CA – SDLT avoidance scheme defeated

March 2024 | Tax - SDLT

Property practitioners will (hopefully) not be advising as to the efficacy or otherwise of SDLT avoidance schemes, but they still need to be alert to the possibility that a client might use one. HMRC has made no secret of the fact that such schemes will be robustly challenged and we now have a CA case on a scheme. The CA summarised the position thus:

‘Introduction

Mr and Mrs Brown acquired the freehold of a house in Surrey as the last step in a series of pre-planned steps in a scheme which, it is said, allowed them to acquire the house without having to pay stamp duty land tax (“SDLT”). The scheme was marketed specifically for the purpose of avoiding SDLT. The question for us is whether the scheme achieved its objective. Both the FTT (Judge Hellier) and the Upper Tribunal (Trower J and Judge Herrington) said no, but for different reasons. The decision of the UT is at [2022] UKUT 00298 (UT), [2023] 4 WLR 11.

The scheme

Under this scheme the ultimate purchaser (“C”) acquires a property from an unconnected vendor (“A”) via an unlimited company (“B”). In summary the scheme works as follows:

  1. C forms an unlimited company, B, and contributes cash to the unlimited company of a sufficient amount to purchase the target property. The contribution of funds is effected by subscribing for shares in B;

  2. A contracts to sell the property to B;

  3. B pays the agreed purchase price for the property to A. At the same time as the completion of the contract between A and B, B reduces its capital and makes a distribution in specie of the property to C. A executes a transfer to B, and B simultaneously executes a transfer to C.

The legal underpinnings of the scheme relied on the sub-sale relief then contained in section 45 of the Finance Act 2003. Thus, the theory was that by virtue of section 45 the contract between A and B is disregarded, and because there is no consideration for the distribution in specie from B to C, no SDLT is payable.

Premier Strategies Ltd put the scheme to Mr and Mrs Brown in a letter of 7 June 2007. The first step was to establish an unlimited company. The remaining steps were then described. Mr and Mrs Brown were to use “the deposit monies” to subscribe for shares. The company would then contract to buy the property. Following exchange of contracts, the company “will resolve to reduce its share capital by way of a distribution in specie” conditional on and simultaneous with completion. Before completion Mr and Mrs Brown would subscribe for further shares using a promissory note. They would then hold shares “equal in value to the price to be paid for the property”. On the day of completion, the solicitor would pay the mortgage monies to the vendor. At that point the distribution would take place “and the property will be transferred from the company to you”.

The intended tax consequences were set out in the proposal. On the question of SDLT it said:

“SDLT – provided that the transfer of the property from the unlimited company to yourself occurs simultaneously with the completion of the contract between the vendor and the unlimited company the consideration paid by the unlimited company should not be chargeable to SDLT. We have Counsel’s Opinion to say that in his view this should be the case provided that the first contract in which the vendor is involved is not connected to the second contract, of which the vendor is unaware. The transfer of the property to you by way of a distribution in specie will be a chargeable transfer, but because there will be no consideration paid in respect of this transfer no actual SDLT should be payable.”‘

Probably the most relevant words in the scheme proposal is that ‘no actual SDLT should be payable’.

As it happens, £38,200 SDLT was payable because the CA found in favour of HMRC. The case tells us little that is new but is a salutary reminder for property professionals that if a client informs them that they intend to use an SDLT avoidance scheme, the firm should consider whether it wants to act at all. After all, it is the firm that will submit the SDLT return on behalf of the client. See Brown v HMRC [2024] EWCA Civ 92 reported at www.bailii.org.


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