Stamp Duty Land Tax on corporate acquisitions – a worrying trend?
Two recent first tier tax tribunal decisions  indicate that where land is acquired indirectly through a corporate vehicle, HMRC may be keener than previously thought to use the wide “anti-avoidance” powers granted to them by section 75A Finance Act 2003. Housebuilders acquiring land via SPVs would be well advised to proceed with caution.
Although the details of the cases in question are rather complex, the basic facts insofar as relevant to SDLT can be briefly summarised.
Greycoat London Office Development Limited Partnership (GCLOD) was an English limited partnership that owned almost all of the units of a Guernsey property unit trust (the GPUT). In turn, the GPUT held a 99% interest in another English limited partnership (the Greycoat Partnership) which owned a large London office building, 30 Crown Place (the Property).
A German group (Hannover) expressed an interest in buying the Property. Unsurprisingly, they were willing to pay a higher price (£138.85m) for the units of the GPUT than they would have paid for a direct acquisition of the Property. This is because there was no SDLT liability attached to acquisition of the GPUT units (Hannover were quite open with the tribunal in relation to their motivation for making an indirect acquisition of the Property).
However, for reasons wholly unconnected with tax, they did not wish to acquire ownership of the Greycoat Partnership. In addition, although for regulatory reasons, Hannover would make its initial acquisition via a corporate entity (the Hannover Company). This allows other interests in the Property to be marketed via a fund aimed at retail investors, after acquisition the Hannover Company would transfer the Property to a Hannover group partnership (the Hannover Partnership).
Setting aside the finer details, the transaction proceeded as follows:
- Greycoat Partnership distributed the Property to GPUT.
- GPUT disposed of the Greycoat Partnership to GCLOD.
- The Hannover Company acquired GPUT for £138.85m.
- The GPUT was terminated and the Property distributed to the Hannover Company.
- The Hannover Company contributed the Property to the Hannover Partnership.
HMRC made SDLT determinations under section 75A against both the Hannover Company and the Hannover Partnership, with the determination against the Hannover Partnership being upheld by the tribunal in the sum of £5,498,460.
As noted above, the tribunal determined that the Hannover Partnership was liable to SDLT under section 75A, which is often referred to as the SDLT anti-avoidance rule. However, while the heading of section 75A reads "Anti-avoidance", the legislation is mechanistic and does not require any avoidance motive.
To fall within the scope of the section 75A charge, three basic tests must be satisfied:
- A person (V) disposes of a chargeable interest to another person (P);
- A number of transactions including the acquisition and disposal (the scheme transactions) are involved in connection with the disposal and acquisition; and
- The aggregate SDLT paid on the scheme transactions is less than would have been paid on a notional land transaction directly transferring the property in question from V to P.
The leading case on section 75A (which went all the way to the Supreme Court) is that of Project Blue Limited. While the judgement in Project Blue Limited made it clear that the only "tax avoidance" necessary for application of section 75A was the reduction in liability noted at 3 above, the facts of Project Blue Limited involved a highly structured “scheme” which combined sub-sale relief with alternative property finance relief in a way unforeseen by the legislature.
In contrast, HMRC guidance indicated that the decision to acquire a property via a corporate entity, rather than making a direct acquisition of the underlying real estate, was acceptable tax planning. The tribunal, however, rejected HMRC's guidance, as “inconsistent with the legislation and… incorrect”.
It is interesting to note that section 75A is qualified by section 75C(1), which states that, “A transfer of shares or securities shall be ignored for the purposes of section 75A if but for this subsection it would be the first of a series of scheme transactions”.
However, due to commercial reasons having nothing to do with tax, Hannover preferred not to acquire GPUT while it still held the Greycoat Partnership and so the trail of “scheme transactions” started before the unit trust acquisition. This resulted in section 75C(1) having no effect.
It is clear that there can be a large sum at stake and like all businesses, house builders need certainty. Following Project Blue, some taxpayers may have been tempted to think that they would not be targeted by HMRC using section 75A, so long as they were not “at it”. The worrying point about Hannover is not so much the decision itself (which as a first tier tribunal decision is not binding), as the fact it is now apparent that HMRC have a much wider definition of “at it” than previously thought.
Points to consider as a housebuilder
- Don’t assume that you have to be an aggressive tax avoider to be caught by section 75A;
- If holding land in a corporate vehicle that might be sold, prepare for sale early (e.g. remove from the structure related entities that might be unattractive to a buyer and wind-up financing arrangements), so that the disposal of the corporate will be the first “scheme transaction” and the buyer can rely on section 75C;
- If the proposed transaction involves anything other than a completely straightforward share or unit sale, take advice early and consider carefully the order and timing of any restructuring steps; and
- If pricing an acquisition on the basis of no SDLT being due, express in heads of terms the buyer’s need for contractual protection against unforeseen SDLT liabilities.
 TC/2016/00913 and TC/2016/00916 - the Hannover Cases
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