HMRC have won a key SDLT tax avoidance case. In Vardy Properties  UKFTT 564 (TC) – published on 17 September – the taxpayer tried to avoid SDLT on the purchase of a property by relying on sub-sale relief. Broadly speaking, the transactions took place as follows:
VPG lent money to its subsidiary VPT.
VPT subscribed for £7.4 million of shares in an unlimited company, VP.
VP purchased a property from a third party.
VP transferred the property to VPT by way of a dividend in specie.
VP paid the funds due to the third party vendor in relation to the sale (following a capital reduction so that the company had sufficient distributable reserves to pay the dividend in specie).
It was claimed that there was not a liability to SDLT because of the rules on sub-sale relief contained in s 45 FA 2003. Section 45 FA 2003 applies where the original purchaser does not take possession of the property and pays nothing more than a deposit until after the sub-sale takes place. Section 45 states that both the original sale (i.e. in this case, the sale to VP) and the sub-sale (i.e. in this case, the dividend to VPT) are chargeable to tax unless the original sale is not substantially performed (except as part of the sub-sale).
The taxpayer argued that:
The sale of the property from the third party vendor was not chargeable to SDLT because there was a sub-sale.
The dividend in specie of the property from VP to VPT was not chargeable to SDLT because there was no consideration.
The First-tier Tribunal disagreed. It held that the dividend had not been properly paid in accordance with company law and therefore s 45 could not be engaged. The Tribunal then went to consider what the position would have been had the dividend been paid correctly. They viewed the facts in the round and found that it was envisaged from the outset that VPT would provide funds to VP to acquire the property. It was therefore held that the consideration given by VP to purchase the property should be chargeable to SDLT.
This is the latest of a number of recent tax avoidance cases that has been won by HMRC and practitioners should tread carefully when advising their clients about tax avoidance schemes because the tribunals and courts seems to be increasingly hostile to them.
The tribunal stated that although the SDLT at stake in this case was £290,000, ‘…the SDLT at stake in all the transactions in which this scheme (or some variant of it) was used is of the order of £100 million.” An appeal might therefore be expected.