A scheme to avoid UK stamp duty land tax (SDLT) on a house purchase involving a claim for sub-sale relief failed because the conditions for the relief were not satisfied. A rider to the contract signed after anti-avoidance provisions had been introduced had no effect.

In 2012 a husband and wife entered into a scheme to avoid £23,400 of stamp duty land tax on the purchase of a house.

They entered into a contract to purchase the property from third party sellers and then entered into a purported sub-sale with a company registered in the British Virgin Islands (BVI). Under the sub-sale the BVI company bought the property from the individuals but the contract would not be completed for at least 25 years and the price would be its then market value. The BVI company issued a perpetual bond to the individuals for the purchase price of the property.

The bond carried a 0.25% rate of interest but the BVI company could simply tell the holder that is was not going to pay the interest. The contract with the BVI company could be terminated by the individuals giving two months' notice. The contract with the third party sellers was completed and the individuals held the legal title to the house and lived in it.

The scheme relied on sub-sale relief. This relief applies when a purchaser sells to a second purchaser without the first contract having been completed or having been 'substantially performed'. If it applies, no SDLT is payable in respect of the first contract. UK tax authority HM Revenue & Customs (HMRC) argued that sub-sale relief did not apply so that the individuals should have paid SDLT on the purchase price of the property.

The Finance Act 2013 introduced anti-avoidance legislation with retrospective effect in relation to certain sub-sales entered into on or after 21 March 2012. After this the promoters of the scheme asked the individuals to enter into a rider to the contract with the BVI company "for the avoidance of doubt and in order to clarify the contents of" the contract.

This stated that the completion date could be brought forward by mutual agreement between the individuals and the BVI company. It also stated that all the consideration under the contract was the issue of perpetual bonds and confirmed that the bonds were sent to the individuals' solicitors on exchange. It also stated that "for the duration of the contract the Seller [the individuals] will hold the property in his capacity as trustee for the benefit of the Buyer [the BVI company].”

The First-tier Tribunal (FTT) found that the conditions for sub-sale relief were not satisfied because the contract with the BVI company did not entitle it to call for a conveyance of the property until the 25 year period had expired and the contract with the BVI company had not been substantially performed or completed. This was on the basis that the individuals remained in possession of the property and the bond was not a substantial part of the consideration as it was an unsecured and unenforceable obligation to pay 0.25% of £590,850 a year on such dates, if any, that the BVI company decided. The judge said that the rider to the contract did not change the position.

She also decided that if she was wrong on these points, the anti avoidance provision introduced by the Finance Act 2013, section 45(3A) Finance Act 2003 would apply.

Section 45(3A) prevented sub-sale relief applying if the secondary contract had been substantially performed but not completed, the individuals were still in possession of the property and they had a tax avoidance motive for entering into the arrangements.

The parties accepted the individuals had a tax avoidance motive and the judge said that they were still in possession of the property notwithstanding the statement in the rider to the contract which suggested that the individuals were holding the property only as bare trustees for the BVI company.

The judge also decided that if she was wrong all these points, the anti avoidance provision in section 75A Finance Act 2003 would catch the transaction.

As sub-sale relief was increasingly being used in SDLT avoidance schemes, the sub-sale relief provisions were changed from 17 July 2013. The new rules apply to 'pre-completion transactions' and include extensive anti-avoidance conditions.

This is another example of a failed SDLT avoidance scheme based on the pre Finance Act 2013 sub-sale rules. The FTT found it would have failed under the original legislation but, even if it did not would have been defeated by the retrospective changes in section 45(3A) despite the endeavours of the parties and their advisers to ‘clarify’ the original contract subsequently to its execution.

As sub-sale relief was increasingly being used in SDLT avoidance schemes, the sub-sale relief provisions were changed from 17 July 2013. The new rules apply to 'pre-completion transactions' and include extensive anti-avoidance conditions.

Interestingly the individuals' land transaction return was selected by HMRC for enquiry because the return used a general code for relief which HMRC became aware was being used by users of some avoidance schemes and HMRC considered that the agents who submitted the return, the conveyancing solicitors, had been 'regularly involved' in stamp duty or SDLT avoidance.

This scheme did not even satisfy the basic conditions of the relief. However, we have seen with more viable SDLT avoidance schemes, that the tribunals and courts take a very strict line and interpret reliefs narrowly and the anti avoidance conditions widely, even if it means as in the Project Blue case that the users of a scheme end up paying more SDLT than if they had not used the scheme.