In this case, the Upper Tribunal of the Tax and Chancery Chamber (the “Tribunal”) considered the application of the transfer of rights provisions contained with section 45 of the Finance Act 2003 in conjunction with the partnership provisions contained within schedule 15 of the Finance Act 2003 regarding Stamp Duty Land Tax (“SDLT”), finding in favour of the taxpayer in relation to the SDLT avoidance scheme that had been used.

The Facts

In 2005, DV3 Regent Street Limited acquired a leasehold interest in a department store on Regent Street. In October 2006, DV3 Regent Street Limited entered into a contract with the owner of the head leasehold interest, Legal and General Assurance Society Limited (“L&G”) to buy that interest for £65.1 million.

DV3 Regent Street Limited entered into a sub-sale contract with DV3 Regent Street Limited as the vendor and DV3 RS Limited Partnership (“DV3”) acting as the purchaser. It was agreed that DV3 Regent Street Limited would sell the head leasehold interest in the property to DV3 for the same price, without payment of a deposit, and with completion to occur on the same day.

DV3 was structured so that DV3 Regent Street Limited was one of its partners, and was entitled to 98% of its income. The other four partners were all connected with DV3 Regent Street Limited for the purposes of the partnership provisions relating to SDLT contained within schedule 15 of the Finance Act 2003.

The sub-sale to DV3 was to be completed by a separate transfer from DV3 Regent Street Limited to DV3, and not by a transfer made directly to DV3 by the original vendor under the first contract, L&G. The reason for structuring the transaction in this way was to take advantage of the provisions relating to sub-sales in sections 44 and 45 of the Finance Act 2003, and to ensure that the sub-sale fell within paragraph 10 of schedule 15 which applied “where – (a) partner transfers a chargeable interest to the partnership”.

On completion, two forms of transfer were executed at a single completion meeting: the first from L&G to DV3 Regent Street Limited, and the second from DV3 Regent Street Limited to DV3.

DV3 Regent Street Limited did not pay SDLT on the first contract, on the basis that SDLT sub-sale relief applied. Further, DV3 claimed that no SDLT was payable on the transfer to them from DV3 Regent Street Limited, as a result of the SDLT partnership rules.

The result of structuring the transaction in this way was that by relying on sub-sale relief, together with the rules to calculate SDLT for partnerships, there was no SDLT payable. HMRC did not agree and raised an assessment for the SDLT; DV3 appealed to the first-tier tribunal, who came to the conclusion that DV3’s arguments were substantially correct and allowed the appeal.

HMRC appealed to the Tribunal.

Section 44 and Section 45 of the Finance Act 2003

Under section 44 of the Finance Act, if a “transaction is completed without previously having been substantially performed, the contract and the transaction effected on completed are treated as parts of a single land transaction. In this case, the effective date of the transaction is the date of completion.” This removes the issue of SDLT being charged twice on what is commercially a single transaction.

Correspondingly, Section 45 of the Finance Act 2003 applies where there is an original contract which is due to be completed by a conveyance, and as a result of a further transaction relating to the whole or part of the subject matter of the original contract, somebody other than the original purchaser becomes entitled to call for a conveyance, for example a sub-sale.

Schedule 15 of the Finance Act 2003

Under schedule 15 of the Finance Act 2003, a transfer by a partner to a partnership only creates a SDLT liability by reference to the proportion of the market value of the asset which will no longer be held by the partner.

In this transaction, DV3 Regent Street Limited were purchasing the leasehold interest and then transferring it to DV3, in which DV3 Regent Street Limited were a partner. Therefore, it was argued that paragraph 10 of Schedule 15 of the Finance Act 2003 applied, and the transfer by DV3 Regent Street Limited to DV3 would not trigger SDLT; DV3 Regent Street Limited was effectively transferring the asset to themselves and to persons connected to them.

Judgment

HMRC’s main argument was that, under section 45 of the Finance Act 2003, the contract from L&G to DV3 Regent Street Limited was to be disregarded and therefore no chargeable transaction had taken place. As such, DV3 Regent Street Limited had not acquired a chargeable interest in the property for SDLT purposes. Therefore, DV3 Regent Street Limited could not be the vendor under the ‘secondary contract’ and so the partnership provisions which would reduce the chargeable SDLT to nil could not apply.

However, after a detailed review of the partnership SDLT code contained in schedule 15 of the Finance Act 2003 and the sub sale provisions in section 45 of the Finance Act 2003, the Tribunal held that a single land transaction arose on the completion of the secondary contract; a tripartite contract was deemed to have been entered into between L&G, DV3 Regent Street Limited and DV3.

Although sub-sale relief disregarded the transfer from L&G to DV3 Regent Street Limited for the purpose of calculating SDLT, it did not mean the conveyance as a whole was disregarded entirely. DV3 Regent Street Limited did acquire an interest which enabled it to then convey the property to DV3 and complete the tripartite contract.

Therefore, DV3 was correct in applying the SDLT partnership rules to the conveyance from DV3 Regent Street Limited to DV3.

The Tribunal concluded that even where one limb of a transaction was effectively exempt from an SDLT charge, this did not mean that the other limb shouldn’t (or couldn’t) also be effectively exempt.

Comment

This case is important as it is the first SDLT case involving a sub-sale avoidance scheme, and it is thought that a significant number of other taxpayers will have used this scheme.

The success of the scheme in this transaction was due to the fact that there were two separate transfers, as opposed to one transfer from L&G to DV3. However, amendments to the SDLT legislation before the Tribunal’s decision on this matter mean that this structure is no longer possible. Whilst the Tribunal conclude that the results was one that “Parliament would not consciously have intended had the facts of the present case been drawn to its attention”, the Tribunal noted that the ability to structure a transaction in this way had effectively been closed by section 75A of the Finance Act 2003.

HMRC are likely to appeal the decision in this case and, should they win, they are likely to issue assessments to recover the SDLT against all those cases currently on hold on similar facts.

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