SDLT AVOIDANCE : Is it still safe to sell an SPV?

This is a question which people are now asking or have been asking, since the court decision in Hannover[1].   It is understood the case is awaiting a date in the courts for the taxpayer’s appeal against the decision of the First-tier Tribunal (FTT). In that case the special purpose vehicle (SPV) was a Guernsey Property Unit Trust (GPUT).

The taxpayer lost due to HMRC and the FTT applying Finance Act 2003, sections 75A to 75C (commonly known as “s75A”).  S75A requires one to consider a notional transaction in respect of the chargeable interest concerned between the Vendor (who could be any prior owner of the interest) and the Purchaser, and asks what the SDLT would be had there been a direct sale from V to P for the amount of money, which directly or indirectly changed hands.  That is a huge over-simplification as s75A has a lot of very specific and detailed rules in it.

The Supreme Court in Project Blue[2], approached this as if it were a tax avoidance matter, relying on dicta from various lines of tax avoidance cases; after all, s75A is headed “Anti-avoidance”.  However, that is the only time the word in mentioned in s75A.  Ignoring the heading, the words of s75A are a series of mechanical instructions, which when applied asks the question, is the amount of SDLT calculated under s75A higher then the SDLT actually paid?   If it is, then s75A can apply.   Unlike many anti-avoidance tests, there is no motive test, laudable or otherwise.   It is simply mechanical, in the same way the calculation of the sum of the lower proportions in part 3 schedule 15 FA 2003 (partnerships), is mechanical.

Even though HMRC have published a reasonably detailed manual on this, there is always the risk of challenge in a particular case.

In the Hannover case, what was, in essence a sale of an SPV, was recharacterized as a sale of a property for some £138.85m.

1. In short, the property in question, (30 Crown Place, known as 30 CP) was held by a Greycoat English Limited Partnership (ELP), the limited partner of which owning as to 99%, was a Guernsey property unit trust (GPUT). The general partner, (GP), had a 1% interest in the limited partnership.

2. The unitholders in the GPUT were Greycoat Central London Office Development LP (GCLOD), as to 99.3% and another group company as to 0.3%.

3. ELP sold 30CP to the trustee of the GPUT for £138,850,000. (SDLT was paid on the 1% acquired from the GP of the ELP).

4. The units in the GPUT were then sold to a Hannover company pending BaFin approval.

5. Once BaFin approval was obtained, the GPUT was dissolved and 30 CP was dropped into the Hannover LP.

However, by applying s75A, HMRC and FTT applied SDLT to the notional transaction which looked like this

To answer the question, “Is it safe to sell an SPV to avoid stamp duty land tax?”, I propose to play a game of what if and ask…

What if Greycoat had sold the GPUT to Hannover first?

The sale of the units in the GPUT would not attract SDLT but it would leave Hannover owning an unsuitable vehicle. The GPUT would therefore have to be dissolved and its interest, being an interest in an English limited partnership owning 30 CP, would then become owned by either Hannover or perhaps an existing German partnership (KG[3]).

The KG would probably count as a body corporate for the purposes of section 53 Finance Act 2003, such that there would be a deemed market value transfer of that partnership interest in the English LP from the trustee of the GPUT to the German partnership. However, as the KG would own all the units in the GPUT, group relief[4] would be available for that transaction and therefore there would be no SDLT. This would then leave the KG to buy in the minority stake held by the remaining Greycoat Company and pay the SDLT which indeed Hannover did pay in this transaction.

So, in short Hannover buys a GPUT and then dissolves the GPUT to get access to a 99% stake in ELP owning a property. The GPUT is dissolved, and Hannover buys the minority interest in the ELP (and paying SDLT on that purchase) which then ceases to exist.

Even if done the other way round, i.e. buy in the 1% partnership interest and then dissolve the GPUT, the SDLT result would be the same.

That looks fairly normal.

But how does Section 75A apply to this revised arrangement?

Well, the first step is the sale of shares[5] for SDLT purposes, and this is expressly disregarded by s75C(1) Finance Act 2003.  This means that at best, or worst if you were HMRC, the vendor for the purposes of Section 75A must be the ELP which would mean that the purchaser would be the KG.

