions were proposed to achieve this, involving the transfer of the property by distribution in specie from the Greycoat partnership to the GPUT, the acquisition of the units in the GPUT by Hannover and the transfer of the property by distribution in specie from the GPUT to Hannover Leasing.

The deal was priced on the basis that no SDLT would be charged on any of the transactions, but £5.5 million was to be held in escrow and only paid to Greycoat if SDLT turned out not to be payable. Greycoat also obtained insurance against the risk of HMRC successfully asserting a liability to SDLT.

HMRC claimed that around £5.5m of SDLT was payable on the basis that section 75A applied to the arrangements.

Section 75A applies where one person (V) disposes of an interest in land and another person (P) acquires either it or a chargeable interest deriving from it, a number of transactions, including the disposal and acquisition, are involved in connection with the disposal and acquisition (known as the scheme transactions), and the amount of SDLT payable in respect of the scheme transactions is less than the amount that would be payable on a notional land transaction effecting the acquisition of V's chargeable interest by P on its disposal by V.

Hannover argued that the purpose of section 75A is to prevent abusive tax arrangements. It argued that section 75A only applies if the transactions, viewed collectively, give a result which is contrary to the scheme of SDLT.

Hannover pointed out that SDLT is not payable on the transfer of shares in a company, nor on the transfer of units in a unit trust – even if those entities are UK 'property rich'. Hannover argued buying units in a unit trust is a fiscally attractive option deliberately offered by the UK parliament, and the use of this option does not amount to tax avoidance.

The judge said that there need not be a tax avoidance motive for section 75A to apply. "I find that the operation of section 75A is not prevented from applying to the transactions under appeal because of the absence of any 'objective tax avoidance', any 'tax avoidance scheme', any 'unintended tax loss', or any exploitation of a 'loophole in the statutory provisions'," he said.

Hannover had referred to a section of HMRC's SDLT manual to support its arguments. This states: "Section 75A is an anti-avoidance provision. HM Revenue & Customs (HMRC) therefore takes the view that it applies only where there is avoidance of tax. On that basis, HMRC will not seek to apply s.75A where it considers transactions have already been taxed appropriately".

However, the judge said: "I consider that HMRC's guidance to which I was referred by Hannover is either irrelevant or wrong."

"I recognise that if the steps had been undertaken in a different order, there might well have been a different SDLT result – in particular if the Hannover Company had acquired the GPUT units as the first step, and only after that step was the property transferred out of the Greycoat Partnership. ….. But the sequencing of the steps was of critical commercial importance to Hannover, and it was essential to them that the property be extracted from the Greycoat Partnership before they acquired the GPUT units. The parties made a deliberate and considered decision as to the order of the steps, and have to live with the consequences that follow," the judge said.

Last year the Supreme Court decided that an SDLT avoidance scheme involving a Shari'a-compliant structure used by developer Project Blue Ltd in connection with the purchase of the former Chelsea Barracks in London fell foul of section 75A, resulting in more SDLT being payable than if the scheme had not been used.

"Consistent with Project Blue the FTT is clear the provision doesn't require a tax avoidance motive to have effect, although the judge appears to find such a motive anyway," Richard Croker said.

"This interpretation can be supported by the statutory wording but is not consistent with the published manuals as they stand and HMRC need to address that. Whether they be able to set out a sensible approach to future cases remains to be seen, but they may have little room to do so based on the case law to date," he said.