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FTT Decision In SDLT Case Involving Sub Sale Relief

Wednesday 12th August 2020

The FTT has recently issued its decision in the SDLT case of Fanning v HMRC which concerned sub sale relief and a purchase option.

This is the second major case to consider the application of the anti avoidance provisions within s.75A since the Supreme Court’s 2018 decision in Project Blue.

In the Project Blue case, the SC held that HMRC could postulate a ‘notional arrangement’ where the chargeable consideration payable exceeded the amount that would otherwise be payable and there was no avoidance motive required.

S.75A applies where one person (V) disposes of a chargeable interest in land and another person (P) acquires either it or a chargeable interest deriving from it, a number of transactions are involved in connection with the disposal and acquisition, and the sum of the SDLT payable in respect of the scheme transactions is less that the amount that would be payable on a notional land transaction effecting the acquisition of V’s interest by P.

The latest case concerned an SDLT avoidance scheme with the ‘sub-sale relief’ and option provisions of s.45 and s.46 FA2003. The appeal was against a discovery assessment issued by HMRC to the taxpayer for £250,000, representing a 5% SDLT charge on the purchase price of £5m paid by the taxpayer.

The Vendor (“V”) and a third-party purchaser (“P”) 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 V-P contract of sale, P granted another person (“O”) 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.

P occupied the property having paid the full purchase price demanded under the V-P contract of sale, whilst the option was not exercised by O.

According to the taxpayer, the V-P contract of sale was a “contract for a land transaction (“the original contract”) under which the transaction was to be completed by a conveyance”, within s.45(1)(a) FA2003.  The grant of the option was “an assignment subsale or other transaction, relating to the whole or part of the subject matter of the original contract as a result of which a person other than the original purchaser becomes entitled to call for a conveyance to him” within s.45(1)(b) FA2003.

S.44 FA2003 applied as if there was a “contract for a land transaction (a “secondary contract”)” under which O was the deemed purchaser and the consideration payable for the option agreement was the deemed consideration (section 45(3)).

The taxpayer maintained that the original contract was completed simultaneously with the completion of the secondary contract, being the option grant.

Alternatively, the original contract was completed simultaneously with the substantial performance of the secondary contract, by virtue of paying the £100 consideration due under the option grant). As such, the original contract should be disregarded for SDLT purposes. Unless and until the option was exercised, SDLT is only chargeable on the (deemed) consideration for the secondary contract, which here was £100. The result was a nil SDLT charge on the £5m residential property purchase.

It is noted that the scheme was blocked by an amendment made by FA2013 with effect from 21 March 2012. HMRC stated that the amendment was to “put beyond doubt” that such a scheme did not work.

The FTT held that while the original contract, transfer and grant of the option were scheme transactions, the exercise of the option was not “involved” and could not be a “scheme transaction” for the purpose of determining the effective date of the notional contract under s.75A(6). S. 75A(6) applied on the basis that the effective date of the notional transaction was the date of completion of the scheme transactions and therefore the chargeable consideration was the £5m paid by the taxpayer to the vendor.

Right to apply for permission to appeal was granted by the Tribunal judge.

If you would like to discuss this decision in more detail, please contact Keith Rushen on 0207 486 2378.


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