Start for s75A

Section 75C(2) allows one to use reliefs in their normal way and again group relief would be available, even with various caveats about bona fide commercial reasons etc.   Since March 2010, the rules in Part 3 schedule 15 FA 2003, the special partnership regime for property investment partnerships (aka PIPS[6]), are not available for the notional transaction from the 75A Vendor to the 75A Purchaser.

Further selling the GPUT first would not, in my view, have been disclosable under the disclosure of tax avoidance scheme (DOTAS) regulations[7], as there is only one instance of step B[8] and only one instance of step A[9] (the group relief claim).  As such the arrangement should not be disclosable.

It appears that in applying Section 75A and DOTAS, that this would appear to be a rather innocent exercise in SDLT mitigation.

It is basically the sale of a company and the purchaser hiving up the property after the sale. HMRC could apply Section 75A to deem the ELP as the vendor and the KG as the purchaser, but the end result would be they would still get £55,000 pounds that Hannover has already paid.

There are no doubt many commercial and regulatory reasons why the option above could not be used, which is a shame, but there we go.

So, is there a problem. And if so, what is it?

The conceptual difficulty here is that there is a conflict between and within the SDLT provisions themselves. The GPUT is clearly an entity separate with its own identity, yet it is treated as a body corporate for the purposes of SDLT[10], although it is not as a matter of law.

However, whilst the ELP is ignored for SDLT purposes, where the ELP is a PIP, a sale to one of its partners is treated as a sale of the whole property interest at market value, an outcome which you would expect with a sale by a company to its member, but not a partnership[11].

We therefore have two entities, neither of which are bodies corporate, but one is treated as if it were, and the other is not so treated, but sales by it to its members are[12].

The taxpayer argued in the case, that in economic terms all GPUT was doing was buying in the small fraction of the partnership it did not already own.

Looking at s75A we basically have the property owned by a limited partnership[13] and the property eventually being acquired by a KG.  A sale from an English partnership to a German partnership would attract SDLT at full value.

And therein lies the key point about Section 75A.

If HMRC see that the ownership of a property has moved from one party to another third party at arm’s length and SDLT on the full value of that property has not been paid, then Section 75A can be applied.

If the ELP had sold to the KG then there would have been SDLT. But due to the series of transactions here, the taxpayer argues that there was not.

Does this mean one can never ever use or buy an SPV?  I think my example above shows that that is not the case.

Further I think that the series of transactions used in the purchase of 30CP is disclosable the DOTAS regulations (I have no idea if it was or, or whether it was grandfathered as having been one disclosed prior to the update of the DOTAS regulations in 2010). Prima facie, there appears to be a sale to an SPV (the GPUT), which is one use of Step A in the DOTAS regulations, followed by a sale of the SPV, which is one use of Step C.

Whilst being disclosable is not conclusive in itself, it does indicate what HMRC are content with from an SDLT planning perspective (and as I often say, HMRC’s emotional well-being is irrelevant; it is the law that is relevant).

The plan, as implemented by the parties, and as perceived by HMRC looks like this:

This is basically the s75A transaction.

Whereas had the GPUT been moved first, then for s75A it would look like this

An intra-group transaction as to 99%, and one liable to SDLT as to 1%.

Where does it go “wrong” or right depending upon your point of view?

It goes “wrong/right” due to two pieces of legislation.  The first being s75C(1) and disregarding a sale of shares / units if that is the first step.

The other being that part 3 schedule 15 is not a relief, and therefore is not a trigger for DOTAS, together with the fact that those provisions cannot apply to the s75A transaction itself (not that it would have helped here[14]).

When s75A was first revealed in 2006, some commentators said it was incapable of interpretation and utterly meaningless; indeed, why bother with the rest of the SDLT legislation?  Why not just have s75A and be done with it?

I think now that s75A has met the real world, it has shown itself to be a very clever, fair and well balanced piece of legislation.   Not one to be interpreted, with all due respect to the Supreme Court in Project Blue, as a quasi Furniss v Dawson / bad motive provision which does not have a motive test, but simply, according to its words.

