To keep you up to date on the murky world of SDLT avoidance schemes, HMRC has recently won its first victory in the courts against a scheme exploiting sub-sale relief. This is significant, not just because of the amounts of tax avoided using this particular scheme (apparently about £100m) but because variants of the sub-sale relief schemes are widespread in residential property purchases, and also because HMRC lost a case last year on a sub-sale scheme.
Broadly sub-sale relief allows that where a property is sold by A to B and B immediately sells it on to C (or assigns to C its right to acquire the property), no SDLT is payable on the A-B transaction. Instead, there is “notional A-C transfer” on which SDLT is payable by C. The sub-sale avoidance schemes all involve devising a B-C transaction on which no SDLT is chargeable. Until recently the most common scheme involved B granting an option to C to acquire the property at some later date, with no real likelihood of the option ever being exercised. This use of an option in a sub-sale was closed down in the March 2012 Budget.
In the recent case which has just come before the First Tier Tribunal, Vardy Properties, the B-C transaction was a distribution in specie of the property by B to its 100% shareholder, C. No SDLT is payable on distributions in specie. However the Tribunal ruled that this particular scheme failed on the facts because there was no valid distribution by B to C.
But much more significant is what the Tribunal went on to say if it turned out that they were wrong that there was no valid distribution. This is where we need to get technical briefly.
The legislation charges SDLT on the notional A-C contract on “so much of the consideration under the [A-B contract] as is referable to the subject matter of the [sub-sale] and is to be given (directly or indirectly) by [C] or a person connected with him.” Our view has always been that this means that if C or a connected party ultimately provides the cash for the A-B purchase, that cash is chargeable to SDLT. This means that most of the sub-sale relief schemes that have crossed our desks do not work because they involve the endpurchaser, C, owning B, and therefore being connected to it, and providing the cash to B.
There are a number of opinions by leading tax barristers, widely relied on by the people marketing the schemes, that the words quoted above should be interpreted as meaning that you just look at the consideration provided by C under the B-C contract.
In our view there is no justification for this limited interpretation and the Tribunal rejected it too: in a pre-ordained transaction, where C, at any early stage, provides the cash to B with which to pay A, that cash is chargeable consideration for the notional A-C contract. SDLT is payable on that amount. In our view, this is obviously right and it undermines sub-sale schemes where B is ultimately funded by C (as will almost always be the case).