In Hannover v HMRC  UKFTT 0262 (TC), the First-tier Tribunal (FTT) has held that the stamp duty land tax (SDLT) anti-avoidance rule in section 75A, Finance Act 2003, applied to a series of transactions that included the sale of units in a Guernsey property unit trust (GPUT), even though there was no tax avoidance motive and each transaction was 'appropriately' taxed.
A fairly typical investment ownership structure had been put in place in 2006 to acquire the UK property in question (the Property).
The GPUT 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 under UK tax law as at the relevant time; and (4) no UK stamp duty or SDLT would arise on sale of the GPUT units.
In early 2011, Hanover, a German fund, 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);
- its 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; and
- it appreciated that pursuing an SDLT-efficient structure would enable it to offer a more competitive purchase price.
On 31 July 2015, HMRC issued determinations under section 75A, which were appealed to the FTT.
The appeals were dismissed
Following conclusion of the appeal hearing before the FTT, the Supreme Court released its decision in Project Blue Ltd v HMRC  UKSC 30. Although the details of the Project Blue case were somewhat different, the Supreme Court in its judgment confirmed that section 75A does not require a taxpayer to have a tax avoidance motive (despite being an anti-avoidance provision). Rather, section 75A 'self-defines' SDLT avoidance. If the transactions implemented 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 section 75A is engaged.
Following the Project Blue decision and having received written submissions on that decision from the parties, the FTT held that section 75A applied in the circumstances of the instant case 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 SDLT already paid).
The FTT acknowledged that had the first step been the transfer of the GPUT units to Hannover, section 75A may well not have been engaged. It is surprising that this anti-avoidance provision can be switched on or off simply 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 section 75A purposes may not always be clear, particularly where acquisition-related loans are being put in place.
If the steps in the sale had been carried out in a different order, it would seem that section 75A would not have been triggered and a significant additional SDLT charge would not have arisen. The decision serves as a timely reminder that careful consideration should be given to 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.
The decision has 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. The decision is likely to create further uncertainty in relation to the amount of SDLT that is payable when complex 'corporate wrapper' structures are used to acquire UK property.
A copy of the decision can be viewed here.