Having lost before both the First-tier Tribunal (FTT) and the Upper Tribunal (UT)3, HMRC have finally managed to secure victory before the Court of Appeal in HMRC v DV3 RS Limited Partnership4, a case involving stamp duty reserve tax (SDLT) planning. The arrangements involved a combination of the SDLT sub-sale rules and the partnership rules to mitigate SDLT that might otherwise have been due.
In October 2006, DV3 Regent Street Ltd (DV3 Regent) entered into a contract with Legal & General Assurance Plc (L&G) to buy the head leasehold interest in the Dickins & Jones building on Regent Street for £65.1 million.
Just over a month later, DV3 RS Limited Partnership (DV3 Partnership) was established. DV3 Regent was entitled to 98 per cent of the partnership income. All the partners were connected for the purposes of SDLT, although one of the partners was not a body corporate.
On the following day, DV3 Regent entered into a sub-sale contract with DV3 Partnership under which it agreed to sell to the partnership the same head leasehold interest for the same price, with completion on the same day as the L&G contract.
As intended, completion of both contracts took place on the same day. L&G executed a transfer in favour of DV3 Regent, and DV3 Regent executed a separate transfer to DV3 Partnership.
The arrangements were designed to take advantage of sections 44 and 45, Finance Act 2003, and to ensure that the sub-sale by DV3 Regent to the Partnership fell within paragraph 10, Schedule 15, Finance Act 2003. Without the sub-sale, SDLT of £2.6 million would have been payable5.
The Court of Appeal’s decision
In allowing HMRC’s appeal, the Court held that DV3 Regent had never acquired a chargeable interest. Completion of the L&G contract took place at the same time as, and in connection with, the completion of the contract between DV3 Regent and DV3 Partnership. In such circumstances, section 45 requires the original completion to be disregarded. As a result, whilst DV3 Regent, as a matter of law, transferred the property to DV3 Partnership, it could not transfer a chargeable interest for SDLT purposes.
Paragraph 10, Schedule 15, Finance Act 2003, only applies if a partner transfers a chargeable interest to a partnership. Since, for the purposes of SDLT, DV3 Regent did not acquire a chargeable interest, it followed that DV3 Partnership could not rely on the paragraph 10 exemption. As a result, the Court held that DV3 Partnership was liable to pay SDLT on the consideration it gave to DV3 Regent for the property ie on the £65.1 million.
Having been successful on two previous occasions, DV3 Partnership will no doubt be disappointed that HMRC’s arguments have been preferred by the Court of Appeal. Given HMRC’s deep pockets and the political support they have to ensure that everyone pays their "fair" share of tax, it should come as no surprise that they appear to be prepared to continue to appeal decisions until they eventually get the result they desire, or the appeal process is exhausted.
It has been reported in the press that the taxpayer intends to seek permission to appeal the Court’s decision6. Given the complexity of the law in this area and the fact that both the FTT and the UT had rejected HMRC’s arguments, it is to be hoped that the Supreme Court grants permission to appeal.