An arrangement exploiting the sub sale relief has been successfully challenged by HMRC in the case of Vardy Properties v HMRC TC 2242. However the reasons for their success are comparatively unusual - and instructive.

It is perhaps unnecessary for me to get into all the details (it was a scheme after all) but a crucial (and successful) part of HMRC's argument is that one of the important steps in the arrangement, being a distribution in specie of the relevant property was unlawful as a matter of company law. A dividend had been declared involving a distribution of the property in specie but the terms of Section 270 Companies Act 1985 had not been satisfied thereby rendering the distribution unlawful. The inevitable effect of that conclusion was that the parent held the property on a constructive trust for the unlimited company and never had an entitlement to call for a conveyance of the property at any time - a crucial requirement for the sub sale relief.

In many ways, this looks a bit tough. No one can blame HMRC for insisting that all the transactions were lawful - indeed it is absolutely right for them to do so. It just highlights the need to consider all relevant areas of law when considering the tax analysis - after all, the tax consequences merely follow a proper legal analysis of the transactions.

The reason I say this looks a bit tough is that Section 270 sets out the various matters one needs to consider in determining whether a distribution may lawfully be made, such as profits, losses, assets, liabilities, provisions, share capital and reserves. However, in a case such as this where the company was formed specifically for the purpose, it could perhaps be said that the directors knew perfectly well all about the company, its profits, assets and liabilities without needing to go through a checklist. However the Tribunal considered that Section 270 required the production of an identifiable and contemporaneous single document which recorded the necessary details.

(I should not overlook to mention that there was a second line of argument which would have enabled HMRC to succeed anyway. The Tribunal found that the parent company did not acquire the property for no chargeable consideration but had provided the full consideration for the purchase.)

One cannot help thinking that with only a very slight variation in the facts, these arrangements may well have succeeded - although that may be a tad optimistic in the current climate.

Another sub sale case is presently under appeal to the Upper Tribunal (DV3 RS Limited Partnership v HMRC) and more information on this subject is likely to be forthcoming soon