A recent English court decision suggests that the SDLT general anti-avoidance rule (Section 75A Finance Act 2003) may be of wider application than previously thought, and significantly wider than indicated in HM Revenue & Customs’ own published guidance. Those involved in complex property transactions, particularly those involving reorganisation of ownership structures, should exercise extra caution and not rely on HMRC’s published guidance.
The case of Hannover Leasing Wachstumswerte Europa Beteiligungsgesellschaft mbH & Another v HMRC involved the sale of commercial property in London to a German limited partnership. The ownership structure was relatively common, an English limited partnership whose limited partner was a Guernsey unit trust. The sellers intended to structure the disposal as a sale of their units in the unit trust. This would have been straightforward, free from SDLT and unlikely to be susceptible to challenge under Section 75A. However, the purchaser, a German limited partnership, was not willing to acquire the units while the unit trust still owned the partnership due to concerns about historic liabilities. Therefore the following transactions took place:
- On 22 August 2011 the property was sold by the partnership to the unit trust;
- On 26 August 2011 the unit trust transferred its interest in the partnership to the principal unit holder;
- On the same day, the unit holders agreed to sell the unit trust, which now owned the property, to the Hannover Company;
- On 31 August 2011, the unit sale was completed and the unit trust immediately distributed the property to the Hannover Company, now the main unit holder;
- On 15 November 2011, the Hannover Company contributed the property to the German partnership.
These steps involved three transfers of the property but the amount of SDLT paid was minimal as the parties claimed relief under provisions designed to prevent SDLT charges on transfers between partnerships and their partners and distributions by unit trusts where there is no ultimate change of ownership. The commercial change of ownership was the sale of the unit trust which was not subject to SDLT. Compared to the sellers’ original intention to sell the unit trust, the SDLT bill was slightly higher, but it was much lower than the amount which would have been paid if the English partnership had sold the property to the German partnership direct. HMRC determined that the transactions were inter-dependent and, applying Section 75A, assessed SDLT on the basis of a sale by the English partnership as notional vendor to the German partnership as notional purchaser.
The Court held, following the Supreme Court’s decision in the case of Project Blue (see our earlier article on LawNow) that it was not necessary to identify a tax avoidance scheme exploiting a loophole in SDLT legislation in order for Section 75A to apply. It was sufficient in this case that the transactions were inter-dependent (as clearly shown in the steps paper and heads of terms) and that the SDLT paid was less than it would have been if the property had been transferred from the English partnership direct to the German partnership.
Points to note:
- The result may well have been different if the unit sale had taken place before any of the property transfers. This is because Section 75C states that a transfer of shares or securities (which includes units for this purpose) will be ignored if it would be the first of a series of transactions.
- The Heads of Terms and Steps Plan made it abundantly clear that the transactions were all pre-planned and inter-dependent, thereby making it easier for HMRC to characterise them as “scheme transactions”.
- The parties unsuccessfully tried to rely on HMRC’s published guidance but this had not been updated to reflect its view that a tax avoidance motive was not necessary for application of Section 75A. At the time of writing it has not yet been updated so should not be relied on.
- The court in question was the First Tier Tribunal whose decisions are not binding on other courts and may well be appealed, but those advising on complex UK property transactions will need to exercise greater caution to ensure they do not fall foul of Section 75A, particularly where property ownership is restructured prior to the sale of a property SPV.
The FTT decision is available here.