In short, I think s75A works.

Conclusion

So, is it safe to buy an SPV to avoid SDLT?

The answer must be yes if that property has been held for a long period of time by that SPV, for example, at least three years, which is the time limit associated most of the SDLT reliefs and exemptions, and the SPV is then sold.   Even if the SPV is subsequently liquidated or the property hived up to a parent company, then that would appear to be inoffensive, not disclosable and in my view should not fall within the scope of Section 75A.

Unfortunately for Hannover that was not the case here. Whilst one could argue that effectively what happened was the wider Greycoat Group sold a GPUT to Hannover, the net effect was that £138.85m changed hands and a valuable City property was sold between third parties and only £55,000 or so of SDLT was paid, and unsurprisingly, HMRC would like their share.

January 2022

THE RELEVANT STATUTORY PROVISIONS

75A(1)  This section applies where–

(a)one person (V) disposes of a chargeable interest and another person (P) acquires either it or a chargeable interest deriving from it,

(b)a number of transactions (including the disposal and acquisition) are involved in connection with the disposal and acquisition (“the scheme transactions”), and

(c)the sum of the amounts of stamp duty land tax payable in respect of the scheme transactions is less than the amount that would be payable on a notional land transaction effecting the acquisition of V’s chargeable interest by P on its disposal by V.

75A(2)  In subsection (1) “transaction” includes, in particular–

(a)a non-land transaction,

(b)an agreement, offer or undertaking not to take specified action,

(c)any kind of arrangement whether or not it could otherwise be described as a transaction, and

(d)a transaction which takes place after the acquisition by P of the chargeable interest.

75A(3)  The scheme transactions may include, for example–

(a)the acquisition by P of a lease deriving from a freehold owned or formerly owned by V;

(b)a sub-sale to a third person;

(c)the grant of a lease to a third person subject to a right to terminate;

(d)the exercise of a right to terminate a lease or to take some other action;

(e)an agreement not to exercise a right to terminate a lease or to take some other action;

(f)the variation of a right to terminate a lease or to take some other action.

75A(4)  Where this section applies–

(a)any of the scheme transactions which is a land transaction shall be disregarded for the purposes of this Part, but

(b)there shall be a notional land transaction for the purposes of this Part effecting the acquisition of V’s chargeable interest by P on its disposal by V.

75A(5)  The chargeable consideration on the notional transaction mentioned in subsections (1)(c) and (4)(b) is the largest amount (or aggregate amount)–

(a)given by or on behalf of any one person by way of consideration for the scheme transactions, or

(b)received by or on behalf of V (or a person connected with V within the meaning of section 1122 of the Corporation Tax Act 2010) by way of consideration for the scheme transactions.

75A(6)  The effective date of the notional transaction is–

(a)the last date of completion for the scheme transactions, or

(b)if earlier, the last date on which a contract in respect of the scheme transactions is substantially performed.

75A(7)  This section does not apply where subsection (1)(c) is satisfied only by reason of–

(a)sections 71A to 73, or

(b)a provision of Schedule 9.

75B(1)  In calculating the chargeable consideration on the notional transaction for the purposes of section 75A(5), consideration for a transaction shall be ignored if or in so far as the transaction is merely incidental to the transfer of the chargeable interest from V to P.

75B(2)  A transaction is not incidental to the transfer of the chargeable interest from V to P–

(a)if or in so far as it forms part of a process, or series of transactions, by which the transfer is effected,

(b)if the transfer of the chargeable interest is conditional on the completion of the transaction, or

(c)if it is of a kind specified in section 75A(3).

75B(3)  A transaction may, in particular, be incidental if or in so far as it is undertaken only for a purpose relating to–

(a)the construction of a building on property to which the chargeable interest relates,

(b)the sale or supply of anything other than land, or

(c)a loan to P secured by a mortgage, or any other provision of finance to enable P, or another person, to pay for part of a process, or series of transactions, by which the chargeable interest transfers from V to P.

