On 18 April 2019, the First-tier Tribunal, caused something of a stir for clients and advisors familiar with the well-trodden (and, usually, tax-efficient) use of offshore unit trusts to hold UK property.
In the Hannover case the Tribunal held that the SDLT anti-avoidance rule (s.75A) applied to a series of transactions that included the SDLT-free sale of units in a Guernsey property unit trust (GPUT). None of these transactions, by themselves, gave rise to a significant SDLT charge. The effect of the Tribunal’s decision, however, is that additional SDLT of £5.49m is payable.
Crucially on the facts of this particular case, a transaction effected as part of the pre-ordained series of sale steps took place before the transfer of the GPUT units. The decision serves as a timely reminder to carefully consider the nature and timing of all transactions that could be considered to take place “in connection” with a sale of UK property, even where there is no SDLT avoidance motive behind those steps. Acquisition steps undertaken for commercial reasons can have unintended SDLT consequences.
A fairly typical investment ownership structure had been put in place in 2006 to acquire the UK property (Property) in question.
The GPUT in this case was the sole limited partner in an English limited partnership (LP). Profits of the LP were allocated as to 99% to the GPUT and 1% to the LP’s general partner. Units in the GPUT were held as to 99.7% by another limited partnership and 0.3% by an offshore company.
The LP acquired the Property in 2006, and the overall UK tax effect of the structure was, in broad summary, that (1) a small amount of UK corporation tax would be payable on net rental income received by the general partner of the LP and the minority unit-holder in the GPUT, (2) net rental income allocated to partners in the partnership holding 99.7% of the GPUT units would be taxed according to their UK residence status, (3) on sale by the LP of the Property the general partner would incur a charge to UK tax on its share of any gain, but no UK tax would be payable by the GPUT, and (4) no UK stamp duty nor SDLT would arise on sale of the GPUT units.
The 2011 sale to Hannover
In early 2011 the German fund Hannover offered to buy the Property. Initially, Hannover was not aware of the existing ownership structure. Ultimately it offered to buy the Property either (1) by way of direct acquisition of the freehold, for £133.6m or (2) by way of acquisition of the GPUT units for £138.8m. The higher price offered for the GPUT units recognised the SDLT saving that the parties believed would be available, but stipulated that post-sale the GPUT structure would be collapsed and the Property distributed to the Hannover purchasing entity.
Hannover’s structuring preferences were driven by a number of factors:
- its preference was to acquire properties directly, so as to be more marketable to German retail investors and in order to more readily obtain approval from BaFin (the German regulatory body)
- their supervisory board took a conservative approach and would be concerned at the prospect of acquiring the GPUT with the LP (and potential historic liabilities) sat below it
- however, Hannover realised that pursuing an SDLT-efficient structure would enable it to table a more competitive purchase price.
The acquisition took place by way of a number of steps, each of which together formed “a single plan, which had to be completed in full…in sequence”. In summary:
- the Property was transferred from the LP to the GPUT. The consideration was £138.8m but the application of the SDLT rules for transfers out of partnerships to partners meant that SDLT of only £55,540 was paid
- a conditional sale of the GPUT units to Hannover was agreed. The conditions included that the GPUT’s interest in the LP be transferred to the sellers of the units. The consideration was again £138.8m but, under the SDLT rules, no tax was due on transfer of the units
- the GPUT was terminated and the Property transferred out to Hannover. No SDLT was paid as the consideration for the transfer was below the SDLT threshold.
Tribunal decision and comment
At the end of the Tribunal hearing the Supreme Court released its decision in the long-running Project Blue case. Although the details of the Project Blue case were somewhat different, the Supreme Court in its judgment in that case confirmed that s.75A does not require a taxpayer to have a tax avoidance motive (despite being an “anti-avoidance” provision). Rather, s.75A “self-defines” SDLT avoidance; if the transactions put in place by the parties mean that less SDLT is payable than would have been paid (on a “notional” land transaction from the original owner to the ultimate purchaser), then s.75A is engaged.
Following the Project Blue decision the Tribunal held that s.75A applied so that there was a “notional” land transaction from the LP to the Hannover purchasing entity. The consideration for this notional transaction was £138.8m resulting in SDLT of £5.55m (with credit given for the £55,540 already paid on the first step noted above).
The Tribunal acknowledged that had the first step been the transfer of the GPUT units to Hannover, s.75A may well not have been engaged. It seems odd that this anti-avoidance provision can be switched on or off solely by virtue of the order in which the parties choose to carry out the acquisition steps. Whether the transfer of units is the “first” step for s.75A purposes may not always be clear, particularly where acquisition-related loans are being put in place.
It seems highly possible that the decision will be appealed but, at least until then, this decision will add to uncertainty around SDLT on complex “corporate wrapper” acquisitions.
The decision can be viewed here.