UK and International Tax news

Court of Appeal Rejects Appeal In Sub Sale Tax Avoidance Case

Thursday 23rd March 2023

The Court of Appeal has recently rejected the taxpayer’s appeal in a case concerning an SDLT avoidance scheme carried out in 2011 involving the sub sale relief and option provisions in s.45 and s.46 FA2003.

In Fanning v HMRC [2023] EWCA Civ 263, the CA heard an appeal from the UT in respect of a discovery assessment issued by HMRC for £250,000 representing a 5% SDLT charge on the purchase price of £5,000,000 paid by the taxpayer. The taxpayer had filed a SDLT return on the basis he had no liability.

The Scheme comprised the following:

The Vendor and a third-party purchaser [the taxpayer] entered into a contract for the sale of a chargeable interest in land to be completed by a conveyance.  At the same time as the completion of the purchase contract, the taxpayer granted another person a call option over the chargeable interest for nominal consideration. The option exercise price was not less than the market value of the chargeable interest at the date of the exercise.  The taxpayer subsequently occupied the property having paid the full purchase price demanded under the contract.  The option was not exercised by the option holder.

In summary, the scheme operated with the original contract being completed simultaneously with the substantial performance of the secondary contract, by virtue of the payment of the £100 option premium. The original contract would be disregarded for SDLT purposes and, unless and until the option is exercised, SDLT would be chargeable on the (deemed) consideration for the secondary contract, being the £100. The result would be a nil SDLT charge on the £5,000,000 residential property purchase.

Such schemes have since been blocked by an amendment made by FA 2013 with effect from 21 March 2012. HMRC stated then that the amendment was to “put beyond doubt” that these schemes did not work

The FTT found the SDLT scheme relied on the interaction between the sub-sale provisions (then in s.45 FA03) and the option provisions in s.46 FA03 but failed because the grant of the option (the secondary contract) was not substantially performed at the same time as the original contract. The FTT held that the consideration paid by the taxpayer was fully chargeable to SDLT and dismissed the appeal.

On appeal, the UT found that the option did not satisfy the requirements of s.45(1)(b) FA 2003 such that there was ‘no assignment, sub sale or other transaction’.

The CA dismissed the appeal and held that ‘natural interpretation of the statutory language leads to the conclusion that the grant of an option does not, without more, answer the statutory description in s.45(1)(b). It is not an “other transaction” as referred to in that provision’.

The CA judgment suggests that it could not have been Parliament’s intention for s.45 to permit the avoidance of SDLT by way of an option grant without a subsequent exercise in cases where the original purchaser and not the option holder ends up with the property.

If you would like further detail on the above, please contact Keith Rushen on 0207 486 2378.

 

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