75B(4)  In subsection (3)–

(a)paragraph (a) is subject to subsection (2)(a)–(c),

(b)paragraph (b) is subject to subsection (2)(a) and (c), and

(c)paragraph (c) is subject to subsection (2)(a)–(c).

75B(5)  The exclusion required by subsection (1) shall be effected by way of just and reasonable apportionment if necessary.

75B(6)  In this section a reference to the transfer of a chargeable interest from V to P includes a reference to a disposal by V of an interest acquired by P.

75C(1)  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.

75C(2)  The notional transaction under section 75A attracts any relief under this Part which it would attract if it were an actual transaction (subject to the terms and restrictions of the relief).

75C(3)  The notional transaction under section 75A is a land transaction entered into for the purposes of or in connection with the transfer of an undertaking or part for the purposes of paragraphs 7 and 8 of Schedule 7, if any of the scheme transactions is entered into for the purposes of or in connection with the transfer of the undertaking or part.

75C(4)  In the application of section 75A(5) no account shall be taken of any amount paid by way of consideration in respect of a transaction to which any of sections 60, 61, 63, 64, 65, 66, 67, 69, 71 and 74, or a provision of Schedule 6A, 7A or 8, applies.

75C(5)  In the application of section 75A(5) an amount given or received partly in respect of the chargeable interest acquired by P and partly in respect of another chargeable interest shall be subjected to just and reasonable apportionment.

75C(6)  Section 53 applies to the notional transaction under section 75A.

75C(7)  Paragraph 5 of Schedule 4 applies to the notional transaction under section 75A.

75C(8)  For the purposes of section 75A–

(a)an interest in a property-investment partnership (within the meaning of paragraph 14 of Schedule 15) is a chargeable interest in so far as it concerns land owned by the partnership.

(b)[Omitted by FA 2010, s. 55(1).]

75C(8A)  Nothing in Part 3 of Schedule 15 applies to the notional transaction under section 75A.

75C(9)  For the purposes of section 75A a reference to an amount of consideration includes a reference to the value of consideration given as money’s worth.

75C(10)  Stamp duty land tax paid in respect of a land transaction which is to be disregarded by virtue of section 75A(4)(a) is taken to have been paid in respect of the notional transaction by virtue of section 75A(4)(b).

75C(11)  The Treasury may by order provide for section 75A not to apply in specified circumstances.

75C(12)  An order under subsection (11)) may include incidental, consequential or transitional provision and may make provision with retrospective effect.

References

[1] (TC07102: HANNOVER LEASING WACHSTUMSWERTE EUROPABETEILIGUNGSGESELLSCHAFT MBH; HANNOVER LEASING WACHSTUMSWERTE EUROPA VI GMBH & CO. KG) 2019.

[2] Project Blue Ltd v R & C Commrs [2018] BTC 23, SC.

[3] Kommandit gesellschaft.

[4] Pursuant to para 2 schedule 7 FA 2003, the units are treated as shares in a company, s101 ibid.

[5] Units in a unit trust are treated as if they were shares in a company for SDLT purposes (FA 2003, s101).

[6] Para 14(8) schedule 15 FA 2003

[7] Stamp Duty Land Tax Avoidance Schemes (Prescribed descriptions of arrangements) Regulations 2005, SI 2005/1868.

[8] Step B is the claiming of a relief, usually a group relief

[9] Step A is putting a property into an SPV

[10] Finance Act 2003, s101.

[11] Although the same happens in CGT whenever there is a disposal of an interest in partnership property to a connected party (see SP /D75)

[12] Part 3 of schedule 15 FA 2003 deems the sale of a property to its partner as a sale at market value but gives a reduction to the extent that the sum of lower proportions exists.  But by selling the units in the GPUT first, we have a change of ownership which is disregarded for the purposes of s75A.

[13] Although for the purposes of paragraphs 1 and 2 Schedule 15 Finance Act 2003 and as a matter of English law, it is  owned by the partners, and not the partnership, as the partnership is not a legal person.

[14] An amendment for which I am sure I was responsible for by disclosing, on behalf of clients, how certain schemes worked using part 3 schedule 15, i.e. design a scheme where the s75A transaction was one to which part 3 schedule 15 applied.