SDLT: application of s.75A does not require "objective tax avoidance"

The FTT has held that the application of the SDLT anti-avoidance provisions in s.75A does not require HMRC to show that there was tax avoidance contrary to the scheme of SDLT in any wider sense.

The FTT has held that the SDLT anti-avoidance provisions in s.75A contain, essentially, a stand-alone definition of those transaction within its ambit and that it is not necessary to revert to any wider concept of tax avoidance to determine its scope: Hannover Leasing v HMRC [2019] UKFTT 262. The FTT rejected the argument that it should only apply the provisions of s.75A where the transactions concerned had not been taxed “appropriately” in the absence of s.75A.

Since the provisions of s.75A are notoriously widely drawn, the decision is potentially a very serious one for any tax structuring involving UK property. Great care should be taken that any arrangements put in place in the context of a UK property transaction, no matter their motivation, do not fall foul of s.75A.

Background

The case concerns the acquisition of a UK property by Hannover, a German fund. Hannover had identified the property as a possible investment and engaged an agent to make offers to the owner, Greycoat. The intention by Hannover was to acquire the freehold in the property via a German GmbH & Co. KG structure, as that was the normal holding structure for retail investments in property in Germany.

After making offers for the property, Hannover discovered that the property was owned via a Guernsey property trust structure (GPUT). This involved a Guernsey unit trust owning a UK limited partnership (Greycoat) which in turn owned the property. Given that the units in the GPUT could be sold without any SDLT, Hannover revised its offer so that it offered either £138m for the units or alternatively £133m for the freehold of the property. Greycoat accepted the offer for the units and a scheme was devised for the completion of the sale. Since Hannover was concerned over any historic liabilities in the structure (especially as Greycoat had been the developer of the property), it was agreed that the property should first be moved out of the Greycoat partnership to the GPUT, with Greycoat then being removed from the structure before Hannover acquired the units in the unit trust. After its acquisition of the units, Hannover would then move the property from the GPUT into a Hannover GmbH Co. KG (the Hannover partnership).

The scheme was put in place resulting in the payment of only £55,500 SDLT (due in part to the computational provisions dealing with transfers involving partners and partnerships and due to one of the transactions being carried out as a distribution in specie). HMRC opened an enquiry into the sale of the property which resulted in the issue of determinations that no land transaction had been filed in respect of a notional land transaction under FA 2003 s.75A. The amount of SDLT due on that notional land transaction was £5.5m.

Decision of the FTT

Both Hannover and HMRC accepted that s.75A should be construed purposively. However, that is where the arguments of the parties diverged. Hannover argued that s.75A was clearly an anti-avoidance provision and must be interpreted as such. In essence, Hannover argued that s.75A only applied where one could say that the arrangements looked at as a whole had not been subject to an appropriate amount of SDLT viewed from the perspective of the scheme of SDLT. In this case, viewed collectively, the transactions had been taxed appropriately and s.75A was not in point. In particular, the scheme of SDLT provided for the sale of units in a unit trust (such as the GPUT) to be outside the scope of SDLT.

The FTT rejected this argument. It was not necessary to find “objective tax avoidance” or to identify “a tax avoidance scheme” for s.75A to operate. Although it was clear that s.75A was enacted as an anti-avoidance provision, in essence, s.75A itself defined the type of avoidance that falls within its scope so that it was unnecessary to look beyond its terms. On this issue, the FTT agreed with HMRC. (The Supreme Court has previously held, in the Project Blue case, that it is unnecessary for the scheme to be motivated by tax avoidance.)

In particular, it was incorrect to argue that it is necessary to seek to determine the appropriate amount of SDLT on a scheme in the absence of s.75A first. This is because s.75A is itself part of the “scheme of SDLT”. The FTT’s approach is to treat is a part of the charging structure of the SDLT rules rather than something sitting outside that scheme designed to pick up tax avoidance.

All that s.75A required was three conditions to be met:

  • V disposes of a chargeable interest and P acquires either it or a chargeable interest deriving from it
  • A number of transactions are involved in connection with the disposal and acquisition
  • The sum of amounts of SDLT payable is less than the amount that would be payable on a notional land transaction effecting the acquisition by P from V.

In this case, the FTT concluded that the Greycoat partnership was V and the Hannover partnership was P for the purposes of the notional transfer of the property. The steps to transfer the property from V to P were all pre-ordained and commercially interdependent. The highest consideration payable as part of those arrangements was £138m. Pursuant to s.75A, therefore, the sum of SDLT paid (£55,500) was less than that due under the notional land transaction (£5.5m).

Comment

It should be noted that s.75C provides an exception to the operation of s.75A for a transfer of shares or securities, but only where that transfer is the first of a series of scheme transactions. As such, had the transactions in this case been carried out in a different order, with the sale of the units being the first step, it seems that s.75A would not have applied. However, the FTT pointed out that “the sequencing of the steps was of critical commercial importance to Hannover, and it was essential to them that the property be extracted from the Greycoat Partnership before they acquired the GPUT units. The parties made a deliberate and considered decision as to the order of the steps, and have to live with the consequences that follow”.

Anyone advising on property transactions involving any form of restructuring should pay close attention to s.75A, even where the arrangements have a clear commercial purpose. Clearly any arrangements that involve the sale of shares or securities should be carefully considered and any type of restructuring that might precede such a sale should be avoided.

Finally, Hannover had pointed out that HMRC guidance in the SDLT manual itself stated that HMRC take the view that s.75A only applies “where there is avoidance of tax” and that “HMRC will not seek to apply s.75A where it considers transactions have already been taxed appropriately”. On this issue, the FTT simply stated that HMRC’s guidance was “inconsistent with the legislation and is incorrect”. Indeed, the FTT noted that it amounted to “(yet another) example of HMRC seeking to narrow by guidance legislation that they consider to operate too broadly. The solution is not to narrow the operation of the legislation by guidance, but by promoting amending legislation in Parliament”.

Equally, the FTT noted that it was possible that the guidance might give rise to issues of legitimate expectation if Hannover entered into the transactions in reliance on HMRC's guidance. However, that was an issue to be resolved by judicial review, and was not something that can be resolved by the FTT.

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