The first stamp duty land tax (SDLT) avoidance case has been decided: DV3 RS Limited Partnership v Commissioners for HM Revenue & Customs (SDLT)  UKFTT 138 (TC).
The case, a First-tier Tribunal decision, gives an interesting walk through the legislation for tax practitioners, but offers few practical opportunities for the property sector. While the SDLT-planning in question was 'blessed', the door may now be shut for people wishing to use a similar structure (see below). It is a ready indicator of how little SDLT litigation there has been that the decision begins with an introduction to the tax.
In the case, a partnership acquired an interest in land via one of its partners; a company. The company had entered into a contract with a third-party seller to acquire land. The partnership was then set up. The partnership entered into a contract with the company to acquire the land. The company then completed its contract with the seller, took a transfer of the property ('Transfer 1'), and immediately transferred it on to the partnership ('Transfer 2').
The taxpayer contended that Transfer 1 was taken out of the charge to SDLT by section 45(3) of the Finance Act 2003. This provision disregards an acquisition of land when it is simultaneously sold on to another party, and its effect is commonly referred to as 'subsale relief'.
Transfer 2 was not disregarded, but the taxpayer argued that the 'chargeable consideration' for the transfer was nil, because the transfer was from a partner (the company) to a partnership and should therefore be dealt with by the SDLT partnership rules. Where these rules apply, a proportion of the market value of the land is in charge and actual consideration given for land is ignored. In this instance, the rules applied to make that proportion nil.
The taxpayer argued that neither transfer gave rise to an SDLT liability: Transfer 1 was disregarded for SDLT purposes, and for Transfer 2, the SDLT partnership rules treated the chargeable consideration as being nil. It is worth pointing out that the transfers were effected before HM Revenue & Customs (HMRC) had introduced its new anti-avoidance provision - section 75A Finance Act 2003. This new provision, in HMRC's view, would prevent planning such as this working by taxing a deemed transfer from the original seller direct to the partnership, on the basis of the largest amount of consideration given in the purchase chain. However, this view has not been tested in litigation.
While it could not rely on section 75A (it came into force after completion), HMRC tried to achieve the same result by interpreting subsale relief in a way which produced a similar analysis.
HMRC argued that because subsale relief achieves its aim by disregarding Transfer 1, the company was not the party transferring the property to the partnership: the original seller was. This meant that Transfer 2 did not fall within the SDLT partnership rules, because the seller was not connected with the partnership. This meant that Transfer 2 was subject to SDLT under the ordinary rules, i.e. on the basis of the consideration given.
The Tribunal found that, even though Transfer 1 was disregarded for the purposes of subsale relief, this did not mean that it was disregarded for all other intents and purposes. The taxpayer's assessment (at nil) was therefore correct.
This decision gives a bloodied nose to HMRC in its first SDLT avoidance case, but this is unlikely to be the end of the matter: HMRC may appeal this case, and are known to be looking into other SDLT schemes utilising subsale relief. In certain instances, they may even be able to test the efficacy of section 75A - which will be an interesting exercise in and of itself.