Stamp duty land tax avoidance scheme was effective says the Upper Tribunal

Out-Law News | 08 Nov 2012 | 4:34 pm | 2 min. read

A stamp duty land tax (SDLT) avoidance scheme which involved the interaction of the sub-sale and the partnership rules was effective, according to the Upper Tribunal.

DV3 Regent Street Limited (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.

DV3 set up a British Virgin Islands (BVI) limited partnership called DV3 RS Limited Partnership (the Partnership). DV3 was one of the partners and was 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 for £65.1m with completion fixed for the same day as completion of the contract between L&G and DV3. The sub sale was completed by a transfer from DV3 to the Partnership, rather than a transfer direct from L&G to the partnership.

The scheme was designed to take advantage of the interaction between the sub-sale rules for SDLT and the rules that deal with transfers of interest to partnerships.

The effect of the sub sale rules was to prevent SDLT from being chargeable on the contract between L&G and DV3 and to charge SDLT on a deemed contract where the partnership is the purchaser. The legislation 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 was treated as nil because DV3 and people connected to it were the partners in the partnership.

HMRC argued 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.

The Upper Tribunal judge (Mr Justice Henderson) decided that the seller under the secondary contract must be DV3 and not L&G and therefore the scheme was effective as the partnership SDLT provisions meant there was no SDLT liability. "The sub-sale by the Company [DV3] to the Partnership forms part of the real state of affairs, and I can find nothing in the statutory hypothesis which require it to be displaced," he said.

The judge noted that the partnership provisions have "undergone considerable evolution" since they were introduced. The scheme would not have worked if it had been carried out four months earlier or a few months later when section 75A Finance Act 2003 introduced anti avoidance provisions.

Alison Walker, a property tax expert at Pinsent Masons, the law firm behind Out-law.com said  that the case highlights the importance of section 75A to HMRC in tackling SDLT avoidance.

"Section 75A marked the end of taxpayers such as DV3 being able to profit from a window of opportunity before a loophole in the SDLT legislation is closed, a point not lost on Mr Justice Henderson or the parties in this case." she said.

Walker added that it is not clear from the case whether HMRC considered applying the more general anti-avoidance rules derived from cases such as outlined in that involving Ramsay and the Inland Revenue Commissioners in 1982. Although she added that "in practice, this would have been a difficult point for HMRC to succeed on as the onus would have been on HMRC to show that the partnership was used solely for tax avoidance purposes and had no commercial purpose."

The First Tier Tribunal decision in the DV3 case was the first time an SDLT avoidance case had been considered by the courts. The decision in the second case, involving Vardy Property Group resulted in a win for HMRC.