In his leading judgment, Lord Justice Lewison said that property developer DW3 Regent Street Ltd (DW3) had claimed to "have devised a simple and elegant scheme" to avoid SDLT. However, the company had "in the real world" acquired a chargeable interest in the property, and was therefore liable to pay the tax, he said.
"The taxpayer's successes before the First Tier and Upper Tribunals have vanished before an elegant interpretation of the legislation by the Court of Appeal," said tax expert John Christian of Pinsent Masons, the law firm behind Out-Law.com.
"The decision hinges on the partnership SDLT rules relied on by the taxpayer requiring a 'transfer' of a chargeable interest which did not occur in the Court's view. It points up the difficulties in interpreting the sub-sale rules and particularly the partnership regime in commercial transactions," he said.
DV3 had a lease of the Dickins and Jones building on Regent Street in London. It agreed to buy the head lease of the property from insurance company Legal and General (L&G) for £65.1 million. It entered into a scheme to avoid the £2.6m of SDLT that would otherwise be payable.
The company set up a limited partnership in the British Virgin Islands (BVI). DV3 was one of the partners and entitled to 98% of its income. The other partners were two general partners, another company and a unit trust. DV3 agreed to sell on the head lease in the property to the partnership on the same day as the contact between itself and L&G was completed. This 'sub-sale' was completed by a transfer from DV3 to the partnership, rather than a transfer directly from L&G to the partnership.
The effect of the sub-sale rules as set out in the legislation at the time of these transactions was to prevent SDLT from being chargeable on the contract between L&G and DV3. Instead, the legislation creates a deemed contract with the partnership as purchaser on which SDLT is chargeable. It does not state who the seller should be under this secondary contract.
The partnership argued that the effect of the SDLT partnership rules was that the chargeable consideration for the transfer of the property to the partnership would be treated as nil because DV3 and people connected to it were the partners in the partnership. However, HM Revenue and Customs (HMRC) said that the effect of the sub-sale rules was that DV3 was not the seller under the deemed secondary contract with the partnership and so SDLT was payable.
Lord Justice Lewison agreed, finding that "it was illegitimate to ignore that reality of the contract between L&G and the Company and the Company and the Partnership; or the transfers that amounted to completion of each of those contracts".
"[DV3] occupied a real place in the transactions agreed in the real world, and that reality could not be ignored," he said.
"We know that in the real world the Partnership had a contract with the Company. We know that in the real world that contract was completed by the execution of a transfer. We know also that in the real world what the Partnership acquired by those two steps was (at least) the whole equitable interest in the head lease. That is a chargeable interest. We can therefore say with confidence that the Partnership acquired a chargeable interest as a result of those two steps, even if the equitable estate in the hands of the Company was not a chargeable interest," he said.
The Court's analysis meant that the scheme failed despite the fact that the transactions had taken place a few months before section 75A of the 2003 Finance Act introduced anti-avoidance provisions. This provision now applies where a number of transactions are involved and the SDLT payable is less than if the purchaser had just acquired the property directly from the seller.
Additional changes to the sub-sale rules came into force earlier this month, when this year's Finance Bill received Royal Assent. Under the new regime, the party acquiring the property from the seller is regarded as making an acquisition for SDLT purposes and will need to make a return. This party will be able to claim full relief against any SDLT in 'normal' cases where it assigns its rights or enters into a sub-sale transaction "with no SDLT avoidance purpose". A 'minimum consideration" rule also applies to transactions where the transferor and transferee are connected or act on non-arm's length terms.