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FTT Decision in ATED and SDLT Case

Thursday 16th May 2024

The FTT has recently issued its decision in a case involving the acquisition of a residential property by a company from its director and whether it was for the purpose of its property development trade.

In Investment and Securities Trust Ltd v HMRC [2024 UKFTT 230 TC], IST had claimed property development trade relief from ATED and the higher rate of SDLT.  HMRC subsequently issued IST with assessments to additional SDLT [15% instead of 7%] and closure notices in respect of ATED returns as the result of an option agreement to purchase the property.

The property owner and occupier was a director of IST. In 2014, the property was in a state of disrepair and would have required a substantial outlay of funds to refurbish. Given this and the director’s financial situation and health issues, she decided to sell the property.

IST decided it should acquire the property as it represented a good development opportunity with a redevelopment conversion adding significant value to the property. However, IST did not have the funds to purchase the property outright and did not want to finance the purchase with debt as the property would not have generated any income during the lengthy planning phase.

An option agreement was proposed for the purchase which set the exercise price at the open market price of the property, being £9,300,000 and an option premium of £4,650,000. IST considered that unless it paid some money upfront, the director would have sold the property on the open market.

Given the option agreement, it was subsequently accepted by HMRC that incorrect amounts of ATED had been charged in the three closure notices which should have referred to the option premium of £4,650,000 rather than the full exercise price of £9,300,000.

IST maintained that it was clear from the evidence that IST’s property development trade was the exclusive purpose behind the purchase of the property.

Whilst HMRC accepted that IST had carried on a property development trade between March 2014 and January 2020, it did not accept that the property interest was held exclusively for the purpose of the property and development trade. It contended there were additional purposes for the purchase such that the pursuit of the property development trade was not an exclusive purpose. These other purposes were to give IST more time to raise funds for the purchase and development of the property; to assist with the director’s need for funds, to prevent the sale of the property to a third party and to provide the director with somewhere to live while she looked for a new home.

The issues before the FTT were whether (i) the option was acquired exclusively for the purpose of the property development trade, and (ii) was the director as a non qualifying individual permitted to occupy the property.

With regard to (i), the FTT agreed with HMRC and held that IST had three other purposes for acquiring the property via the option agreement which meant that its appeal failed as the property was not acquired “exclusively” for one of the specified purposes.

Given its decision on issue (i), the FTT held that it was not required to make a decision on whether the director was permitted to occupy the property. However, the FTT did decide that the option did not grant IST any possession over the property and did not give it the ability to influence or decide whether or not the director occupied the property. The director occupied the property as of right in her capacity as freeholder which then ceased in January 2020 when IST acquired the freehold and she moved out.

The FTT noted that HMRC had contended “that, by voluntarily entering into an agreement which allowed, or did not prevent, the occupation, the director was permitted to occupy the property”. However, the FTT did not find “any support for such an interpretation of “permitted” in established case law.  Whilst the taxpayer must show that it did not permit a “non-qualifying individual” to occupy the property, the director’s occupation of the property was as of right as the freeholder.  This was beyond IST’s control and so it cannot have permitted the occupation.

The FTT accordingly dismissed IST’s appeal, found that the acquisition of the option to purchase the property was chargeable to SDLT at the higher rate of 15%, and IST was not entitled to relief from ATED.

 

For more information on the above case, please contact Keith Rushen on 0207 486 2378.

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